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The Marriage Penalty After the TCJA: Effects on High- and Low-Income Households and the Elderly

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The Marriage Penalty After the TCJA: Effects on High- and Low-Income Households and the Elderly REPORT 03.26.19 The Marriage Penalty after the TCJA: Effects on High- and Low-Income Households and the Elderly Joyce Beebe, Ph.D., Fellow, Center for Public Finance Although couples rarely think about tax and $100,000. Because families can pool returns at their wedding, the tax system resources together in ways individuals does change a couple’s income tax liability cannot, the tax system views the family as from that day forward, for richer or for a tax unit, instead of the individuals within poorer. Furthermore, some marriage-related the family. Secondly, the system maintains tax effects last after death doth a couple a progressive rate structure, meaning that part. This issue report first summarizes the taxpayers with higher incomes pay higher nature and evolution of the marriage penalty taxes at higher rates. Finally, the tax system in the U.S. tax system. It then reviews the is based on the belief that a couple’s marital magnitude of the penalty and its influence status should not influence their tax liability; on work and marital decisions. Finally, it the system remains marriage neutral. discusses how the Tax Cuts and Jobs Act Separately, these are all desirable of 2017 (TCJA, Pub. L. 115–97) changes the goals. However, the “unattainable ideal” marriage penalty for different income and that incorporates all three simply cannot This year marks the age groups. be achieved simultaneously. Prior to the 50th anniversary of TCJA in 2017, two unmarried people who the creation of the both earn $100,000 would each pay WHAT IS THE MARRIAGE PENALTY? $18,139 in taxes, or $36,278 total. After marriage penalty in the marriage, the couple would pay a combined U.S. tax system. As the The marriage penalty refers to the $37,060 in taxes, an increase of $783. This tax code changed over increased joint income tax liability two is because joint reporting pushes some of 1 time, the magnitude of taxpayers incur when they marry. In the couple’s income into the higher 28% certain cases, marriage could reduce joint tax rate bracket. For this couple, the tax the marriage penalty income tax liability, which is often called a system treats them jointly as a tax unit and has also varied. marriage bonus or marriage benefit. Besides maintains the progressive rate structure an increase in taxes owed, the marriage (satisfying the tax system’s first and second penalty can also take the form of reduced objectives), but they pay more taxes as 2 tax credits or lower tax preferences. a result of marriage, a violation of the The cause of the marriage penalty is marriage neutrality principle. rooted in three objectives of the U.S. tax The marriage penalty can be eliminated 3 system that are intrinsically conflicting. by relaxing the first or second objectives. First, the system is designed to ensure that Using the individual rather than the family households with the same income pay the as a filing unit or switching to a flat tax same amount of income taxes, regardless of rate structure would solve the conundrum, who earns the income. A couple that earns but these options are often perceived as $200,000 and $0 should have the same less desirable politically than leaving an tax liability as a couple that earns $100,000 BAKER INSTITUTE REPORT // 03.26.19 acceptable marriage penalty in place. Not perspective, although it does generate only would switching to a flat tax system uneven distributional results.6 change the current distribution of income The 1990 and 1993 tax acts increased tax burdens, it would also be considered taxes overall, expanded the number of unfair because higher income households tax brackets, and raised the maximum would not pay a higher portion of their marginal tax rate to 39.6%. A Congressional income in taxes. A complete switch to an Budget Office (CBO) report indicated that individual filing system would also change these changes imposed larger marriage the current distribution of tax liability and penalties on both low- and high-income likely increase taxes for single-earner families, as well as increased marriage families. A less radical proxy is therefore to bonuses for some.7 Throughout the 1990s, set the standard deduction and the income dissatisfaction about the increasing marriage bracket at which higher tax rates take effect penalty again intensified, and by the early for married couples at twice the levels 2000s, there was congressional interest for single taxpayers, but the potentially from both political parties in reducing the undesirable effect would be to enhance marriage penalty.8 The 2001 and 2003 tax a marriage bonus, creating a “dowry” for cuts therefore reduced the penalty for many some married couples. middle class taxpayers.9 A major approach In general, the marriage penalty has used was to make some tax brackets for garnered the most attention in discussions married couples filing jointly (MFJ) twice The cause of the regarding personal income tax treatment as large as the corresponding brackets for marriage penalty of families; however, the marriage bonus single filers. For example, between 2003 actually existed before the marriage and 2017, the income range of the 15% is rooted in three penalty became an issue. In 1948, Congress tax rate bracket for MFJ households was objectives of the U.S. introduced the concept of universal income double that of single filers, but not for higher tax system that are splitting to calculate joint tax liability rate brackets. As such, taxpayers with intrinsically conflicting: between couples. Under this regime, when incomes subject to the 25% marginal tax two taxpayers got married, their tax liability rate or above generally were more likely to household-based was calculated as double the liability owed experience a marriage penalty.10 taxation, progressive on half of their combined income, which Although the occurrence of a marriage rate structure, and generally led to lower joint tax liability, or a penalty or bonus depends heavily on the marriage neutrality. marriage bonus, compared with two single circumstances of the particular taxpayers, individuals.4 To resolve this issue, Congress three factors have the greatest influence: the created a separate rate schedule in 1969 couple’s income level, number of children, for unmarried taxpayers, but this made it and the division of income between them.11 possible for two individuals’ joint tax liability As indicated, from 2003 to 2017, to increase when they got married—thus households with income subject to the 25% creating the marriage penalty. rate or above were more susceptible to the Political debate regarding the marriage marriage penalty because of the narrower penalty was intense in the 1970s through MFJ brackets; this bracket asymmetry kicked 1980s, but greatly declined after the Tax in at approximately $57,000 to $75,000 per Reform Act of 1986 (TRA 86), in part because individual.12 For income levels below this the reform lowered the marginal tax rates range, however, the standard deduction and to an extent that the marriage penalty and the income brackets for married couples bonus were not as significant.5 Additionally, filing jointly were twice those for single studies generally found that the number of taxpayers; hence, there was limited concern households that incur a marriage penalty of a marriage penalty for these groups. versus a marriage bonus are similar, and The number of children a couple has that the size of their respective penalties matters because it could determine the or bonuses are also not significantly taxpayers’ filing status, the associated different. This leads to the impression that deduction level, and whether they qualify in aggregate, the marriage penalty is not for various credits. Finally, spouses with a major issue from a government revenue roughly the same income levels tend to 2 THE MARRIAGE PENALTY AFTER THE TCJA: EFFECTS ON HIGH- AND LOW-INCOME HOUSEHOLDS AND THE ELDERLY pay a marriage penalty, while spouses with all family structures—a trend influenced by unequal incomes tend to receive a marriage several other social or economic factors— bonus. A study by the Joint Committee on the resulting decrease in the number of MFJ Taxation (JCT) states that under the 2001 tax taxpayers has reduced the impact of the law, married couples whose earnings were marriage penalty. split more closely than 70-30 would suffer Although the marriage penalty does a marriage penalty.13 A more recent study not appear to have much of an impact on on the tax consequences of marriage for couples’ marital decisions, it does change cohabiting couples found that in situations people’s work patterns, especially for the where one spouse earns less than 5% of secondary earner in a couple (the lower the family income, 77% of these households earning spouse). Specifically, because a would have a marriage bonus, while 3% joint system taxes the combined income would pay a marriage penalty. As the of married couples as one single unit, the couples’ income distribution becomes more secondary earner’s marginal tax rate is the even, where one spouse earns 40-50% of same as that of the primary earner. This Research has generally the total income, only 11% of those couples has the effect of causing the secondary found limited evidence incur a marriage bonus, but 63% would pay earner to reduce his/her work hours or not that a tax-induced a marriage penalty.14 work at all.17 A more subtle way the marriage penalty marriage penalty emerges is in the form of tax preferences. International Perspective caused lower marriage There is plenty of evidence in the tax code The Organisation for Economic Co-operation rates; however, it does demonstrating how tax preferences depend and Development (OECD) points out that change people’s work 15 on marital status.
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