Does It Pay Both Spouses to Work?

Studies | Taxes

No. 260
Wednesday, May 14, 2003
by Jagadeesh Gokhale and Laurence J. Kotlikoff


Components of Marginal Net Tax Rates

Figure V - Components of the Marginal Net Tax Rate for a Wife Earning %2410%2C000 A Year

Why are marginal net tax rates so high for working spouses in two-earner families? As noted above, marginal tax rates are high at the low end of the income ladder because of the loss of means-tested benefits. Our system is very generous to those who do not work, but it withdraws those benefits quickly as people work and produce.

The components of marginal net tax rates for a woman who earns $10,000 a year are depicted in Figure V:

  • If the husband also earns $10,000 a year, the wife's marginal tax rate is 96 percent. [See Table I.]
  • About 65 percent of this marginal tax rate consists of the loss of Medicaid and other welfare benefits as a result of the wife's decision to work. [See Figure V.]

If the husband earns a higher income, the marginal tax rate is significantly lower (but still quite high) and the components of the tax rate change:

  • If the husband earns $30,000 and the wife earns $10,000, her marginal tax rate is 48 percent. [See Table I.]
  • Less than one-fourth of this marginal tax rate consists of loss of benefits, while more than three-fourths consists of taxes - mainly income and payroll taxes. [See Figure V.]

"Only middle-income workers face a lower net tax after marriage."

Figure VI shows the composition of the marginal net tax rate for a woman who earns $30,000 a year:

  • If her husband earns $10,000, her marginal net tax rate is 83 percent.
  • In this case, more than half of the penalty for working consists of loss of entitlement benefits and the remainder is lost to taxes.
  • If her husband also earns $30,000, her marginal net tax rate drops to 44 percent.
  • In this case, only 13 percent of the penalty for working consists of loss of benefits; 77 percent of the loss is due to taxes.
Figure VI - Components of the Marginal Net Tax Rate for a Wife Earning %2430%2C000 A Year

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