# Presentation: 684400

## THINKING ABOUT THE “MARRIAGE PENALTY”

- President’s Advisory Panel on Federal Tax Reform
- March 23, 2005
- James Alm
- Andrew Young School of Policy Studies
- Georgia State University

## Overview: Who is the “individual” in the individual income tax?

- What Is The “Marriage Penalty”?
- Why Does It Arise?
- How Big Is It?
- Why Does It Matter?
- Do Other Countries Have A Marriage Penalty?
- Can It Be Reduced Or Eliminated?

## What Is The “Marriage Penalty”?

- A “marriage penalty” exists when the income taxes of two individuals as a married couple are greater than their combined taxes as singles.
- There can also be a “marriage bonus”, if the income taxes of the married couple are lower than their combined taxes as singles.

## Example: Marriage Penalty

- As Single Taxpayers (2001):
- 	_Individual Income_	_Individual Tax_
- 	$30,000			$3,383
- 	$30,000			$3,383 $6,766
- As Married Taxpayers:
- 	_Joint Income_		_Joint Tax_
- 	$60,000			$7,172
**	******** ****Marriage Penalty $406** (=7,172-6,766)

## Example: Marriage Bonus

- As Single Taxpayers (2001):
- 	_Individual Income_	_Individual Tax_
- 	$0				$0	   
- 	$60,000			$11,198 $11,198
- As Married Taxpayers:
- 	_Joint Income_		_Joint Tax_
- 	$60,000			$7,172
**	******** ****Marriage Bonus -$4,026** (=7,172-11,198)

## Why Does It Arise?

- The quick answer:
- 	Because the family is the “unit of taxation” in a progressive individual income tax that allows income splitting of a married couple.
- A more complicated answer:
- 	Because the individual income tax imposes taxes based on family income, and imposes different marginal tax rates at different levels of income.

## Why Does It Arise?

- An even more complicated answer:
- 	Because there are multiple, and conflicting, goals in the individual income tax:
- Progressivity: Marginal tax rates should increase with income.
- Equal Treatment of Married Couples: Married couples with equal incomes should be taxed equally.
- Equal Payments for Married and Single Taxpayers: A single individual should pay the same taxes as a married couple with equal income.
- Marriage Neutrality: Taxes should not change with marriage.
- And there are many other programs in the tax and transfer system that create marriage penalties and bonuses.

## How Big Is It?

- Feenberg and Rosen (1995):
- 51 percent of married couples paid an average marriage penalty of $1,200, 38 percent received an average marriage subsidy of $1,400, and 11 percent were unaffected.  Couples more likely to incur a marriage penalty are those with two earners with similar incomes.
- Alm and Whittington (1996):
- 57 percent of married couples paid a marriage penalty of $1,200, 30 percent received a marriage bonus of $1,100, and 13 percent were unaffected.  Couples more likely to incur a marriage penalty are those with two earners with similar incomes.
- CBO (1997):
- 42 percent of married couples paid a marriage penalty of $1,400, 51 percent received a marriage bonus of $1,300, and 6 percent were unaffected.  Couples more likely to incur a marriage penalty are those with two earners with similar incomes, and those with higher combined incomes.
- OTA (1999):
- 48 percent of married couples paid a marriage penalty of $1,100, 41 percent received a marriage bonus of $1,300, and 11 percent were unaffected.  Couples more likely to incur a marriage penalty are those with two earners, and those with higher combined incomes.

## Why Does It Matter?

- There is evidence that individuals respond to the marriage penalty/bonus:
- In the decision to stay single versus to marry.
- In the decision to cohabitate versus to marry.
- In the decision to marry versus to divorce.
- In the timing of the decision to marry.
- In the labor supply decision.
- Even so, most of these responses are generally small, and taxes do not appear to be the driving force in marital decisions.

## Why Does It Matter?

- The marriage penalty introduces large, variable and capricious inequities due to unequal treatment of taxpayers based solely on their marital status:
- Between married couples with one earner and those with two earners.
- Between married couples and cohabiting couples.
- Between married couples and single households.
- Between married couples and “extended” households.
- And the marriage penalty affects revenues.

## Do Other Countries Have A Marriage Penalty?

- International practice is varied.
- Among the 32 OECD countries (for 2002), the dominant practice is:
- The use of progressive marginal tax rates.
- The choice of the individual, not the family, as the unit of taxation.
- Joint filing is required in 7 countries, and is allowed in 6.
- The individual is the required unit in the remaining countries.
- Since 1970, 7 countries have moved from joint taxation to individual taxation.

## Can It Be Reduced Or Eliminated?

- Reducing or eliminating the marriage penalty requires eliminating one of the conditions that cause the penalty:
- Imposing the tax on family income
- Imposing the tax at progressive rates
- Recent tax changes (EGTRRA 2001 and JGTRRA 2003) reduce the marriage penalty for most households – but keep the marriage bonus by (among other things):
- Increasing the standard deduction for married couples to double that of singles
- Increasing the width of the 10 and 15 percent brackets for married couples to twice that of singles
- Raising the EITC phaseout point for married couples.

## Marriage Penalties and Bonuses in 2004

- As Single Taxpayers (2004):
- 	_Individual Income_	_Individual Tax_
- 	$30,000			$2,950
- 	$30,000			$2,950 $5,900
- As Married Taxpayers:
- 	_Joint Income_		_Joint Tax_
- 	$60,000			$5,900
**	******** ****Zero Marriage Penalty or Bonus**

## Marriage Penalties and Bonuses in 2004

- As Single Taxpayers (2004):
- 	_Individual Income_	_Individual Tax_
- 	$0				$0	 
- 	$60,000			$9,750 $9,750
- As Married Taxpayers:
- 	_Joint Income_		_Joint Tax_
- 	$60,000			$5,900
**	******** ****Marriage Bonus - $3,850** (5,900-9,750)

## MARRIAGE PENALTIES/SUBSIDIES UNDER PRIOR 2001 TAX LAW AND EGTRRA FOR A MARRIED COUPLE WITH TWO CHILDREN (Carasso and Steuerle 2002)

## Some Piecemeal Reform Options

- Increase the standard deduction for married couples.
- Expand the tax brackets facing married couples.
- Reinstitute the secondary earner deduction.
- Expand the phase-out range of the EITC.
- Flatten overall rate structures.
- Allow optional individual filing.
- Require individual filing – restore the individual as the unit of taxation.

## Some Fundamental Reform Options

- Eliminate progressivity – make the individual income tax a flat rate tax.
- Eliminate the individual income tax and replace it with a national sales tax or a VAT.
**But:** There would still be marriage penalties and bonuses throughout other parts of the tax and transfer system.