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The Marriage Penalty
Economic Effects
"The marriage penalty significantly discourages work effort among married women."
"Sharply cutting the tax rate on secondary workers could led to an increase of as much as $66 billion per year in their earnings."
As noted earlier, the principal effect of the marriage penalty has been
on wives, because they generally earn less than their husbands and thus
are in effect taxed at their husbands' marginal tax rates. This means that
wives generally receive less aftertax income on each dollar they earn than
their husbands do. This significantly discourages work effort among married
women. A considerable amount of economic research demonstrates that high
marginal tax rates reduce labor supply, especially for married women. 19
Labor Supply.
Thus it should come as no surprise that tax policies affecting the marriage penalty have had a significant impact on female labor supply. The institution of income splitting in 1948 and the effective reduction in marginal tax rates had a major effect on women's work decisions. As Table VIII shows:
- Between 1947 and 1950 the labor force participation rate for married
women shot up, raising their share of the female labor force from 46.2
percent to 52.1 percent.
- Those with a husband present, who were most likely to be affected by
income splitting, increased their labor force participation most, increasing
their share of the female labor force from 40.9 percent to 48 percent.
- By contrast, the labor force participation of single, widowed or divorced women, who gained nothing from income splitting, stayed flat or declined.
The labor force participation rate for men was also unchanged over this period.
A study of the 1981 tax act, which reduced the marriage penalty by instituting a secondary-earner deduction, shows that married women's work expanded by almost enough to pay for the deduction's revenue loss. 22 Analysis of the Tax Reform Act of 1986, which lowered the top marginal tax rate from 50 percent to 28 percent, shows that married women responded more strongly than men to the increased work incentive. 23 Another study estimated that: 24
- If the marriage penalties remaining after the Tax Reform Act were eliminated,
the average married woman would work 46 more hours per year.
- High-income and low-income women would respond even more strongly, increasing their work hours by 100 hours per year.
The latest estimates by economists Martin Feldstein and Daniel Feenberg suggest that the labor supply response of married women to reduction of the marriage penalty today could be quite large. Sharply cutting the tax rate on secondary workers could lead to an increase in earnings by such workers of as much as $66 billion per year. 25
Marriage or Divorce. In addition to effects on labor supply, the marriage penalty also impacts the marriage/divorce decision. There is certainly no question that over time the number of couples living together without marriage has sharply increased.
- The Census Bureau reports that 523,000 adults of the opposite sex were
living together in 1970.
- By 1996, this figure had risen to 3,958,000.
In 1970 just 0.5 percent of the couples in the United States were unmarried. By 1996 this percentage had risen to 7.2 percent. At least some of this is undoubtedly due to tax considerations.
Several studies have looked at this question. They find that the marriage penalty has a small but significant impact on couples' decision to marry. When the marriage penalty rises, aggregate marriage rates fall. The impact on the timing of marriage is even greater, with couples often marrying late in the year to minimize their marriage penalty. 26 Finally, there is some evidence that taxes encourage divorce, especially on the part of women who are affected most by the marriage penalty. 27
How Should Married Couples Be Taxed?
"A system of individual filing would be fairer, simpler and more efficient."
"There is no particular reason why married couples should receive special treatment from the Tax Code."
As noted earlier, from 1913 to 1948 Congress adopted an approach to taxation
that did not differentiate between married and unmarried persons. There
was only one tax schedule, and everyone paid the same rates. A single person
and a married couple with the same income paid the same tax. Congress did
not willingly adopt income splitting in 1948. It was forced to do so out
of necessity resulting from the consequences of a Supreme Court case. Nevertheless,
the effect was to replace the individual with the family as the fundamental
unit for taxation. It has long been known that a tax system cannot simultaneously do three
things: (1) have progressive tax rates, (2) treat couples with the same
income equally and (3) have a neutral effect on marriage. 28 If the first
goal is taken as given, one must choose between the second and third. In
1948 Congress chose the first and second and abandoned the third. Progressivity.
The notion of progressivity has been under attack for many years. Tax experts have long known that exemptions, deductions and exclusions in the Tax Code can easily erode the nominal progressivity of the rate structure. They have also known that progressivity breeds complexity and evasion and imposes a large deadweight cost on the economy. But the idea that "fairness" demanded higher tax rates on those with upper incomes was too widespread to challenge. 29
By the 1980s, opinion had shifted enough to permit serious support for a flat tax with a single rate for all taxpayers, regardless of income. So popular was the idea that in 1986 Congress moved toward a flat tax by creating a two-rate system, with a top rate of just 28 percent. Eventually, even academic tax theorists began to come around to the idea. Now criticism of progressivity appears in leading law journals, where earlier it would have been unthinkable. 30
At the same time, economists have increasingly come to see the cost of progressivity as extremely high. One study put it this way: 31
Even a mild degree of progressivity in the income tax system (as measured by the steepness of the marginal rate schedule) imposes a very large efficiency cost. For example, in comparison with an equal revenue proportional income tax, a progressive income tax with average tax rates varying over the life cycle between .23 and .32 and marginal rates ranging from .23 to .43 imposes an efficiency cost greater than 6 percent of full lifetime resources.
Since that study appeared, many others have reached similar conclusions about the overall welfare cost of progressivity in the U.S. tax system. 32 As a result, a recent president of the American Economic Association stated, "Today, it is fair to say that many, if not most, economists favor the expenditure tax or flat rate income tax. This group has joined the opponents of progressive taxation in the attack on the income tax." 33
Tax Unit. Just as progressivity increasingly has become questioned, many tax theorists have begun questioning whether the family should be the fundamental unit of taxation. They suggest that the individual is the more appropriate unit of taxation. Such a move would eliminate not only the marriage penalty but also the marriage bonus. The bonus may be inappropriate because there is no particular reason why married couples should receive special treatment from the Tax Code. To aid children, tax deductions or credits could target children rather than families. 34
Individual taxation may also be better suited to changing societal mores. In 1948 relatively few women worked, few headed households and most couples had a single earner. Now women work in almost the same percentages as men, female-headed households are common and families represent a decreasing share of households. Indeed, growth of the marriage penalty is as much due to demographic changes as to changes in the tax law. 35 According to the Census Bureau, nonfamily households have risen from 18.8 percent of all households in 1970 to 30.1 percent in 1996. 36 It is also worth noting that most major industrialized countries use the individual as the basic unit of taxation. 37 ,