Microeconomic Behavioral Responses to the Marriage Penalty and Reforms for the 21st Century

October 3, 2012

There are strong financial disincentives for couples to be married in the status quo. Rather than promoting the institution of marriage, the federal tax code imposes heavy burdens on married couples that encourage couples to choose cohabitation as an alternative, say Jason J. Fichtner, a senior research fellow at the Mercatus Center, and Jacob Feldman, a research analyst at George Mason University.

  • Today, the growing equivalence in wages across genders makes the marriage penalty more severe than it was 60 years ago -- there are more women in the workforce meaning there is more taxable income per household.
  • The size of the marriage tax amounts to almost 18 percent of total income.
  • Tax reforms passed in 2001 and 2003 (the Bush Tax Cuts) included provisions that decreased the marriage penalty.
  • However, those cuts are set to expire, increasing the tax burden that married couples have to endure.

Some couples don't receive a penalty for being married, but rather get a marriage bonus. This allows married couples to receive advantageous tax treatment relative to two individual filers earning an equivalent income. However, this is mainly found in single-earner households, which now comprise only 33 percent of married households.

Moreover, the marriage tax increases the likelihood that couples will file for divorce, especially those in lower income ranges. This is primarily because couples can't afford the tax and because they are eligible for higher welfare benefits.

The tax also decreases the labor participation of females, according to the data. During the Reagan tax reforms that reduced the marriage tax there was a 30 percent increase in female labor participation for women whose husbands earned more than $84,000.

There are many policy solutions that lawmakers can implement to eliminate the tax to encourage marriage:

  • First, empowering married couples to select individual filing rather than requiring joint filing.
  • Second, income splitting. This would allow couples to maintain joint filing but adjust for differences in tax schedules between single and joint filers.
  • Finally, a second-earner deduction, which has already become law under the Economic Growth and Tax Relief Reconciliation Act of 2001.

Source: Jason J. Fichtner and Jacob Feldman, "Taxing Marriage: Microeconomic Behavioral Responses to the Marriage Penalty and Reforms for the 21st Century," Mercatus Center, September 17, 2012.

 

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