The Taxing Reality of the Modern Woman

Commentary by Pete du Pont

All across America people are scurrying to the post office to file their taxes. For some it's the bittersweet feeling of knowing you're going to get a refund, but also that it was your money to begin with. For others, it's the acceptance that you owe all your prosperity to Uncle Sam.

In a way it's a shame that this is only an annual ritual. While I'm not a masochist, having tax day only every April 15 disguises the fact that taxes are central to all aspects of our economic lives and impact the decisions we make on a daily basis.

While this is true across the board, it is particularly important to women. In fact, as a recent study published by my colleagues at the National Center for Policy Analysis points out, women are adversely affected by tax laws that no longer match the way the vast majority of women now interact with the economy.

The major elements of the tax system, from the personal income tax law to the payroll taxes that are deducted every month, were put into place during an era when most women, certainly most mothers, were not in the workforce. That is no longer the case. Today, 70 percent of all married women, and 60 percent of mothers with children under the age of 6, work for wages. Yet the tax laws are biased toward single-earner households in which only one spouse works.

The most common example of this discrepancy between how the law is structured and the modern family is the personal income tax, and what is known as the "marriage penalty." The marriage penalty is not really a tax on marriage. Instead, it is a quirk in the law where two-earner couples are taxed more when they are married than if they just lived together. Put simply, income tax brackets work like the rungs on a ladder. As your income increases, you enter new brackets on the margin. That is, you do not lose the benefits of the lower rates, or rungs, for the dollars you have already earned.

Since the IRS treats the family as one taxing unit, when a wife enters the labor market her first dollar earned is automatically taxed at her husband's highest income tax bracket, even if she's only earning the minimum wage. (While the tax law does not actually speak of women and men, wives are used in the example since about three quarters of secondary earners are women.)

Moreover, even if her husband has paid the maximum Social Security payroll tax, which is taxed on the first dollar of earnings up to $84,500, the wife who works must begin paying from the first dollar she earns. So while the income tax law taxes the couple as a unit, the payroll tax law taxes the couple individually - in each case Uncle Sam has chosen a method that works best for him at her expense.

The Social Security payroll tax is particularly bad for working wives, because the spouse is already entitled to benefits based on the other spouse's earnings (50 percent of primary earner's benefit). When a woman works and pays taxes, she still only receives the 50 percent spousal benefit unless she is able to earn enough to generate benefits that exceed the 50 percent benchmark. And even if she does, since she would then forfeit the spousal benefit, she sees a very small marginal benefit for her labor.

What does this mean to the average couple? Combine a 28 percent federal income tax with an 8.5 percent state and local income tax, then add a 7.65 percent Social Security payroll tax, and the marginal tax rate of the second earner in the average household is more than 44 percent.

These marriage penalties hit at the top and bottom of the income ladder. They hit those at the top particularly hard because high-income earners are in the top tax brackets. Lower-income women also suffer a stiff marriage penalty because of the burden of accelerated phase-outs of the Earned Income Tax Credit, a federal program that gives low-wage workers extra cash through credits.

Adding it all up, the tax system sends a curious message to American women: If you're middle- to upper-income and married, don't work. If you're a low-income working woman, Uncle Sam tells you to stay single.