The Marriage Penalty
Table of Contents
How Should Married Couples Be Taxed?
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.
"A system of individual filing would be fairer, simpler and more efficient."
Progressivity. In recent years a number of tax theorists have questioned that congressional decision. Progressivity is no longer assumed to be a primary criterion of our tax system. Increasingly, tax theorists question whether it is fair to penalize those with higher incomes, while economists produce more and more data on the economic cost of progressivity. At the same time, others question family-based taxation. They argue that a system of individual filing would be fairer, simpler and more efficient.
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
"There is no particular reason why married couples should receive special treatment from the Tax Code."
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