Women and Taxes

Policy Reports | Taxes | Work & Wages

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

Fixing Things

Tax isn't the only thing affecting the patterns of work and family in America today, but it is a very big thing indeed. America collects about one-third of its gross domestic product (GDP) in taxes of various sorts; on the average, 33 cents out of every dollar earned goes to the federal or some state or local government, somewhere. What we have learned above shows that the burden on some households, and particularly on the women within them, is even higher. How can such a large and coercive system not affect major elements of our social lives?

This may be surprising, but on reflection it really shouldn't be. The tax system was set up when times were quite different than they are today. It's hard enough to understand the biases of tax, hidden as they are in the complex prose, the technical provisions, the interactions among diverse sections of the huge tax and transfer system. Fixing the mess seems overwhelming, to say the least. But the good news that comes from the bad facts we have just seen is that there are indeed attractive ways to reverse course and solve the tax-induced problems facing women. What we really need is a way - and a will - to get our elected officials to listen.

What should be done? Consider the following six-step plan as a central piece of a meaningful women's agenda for economic change. These six points track the problems discussed above; in many cases, there are diverse ways to implement reform, but the general direction of change ought to be clear.

"Fix the marriage penalty by allowing separate filing."

One: Fix the Income Tax. The largest single problem of tax for women is the system of joint filing under the income tax, which, by effectively putting the secondary earner in a tax bracket dictated by the primary earner's salary, creates a major de facto bias against women. The simplest way to fix this problem is to revert to a system of separate filing, as America had before 1948 and as most advanced countries around the world now have. People sometimes object that this will be complicated in the case of unearned income, but separate filing can be limited to earned income, or wages. Separate filing would mean that each spouse fills out a tax form on his or her own wages, and each has her or his own zero bracket, and so forth. It would eliminate in one stroke the second earner bias of the federal income tax.

A problem with simply moving to separate filing - which is sometimes called mandatory separate filing because there would be no choice - is that it would eliminate the marriage bonuses that primarily one-earner families now receive under the rate structure as typified in Table II. For this reason, this proposal has been unpopular, as one-earner families are politically influential. A solution to this problem is to adopt optional separate filing. Under such a plan, married couples would have a choice of filing jointly, under something like Table III, with its 1.6 times the unmarried person's rate brackets, or individually, as if unmarried, under Table I style rate brackets. Those couples getting a marriage bonus would continue to file jointly and get theirs; those couples now paying a marriage penalty - all of whom are two-earner ones - could opt out of joint filing, and eliminate the penalty (recall that "married, filing separately" today does not solve the problem, because their rate structure is set at one-half of the married filing jointly one, or 0.8 of the unmarried person's rate schedule; optional separate filing would set the rate structure for "married, filing separately" equal to that for unmarried persons).

"Fix the EITC phaseouts by doubling the phaseout range for married couples."

Two: Fix the Phaseouts. It's inexcusable that there should be marriage penalties among the poor, the very income class where family structure is most fragile in any event. It is a simple matter to fix this, by doubling the phaseout range under the EITC and other workfare/welfare/entitlement programs for married couples. A more radical plan is just to get rid of phaseouts altogether. Phaseouts make the near-poor pay for the poor; without phaseouts, the burden is dispersed throughout all of the non-poor society. But if we are not ready, willing or able to go that far, we should at least fix the unconscionable situation of the status quo, where the working poor cannot afford to get married in the first place. Doubling the level at which the phaseouts begin for married households as compared to single parent ones would go a long way toward fixing this problem.

Three: Fix Social Security. Social Security, viewed purely as a tax system, is highly unfair to two-earner households and hence to the working wives within them. As a tax system, this could be largely remedied by creating a second earner exemption under the payroll tax, to prevent working wives from paying a pure tax with little or no offsetting benefit. Suppose, for example, that we exempted the first $10,000 of a second spouse's wages from any payroll tax, on proof that her husband was earning and paying tax on at least as much. Considering now both the employer and the employee share, this would mean $1,530 that the employer could pay out to the working wife, perhaps to be used for child care.

"Fix Social Security by allowing ilearnings sharingle for married couples."

An alternative fix to the Social Security system looks in part to the benefits side of the coin. This is to allow full and complete "earnings sharing" under Social Security. Each spouse would get credit for one-half of the wages of either spouse up to the ceiling, to carry with him or her in case of divorce and so forth. This would at least alleviate the problem of many working wives paying a pure tax, with no offsetting benefit, as occurs today. But it is also considerably more complicated, and hence no doubt more contentious, than a second-earner exemption. More significantly, an earnings sharing plan would only help working wives far down the road in their lives - when they retire - whereas a second-earner exemption would free up much needed cash in the here and now to help with the stresses of the present.

Four: Better Child Care, Not Per-Child Relief. Working mothers need help with their child care expenses. Per-child credits, a recent trend in tax policy, do nothing to address these particular costs. The simplest way to provide child care relief is a simpler, and more generous, tax deduction along the lines of a general business expense deduction. I recommend allowing any taxpayer to deduct up to, say, $10,000 on a showing of qualified work-related child care expenses - basically, by showing earned income of at least $10,000 per spouse and the presence of minor children.

Note that such a provision would foster a very attractive principle of neutrality: child care should be tax-free. It would put the working mom on a par with the non-working one. Recall that if Sally stays home, she can care for her children herself, paying no tax on this highly valuable service. But if Sally must work, she has to first pay Uncle Sam and then the child care provider - she must earn perhaps twice as much as the child care costs merely to break even.

Note also that a simpler, more generous child care deduction would help all working mothers, including those in the upper-income brackets. This is as it should be if we are going to stop sending out the mixed and muddled message that only middle-class moms should work for pay.

"Fix the child care expense burden by allowing a tax deduction along the lines of a general business expense deduction."

Like the other changes I am advocating, better child care relief under the tax laws could well be a "win-win" situation. Child care is a legitimate cost of work for the many mothers of young children in or considering being in the paid workforce. When those women who want to work at least some of the time outside the home for pay cannot do so because of the prohibitive costs of taxes and child care combined, we all suffer. It's not a question of forcing women to work for pay, or punishing those stay-at-home mothers happy in their important, and unpaid, work: it's about allowing women to choose for themselves how to spend their time and productive energies. That economic freedom is a major part of America's economic and social success, and we should allow women more of it.

"Fix work-related expense burdens by allowing a second earner deduction."

Five: Better Work-Related Expense Deductions. As we saw above - and as common sense also shows - child care is not the only cost associated with two-worker, two-parent households. If we adopted a system of separate filing, wives could enter or remain in the paid workforce with their initial dollar of wages falling in a zero bracket; this might be relief enough. But in addition to or in lieu of that more fundamental step, we should allow a second earner deduction: that is, a subtraction for two-earner families to offset the tax costs of these work-related costs. For example, we could allow a deduction of 10 percent of the lesser-earning spouse's salary, up to some maximum. The law in fact had such a provision in place from 1981 to 1986, and George W. Bush proposed reinstating it in the 2000 presidential campaign.29

Six: Fix the Fringe Benefit Rules. We should allow an exemption from the tax and ERISA anti-discrimination rules for workers whose spouses already receive medical insurance coverage and other fringe benefits for the family. These workers should be allowed to choose child care or other benefits or cash in lieu of the duplicative benefits that they are now forced to take. And, to be parallel - and fair - to those receiving tax-favored fringe benefits, the cash should be tax-free.

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