The Marriage Penalty

Policy Backgrounders | Taxes

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


It is not necessary to completely abandon the family as the basic unit of taxation in order to eliminate the marriage penalty. It would only require allowing couples the choice of filing as singles or jointly. This would preserve marriage bonuses for single-earner couples but eliminate the marriage penalty for two-earner couples. However, Congress would also have to pass rules about dividing joint income, such as interest and dividends, and allocating itemized deductions, such as for mortgage interest and dependents.38

The major objections to the choice approach are complexity, cost and abandonment of the principle that couples with the same income should pay similar taxes. It would be complex because many couples would, in effect, have to do their taxes twice: first jointly and then as singles to see which way they would come out ahead. Also, whatever rules are adopted for allocating joint income and deductions are bound to be complicated.

Allowing couples to choose their filing status also would be costly. According to the CBO, doing so would have reduced federal revenues by $29 billion in 1996.39 It would also lead to situations in which certain couples would pay less total taxes than others with the same income. This could create pressure in future years for further tax measures to redress this perceived imbalance. Congress certainly needs to be wary about adding additional complexity to an already overly complicated Tax Code. However, in recent years Congress has enacted a number of very complicated provisions to the tax law involving phase-outs for various tax benefits that also have the effect of worsening the marriage penalty for some couples. For example, the child tax credit is phased out for couples with incomes over $110,000 and for singles with incomes over $75,000. This means that a couple making $75,000 each would qualify for the full $500 per child credit if they divorce but receive nothing if married.40

"A flat tax or national retail sales tax would be a better solution than more tinkering with the Tax Code."

Almost any solution to the marriage penalty is likely to increase complexity and raise questions about cost and fairness.41 Short of going all the way to an individual filing system, other options for redressing the marriage penalty include restoration of the second-earner deduction, such as that included in the 1981 tax bill, widening tax brackets and modifying provisions such as the EITC that create marriage penalties.42 Given the cost of full elimination of the marriage penalty and budgetary realities, in the end Congress will probably be forced to choose among these more limited options if it decides to address the issue at all.

A better solution to further tinkering with the Tax Code would be a flat tax or national retail sales tax. By eliminating progressivity, they get at the root cause of the marriage penalty.43 Although there are many other arguments for a flat tax, this one may prove most persuasive to two-earner couples.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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