**PRESENT LAW AND BACKGROUND**

**RELATING TO PROPOSALS TO REDUCE**

**THE MARRIAGE TAX PENALTY**

Scheduled for a Public Hearing

Before the

HOUSE COMMITTEE ON WAYS AND MEANS

on January 28, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

January 27, 1998

JCX-1-98

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**CONTENTS**

INTRODUCTION		

	I.	PRESENT LAW AND BACKGROUND		

- 	Present Law		 Legislative History	
	II.	DESCRIPTION OF PROPOSALS		
- Election to Calculate Combined Tax as Individuals (H.R. 2456--Mr. Weller and others)		 Second Earner Deduction (H.R. 2593--Mr. Herger and others)
	III.	ANALYSIS		

APPENDIX		

**INTRODUCTION**

	The House Committee on Ways and Means has scheduled a public hearing on proposalsrelating to the Federal "marriage tax penalty" on January 28, 1998.  This document,(1) prepared bythe staff of the Joint Committee on Taxation, provides a discussion of present law, legislativehistory, certain legislative proposals, and analysis of issues related to the Federal income taxtreatment of married taxpayers.

	Part I of the document is a description of present law and legislative history on themarriage tax penalty.  Part II is a description of certain House legislative proposals (H.R. 2456and H.R. 2593), and Part III is an analysis of issues.  The Appendix presents an equation relatedto tax progressivity, equal taxation of couples with equal income, and marriage neutrality.

**I.  PRESENT LAW AND BACKGROUND**

**A.  Present Law**

**In general**

	A marriage penalty exists when the sum of the tax liabilities of two unmarried individualsfiling their own tax returns (either single or head of household returns) is less than their taxliability under a joint return (if the two individuals were to marry). A marriage bonus exists whenthe sum of the tax liabilities of the individuals is greater than their combined tax liability under ajoint return.

	While the size of any marriage penalty or bonus under present law depends upon theindividuals' incomes, number of dependents, and itemized deductions, as a general rule marriedcouples whose earnings are split more evenly than 70-30 suffer a marriage penalty. Marriedcouples whose earnings are largely attributable to one spouse generally receive a marriage bonus.Although the marginal tax rate breakpoints(2) and the standard deduction are typically consideredthe major elements of the Federal income tax system that create marriage penalties and bonuses,other provisions of present law also contribute to the amount of marriage penalty or bonus anycouple will face.

**Rate brackets and standard deduction**

	Under present law, the size of the standard deduction and the bracket breakpoints for the15-, 28- and 31-percent brackets follow certain customary ratios across filing statuses. Thestandard deduction and bracket breakpoints for single filers are roughly 60 percent of those forjoint filers. The standard deduction and bracket breakpoints for head of household filers are about83 percent of those for joint filers. With these ratios, unmarried individuals have standarddeductions whose sum exceeds the standard deduction they would receive as a married couplefiling a joint return. Thus, their taxable income as joint filers may exceed the sum of their taxableincomes as unmarried individuals. Furthermore, because of the way the bracket breakpoints arestructured, as joint filers they may have some of their taxable income pushed into a highermarginal tax bracket than when they were unmarried. 

	The rate changes in the Omnibus Budget Reconciliation Act of 1993 (OBRA '93)exacerbated the existing marriage penalty because the new bracket breakpoints did not providethe customary ratios across filing statuses.  For the 36-percent bracket, the breakpoint for singlefilers and for head of household filers are 82 percent and 91 percent, respectively, of thebreakpoint for joint filers.  In addition, unlike the other bracket breakpoints, the threshold for the39.6-percent tax rate is the same for all filing statuses, $278,450 in 1998. To eliminate themarriage penalty caused by the rate structure, the standard deduction and bracket breakpoints forall unmarried filers would have to be 50 percent of those for joint filers. This is the current ratiofor individuals who are married, but file separate returns.(3)

**Other marriage penalties and bonuses under present law**

	A marriage penalty or bonus can occur under other provisions of present law. Forexample, a marriage penalty or bonus can occur when a provision allows for different thresholdsfor the treatment of married taxpayers relative to single taxpayers. For example, the provision ofpresent law that requires a portion of social security benefits to be included in income can createeither a marriage penalty (because it is possible that one spouse's taxable income may require theother spouse's social security benefits to be included in income) or a marriage bonus (becausespouses with relatively unequal incomes may have less social security benefits included in incomethan if the spouses were not married).

	A marriage penalty or bonus can also be created under present law when a provision doesnot provide different treatment for married couples relative to single individuals. For example, thepresent-law dependent care credit phases down beginning at adjusted gross income of $10,000,irrespective of whether the taxpayer is married or not. The dependent care credit can create amarriage penalty because the combined income of a married couple may make the couple eligiblefor a smaller credit than if the couple were both single taxpayers. The dependent care credit cancreate a marriage bonus because a full-time student with no earned income may be entitled to thecredit if married to a taxpayer with earned income, but would not be entitled to the credit if single.

	Additional facets of present law such as the limitation on itemized deductions, thephaseout of personal exemptions, the phaseout of the child credit credits, and the phaseoutsprovided for various provisions can exacerbate the marriage penalty or bonus. 

**Marriage penalty and low-income taxpayers**

	Developments subsequent to 1970 have added additional facets to the marriage penaltythat primarily affect lower-income taxpayers. There are three features of the current individualincome tax system that create a marriage penalty for low-income individuals: the variation of thesize of the standard deduction by filing status, the phaseout of the earned income credit (EIC) asincome increases, and the variation of the size of the EIC by number of dependent children.(4)

	Because the EIC increases over some range of income and then is phased out over anotherrange of income, the aggregation of incomes that occurs when two individuals marry may reducethe amount of EIC for which they are eligible.(5)

	Marriage may reduce the size of a couple's EIC not only because their incomes areaggregated, but also because the number of dependent children is aggregated. Because theamount of EIC does not increase when a taxpayer has more than two dependent children,marriages that cause the resulting family to have more than two dependent children will result in asmaller number of children giving rise to the EIC than when their parents were unmarried. Andeven when each unmarried individual brings just one dependent child into the marriage there is areduction in the amount of EIC, since the maximum credit for two children is generally much lessthan twice the maximum credit for one child.

	These three features can cause unmarried individuals who are eligible for the EIC to facesignificant marriage penalties. For example, in 1998,  two individuals each with one dependentchild, one with wage income of $14,000 and the other with wage income of $10,000, would facea marriage penalty of $3,095(6) due to the EIC.(7)

**B.  Legislative History**

	The marriage penalty in the current income rate structure dates from changes in thestructure of individual income tax rates in 1969.(8) To understand the effect of those changes, oneneeds to go back to 1948, when separate rate schedules for joint filers and single returns wereintroduced. Before 1948, there was only one income tax schedule, and all individuals were liablefor tax as separate filing units.  Under this tax structure, there was neither a marriage penalty nora marriage bonus.  However, this structure created an incentive to split incomes because with aprogressive income tax, a married couple with only one spouse earning income could reduce itscombined tax liability if it could split the income and assign half to each spouse. While theSupreme Court upheld the denial of contractual attempts to split income,(9) it ruled that in Stateswith community property laws, income splitting was required for community income.(10) As incometax rates and the number of individuals liable for income taxes increased before and during WorldWar II, some States adopted, or considered adopting, community property statutes to give theircitizens the tax benefits of income splitting.

	The Revenue Act of 1948 provided the benefit of income splitting to all married couplesby establishing a separate tax schedule for joint returns. That schedule was designed so thatmarried couples would pay twice the tax of a single taxpayer having one-half the couple's taxableincome. (This relationship between rate schedules is the same as that between joint returns andseparate returns for married couples under present law.) While this new schedule equalizedtreatment between married couples in States with community property laws and those in Stateswith separate property laws, it introduced a marriage bonus into the tax law for couples in Stateswith separate property laws.(11) As a result of this basic rate structure, by 1969, an individual withthe same income as a married couple could have had a tax liability as much as 40 percent higherthan that of the married couple. To address this perceived inequity, which was labeled a "singlespenalty" by some commentators, a special rate schedule was introduced for single taxpayers(leaving the old schedule solely for married individuals filing separate returns). The bracketbreakpoints and standard deduction amounts for single taxpayers were set at about 60 percent ofthose for married couples filing joint returns. This schedule created a marriage penalty for sometaxpayers.

	In 1981, Congress created a deduction for two-earner married couples. The maximumdeduction equaled 10 percent of the lesser of: (1) the earned income of the spouse with lowerincome or (2) $30,000. The two-earner deduction, was, in part, created to alleviate the workdisincentive effects of high marginal tax rates on the second earner's income.  The Tax ReformAct of 1986 repealed the two-earner deduction in conjunction with the enactment of generallylower tax rates.

**II.  DESCRIPTION OF PROPOSALS
**A.  Election to Calculate Combined Tax as Individuals****