Women and Taxes

Policy Reports | Taxes | Work & Wages

No. 250
Thursday, February 28, 2002
by Edward J. McCaffery

Executive Summary

Taxes are central to all aspects of women's economic lives. Personal income taxes, payroll taxes, child care tax credits, earned income tax credits, and state and local taxes all have particular importance to women and all have aspects that adversely effect the majority of women. Largely for historical reasons, the American tax system is disconnected with the way women participate in the economy. The major elements of the tax system were put in place in the 1930s, 1940s and 1950s, when most women, certainly most mothers, were not in the workforce.

  • Today 70 percent of all married women work for wages.
  • 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 and biased against two-earner households.

The "marriage penalty" in the tax code is not really a tax on marriage. It is tax on two earner households. When a wife enters the labor market, even if she earns only the minimum wage, she is automatically in her husbands tax bracket. Moreover, even if her husband has paid the maximum Social Security tax, the wife who works must begin paying from the first dollar she earns.

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 (FICA) payroll tax, and the marginal tax rate of the second earner in the average household is more than 44 percent. In addition, when both spouses work they must usually begin to purchase many services the wife was providing free of financial cost in the home - child care, cooking, cleaning and so on. After these expenses, many women find that their actual net take-home pay is just a third of their wages. Some married working women actually lose money by entering the labor market.

These marriage penalties hit at the top and the bottom of the income ladder. It hits 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 (EITC), a federal program that gives low-wage workers extra cash through tax credits. Adding it all up, the tax system sends a curious message to American women:

  • If you are middle- to upper-income and married, the incentive is not to work.
  • If you are low-income and working, the incentive is not to marry.

The Social Security or federal payroll tax is particularly bad for working wives. This is because each spouse is already entitled to benefits based on the other spouse's earnings. For example, a wife who never works and never pays taxes is entitled to a retirement benefit equal to 50 percent of her husband's benefits. After he dies, she is entitled to 100 percent of his benefits. When women work and pay taxes, however, they will collect benefits based on their own contributions, or on their husband's contributions, but not both. As a result, many women discover they get little or nothing in return for years of paying taxes into the system because they claim a spousal share. In the case of two average income earners, for example, the wife's decision to work will double the couple's lifetime payroll taxes. But there will be very little increase in lifetime benefits.

When the tax law combines with employee benefits law, we confront another institution that has not kept pace with our changing society. The employee benefits system is organized from top to bottom to meet the needs of the one-earner family. At the same time the system discriminates against the two-earner couple. Consider a woman whose husband has generous health insurance for the couple through his employer. Since the woman does not want duplicate coverage when she accepts a job, it would be sensible for the employer to pay for higher wages instead. But federal law in general will not allow employees to choose between wages and benefits. Instead it forces employer to offer take-it-or-leave-it benefits that cannot be adjusted to meet the needs of modern families.

To bring our tax system into the 21st century, we should:

  • Change the income tax law to permit each married partner to file separately and avoid unfair penalties for working wives.
  • Allow a second-earner exemption which would let couples deduct work-related expenses associated with two earner households when calculating income taxes.
  • Fix burdensome EITC phase-outs by doubling the level at which the phase-outs begin for two-earner households, thereby eliminating some of the highest marginal tax rates on some of the lowest income earners.
  • Create a second-earner exemption for Social Security - exempting, for example, the first $10,000 of the second-earner's wages - or allow "earnings sharing," which would combine the taxes paid by a husband and a wife and split them equally for the benefit of each.
  • Modify the child care expense burden for two-earner couples by allowing a tax deduction along the lines of a general business expense deduction.
  • Alter rules relating to employer-provided benefits so earners can freely choose between taxable wages and nontaxed benefits, selecting the combination that best meets the employee's family needs.

The tax system's bias against working wives is inefficient and unfair. It is time for reform.

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