Women and Taxes

Policy Reports | Taxes | Work & Wages

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

Not Just the Income Tax, and Not Just the Marriage Penalty

The federal personal income tax is not the only tax that Sally's work will trigger. She will also have to pay the federal payroll tax - the combined Social Security and Medicare "contribution." Social Security is set at 6.2 percent of earnings up to a ceiling, now $84,900, for both employee and employer; Medicare is 1.45 percent without a ceiling. Combined, that's another 7.65 percent Sally must pay to Uncle Sam.

This federal payroll tax is a tax. It's a mandatory governmental extraction from your paycheck. It's called a "contribution," but you have no real choice but to pay it. And while it's tied to a system of benefits that you may get one day, this tie is essentially arbitrary - your Social Security "contributions" don't go into any account with your name on it. The federal government has certain expenditure needs, including paying for Social Security and Medicare benefits, and at the same time, it has certain revenue sources, such as income and payroll taxes. Any link between particular revenues and particular expenditures is essentially arbitrary. This is why presidents and Congresses often argue about whether or not to spend the "Social Security surplus" - because there is nothing but politics, and the outcome of these arguments, to keep them from doing so.

"Many working wives will get little or nothing in return for the Social Security taxes they pay."

It's worse for married working women, because Social Security, as a benefit system, does provide for non-working wives as both retiree spouses and widows. This is all fine and good, except that there's no adjustment made for working wives. The net result is that many married working women today are paying a pure tax with no offsetting benefit.

It gets even worse. Unlike the income tax, the federal payroll tax system has no zero bracket, no accommodation whatsoever for children or child care, no minimum threshold. It works like a flat wage tax up to its ceiling - everyone pays the same percentage of wages in tax - after which it drops off.

It gets worse still. Sally will see 7.65 percent of her $30,000 salary, or approximately $2,300, taken out of her paycheck for payroll taxes, right off the top. But there's another $2,300, the so-called employer's share, that Sally's boss must pay to the federal government on account of Sally's work. This is money that the employer could have given to Sally in cash or in benefits - perhaps by providing child-care. To an employer, a dollar is a dollar; Sally's work better be worth $32,300, or it wouldn't make sense to employ her; if Sally's work is worth that much, the employer doesn't care whether it cuts the checks to Sally, her children - or her distant Uncle Sam. In other words, to an economist, the federal payroll tax is in essence a 15.3 percent tax, because the employee really, ultimately, bears the economic burden of the so-called employer's share.

Viewed this way, it should come as no surprise that the payroll tax is a very large tax indeed, collecting about 80 percent as much as the income tax does. Well over 70 percent of American households pay more in payroll taxes than in income taxes.10

Back to Sally: We can add the $2,300 coming out of her $30,000 (the employer's share remaining offstage, as an opportunity lost) to the $8,400 in income taxes Sally's work generates. That's $10,700 to Uncle Sam, right off the bat; $19,300 left for Sally and Bill and the kids.

But wait. We're not done yet.

State Taxes, Too. The federal government isn't the only show in town. States and even counties and cities collect taxes, too, often wage-based ones.

More than 40 states levy state-level income taxes. Marginal rates range up to 9 percent in Pennsylvania, 9.3 percent in California, 11 percent in Montana and 12 percent in North Dakota. A couple of states, Vermont and Rhode Island, simplify their own affairs by setting their state level income tax at a fixed percentage of about 25 percent of the federal income tax charge.11 All of these state income taxes work the same as the federal tax methodology; when it comes to husbands and wives, they all have joint filing, pushing Sally into Bill's rate bracket.

Many cities and even counties levy taxes, too. There are local payroll taxes, state disability funds and so forth. Even the sales tax can come into play, because working women are likely to purchase more goods, including restaurant meals, subject to such taxes. There are often commuter taxes to pay (tolls, etc.), and so on.

"On the average, an earner pays 8.5 percent in state and local taxes and a 7.65 percent FICA tax in addition to federal taxes."

All told, it seems reasonable to put a figure of from 7 percent to 10 percent on Sally's tax debts to other government divisions; splitting the difference, let's call it 8.5 percent, for another $2,450.

Adding It All Up. So far, looking at taxes alone, Sally has lost $13,150 of her $30,000 salary almost 44 percent, to federal income and payroll taxes, plus state and local levies. Sally's job is bringing home $16,850 to the household.

But wait. We're not done yet.

Not the Marriage Penalty. The marriage penalty arose, as we saw above, because the rate brackets fail to double when moving from single to married persons. Marriage penalties are a bad thing, but they are not Sally's main problem. Rather, Sally's tax problems so far are due to the secondary earner bias in the system.12 This occurs because the joint filing system pushes Sally, as the "secondary" earner, into a tax rate bracket dictated by Bill's work. Whereas Bill, as the primary earner, entered the workforce at the zero bracket, Sally's very first dollar of earnings is getting taxed at the 44 percent level, as already explained (and, once again, this can be worse - an even higher tax rate - for both richer and poorer working wives, as we'll see below).

A system of separate filing - either mandatory or optional - would change this situation. Under separate filing, Sally would fill out her own tax return on her own earnings, and she would then get her own zero bracket. There would be no second earner bias. But the law doesn't provide for that now.

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