Tax and Benefit Laws Punish Two-Income Households

Couples Lose Half of Second Income, Says NCPA Study

DALLAS (May 14, 2003) -- Most working couples lose half or more of their second income in taxes and lost government benefits, according to a new study by the National Center for Policy Analysis (NCPA).

"The second income earner (usually the wife) faces some of the highest marginal tax rates in the country - sometimes in excess of 100 percent," said NCPA Senior Fellow Laurence Kotlikoff, professor of economics at Boston University and co-author of the study with Jagadeesh Gokhale, senior economic advisor at the Federal Reserve Bank of Cleveland. "These huge penalties for working are not restricted to the wealthy. They burden families at all income levels."

The NCPA study examined the cumulative lifetime impact of higher taxes and lost benefits when a second person in a household goes to work. It found that half or more of her income is lost in higher taxes and lost benefits. Among low-income couples, most of the penalty for working comes from the loss of welfare benefits. Among middle-income couples, the penalty mainly consists of direct taxes. Moreover, penalties often are highest for those who earn the least.

For example, consider a wife earning $10,000 a year:

  • If her husband also earns $10,000 a year, she loses almost all - 96 percent - of what she earns. About 65 percent of this penalty consists of lost Medicaid and other welfare benefits.
  • If her husband earns $30,000 a year, she loses nearly half - 48 percent - of what she earns. In this case, more than 75 percent of that penalty consists of direct taxes - mainly income and payroll taxes.

"Add in the out-of-pocket expenses needed to replace many things the working wife used to do in the home - child care, cooking, cleaning, etc. - and it's amazing that so many wives even bother to work," said Kotlikoff.

One of the largest contributors to the penalty for working, is the Social Security system. Most wives get very little for the payroll taxes they pay into Social Security. For example:

  • If both spouses earn $10,000, Social Security costs the wife one out of every four dollars she earns, over and above any extra benefit she gets.
  • If both spouses earn $20,000, Social Security costs her one out of every seven dollars she earns.

"Most women who are collecting Social Security benefits are receiving benefits based on their husband's contributions. They are receiving nothing in return for the payroll taxes they paid," said Kotlikoff