The Marriage Penalty

Policy Backgrounders | Taxes

No. 145
Monday, February 09, 1998
by Bruce Bartlett

Economic Effects

Table VIII - Female Labor Force

"The marriage penalty significantly discourages work effort among married women."

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. The disincentive effects of high marginal tax rates on married women are aggravated by their looser attachment to the labor force than men and by their child-rearing responsibilities.20 Although most married women who work do so because of financial necessity, many do not. Their income is not essential for maintaining a couple's standard of living. Such women may work for a variety of reasons, including the simple joy of doing so. But the consequence is that they are more easily driven from the labor force by tax disincentives than are married men. For this reason, economic theory suggests that married women should be taxed less than married men.21

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.

"Sharply cutting the tax rate on secondary workers could led to an increase of as much as $66 billion per year in their earnings."

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

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