Since TAX 1937 FOUNDATION SPECLI L March 1998 No. 77 By Claire M. Hintz Many elements of the tax code vary with a different tax liability than two similarl y Senior Economist marital status, including the amount of the situated single people. Tax Foundatio n standard deduction, the earned income tax A married couple filing jointly incurs a credit, and the tax rate schedule . All of these "marriage penalty" if their tax bill is highe r differences can cause a married couple to have than the combined tax bills that they woul d have paid if each could have filed singly . Similarly, a married couple receives a "mar- Figure 1 riage bonus" when the sum of the individual Distribution of Marriage Penalties and Bonuses by Size of Adjuste d tax liabilities had they filed singly is greate r Gross Income, 199 6 than their tax liability under a joint return . Marriage penalties result from the conflic t between three mutually exclusive goals of th e Less Than $20 k $20k-$50k More Than $50k tax system: • Taxes should be progressive (specifically , the progressive marginal tax rate structure) ; 70% • The tax code should be neutral with respect to marriage ; and • The tax code should treat families equall y 60% (families with equal incomes should have equal tax bills) . Different balances have been struck with 50% regard to these goals over time . Currently, the tax code is not neutral with respect to marriage . The Congressional Budget Office esti- 40% mated that 42 percent of married couples incurred marriage penalties and 51 percent °\° received bonuses in 1996. According to th e 30% study, the average size of a marriage penalty was $1,400 and the average size of a marriag e bonus was $1,300 . 20% 0\0 A Brief History of the l o% Marriage Penalty in the -3\° Federal Income Ta x The income tax expanded rapidly in th e 0% 1940s to finance World War II. As a result of Percent with Percent with Percent with the increasing number of families subject to Marriage Marriage Neither the income tax and higher marginal tax rates , Penalties Bonuses more states began to enact community property laws that allowed couples to spli t source : Congressional Budget office . their income in half and, as a result, pay lower 2 federal income taxes . Congress codified The EITC can impose marriage penalties o r income-splitting in 1948 by allowing marrie d give marriage bonuses to low-income filers couples to file joint returns using tax schedule s because the size of the credit does not depen d whose brackets were twice as wide as those on filing status but varies with the number of for singles . The new law provided marriag e children. Combining the incomes and childre n bonuses for most couples. However, as a of a couple on a joint return can increase o r result of this change, a single taxpayer with th e reduce the credit they receive relative to th e same total income paid higher taxes than a credit they could obtain if each could file married couple. separately as single or as a head of household . In 1969, responding to pressure from In 1993, the size and scope of the Earned single taxpayers who viewed the 1948 ta x Income Tax Credit was expanded, furthe r change not as a marriage bonus but as a increasing the potential of the EITC to create "singles penalty," Congress changed the law b y marriage penalties and bonuses . altering tax brackets so that the tax liability of Finally, there are more than 60 separat e a single person could be no more than twent y provisions in the tax code that vary wit h percent greater than the liability of a married marital status and most can produce marriag e couple with the same income . This change penalties or bonuses. These include th e created marriage penalties for couples in taxation of Social Security, limitations on which husbands and wives had similar in - capital losses and the home mortgage interes t comes . deduction . The Taxpayer Relief Act of 1997 Under this new rate structure, marrie d added new sources of marriage penalties and couples could no longer file as single individu- bonuses, including phasing out eligibility fo r als. They could file as married filing separatel y child credits and education credits differen- or as married filing jointly . If two marrie d tially for married couples and singles . people with similar incomes were pushed int o a higher bracket by this change than eithe r Sources of Marriage Penalties would have been in if they could have file d separately, the new law penalized the m and Bonuses relative to prior law . The size of marriage penalties and bonuses To help offset the marriage penalties tha t under current law depends on individual were created in 1969, the Economic Recovery income and how the income is split between Tax Act of 1981 provided a deduction for two - the couple, the number of dependents, and earner married couples of ten percent of th e the amount of itemized and standard deduc- earnings (up to $30,000) of the lower incom e tions. In general, married couples with highly spouse. disparate incomes receive marriage bonuses .' The two-earner deduction was eliminate d Couples whose incomes are more equal ten d only five years later as a part of the broadenin g to incur penalties . of the tax base by the Tax Reform Act of 1986 . Changes in the tax code are not solely The 1986 Act also collapsed the number of tax responsible for the greater incidence of brackets down from fourteen to two . This marriage penalties. Demographic changes flattening of the rate structure reduced the siz e have caused a significant increase in th e and number of marriage penalties and bonuses , number of couples who incur marriag e temporarily quelling calls for relief from bot h penalties. In the last twenty years, there has married couples and single taxpayers . been a rapid increase in the number of marrie d Changes in the tax code in 1990 and 1993 couples with two incomes and, in addition , exacerbated marriage penalties and bonuses there has been growing equality of incom e anew by increasing the number of statutory ta x between men and women . brackets from two to five . These changes , Within the tax code, the standard deduc- along with the increasing number of marrie d tion and the different widths of tax brackets couples with joint incomes and the increasin g for different types of filers are the primary equality of incomes between men and women , sources of marriage penalties and bonuses . have led to new calls for reducing or eliminat- The standard deduction of a single filer is 6 0 ing "marriage penalties . " percent of the standard deduction of a marrie d The Earned Income Tax Credit (EITC), en- couple. The tax bracket breakpoints for th e acted in 1975 to offset the burden of the pay- 15, 28, and 31 percent tax brackets for single roll tax for low income working families with filers are also 60 percent of the breakpoints fo r children (and subsequently expanded to in- married couples filing jointly .' With thes e clude low-income single working adults), created ratios, two single filers have standard deduc- a new source of marriage penalties and bonuses . tions whose sum is greater than the standard SPECIAL 3 REPORT deduction that they would receive as a mar- Table 1 ried couple filing a joint return . In addition , A Marriage Penalty because of the differential size of the tax Coupl e brackets, joint filers may (especially if thei r Paul Lisa Filing Jointl y incomes are nearly equal) have a portion o f their income pushed into a higher tax bracke t Income $40,000 $40,000 $80,00 0 than if they were unmarried . Less Personal $2,700 $2,700 $5,40 0 Example 1 : A Marriage Penalty¢ Exemption(s ) Paul and Lisa, each earning $40,000 , Less Standard would owe $11,918 in taxes if they could file Deduction $4,250 $4,250 $7,10 0 singly instead of filing jointly . They incur a marriage penalty of $1,478 . (See Table 1, left.) Equals Taxabl e The difference in the tax liability is due to Income $33,050 $33 .050 $67,50 0 two factors: Taxed at 15% $25,350 $25,350 $42,350 • The standard deduction for marrie d couples is not twice that of a single filer . Taxed at 28% $7,700 $7,700 $25,15 0 Filing jointly, Paul and Lisa have a standard deduction that is $1,400 less than the tw o Total Tax Liability $5,959 $5,959 $13,395 single standard deductions that they could Marriage Penalty $1,478 claim if they were not married . At the 28 percent marginal tax bracket this smalle r deduction costs them $392 . • The difference in the breakpoints of th e tax brackets for single filers and marrie d couples is the second source of the marriag e Table 2 penalty for Paul and Lisa . Filing singly, th e A Marriage Bonus breakpoint for moving from the 15 percen t rate to the 28 percent rate is $25,350 . For a Coupl e s Bob Mary Filing Jointl y married couple filing jointly, this breakpoint i $42,350 . Because the tax brackets of marrie d Income $ 0 $80,000 $80,00 0 couples are not twice as wide as those fo r single filers, $8,350 of their income that would Less Personal $ 0 $2,700 $5,40 0 be taxed at 15 percent if they could file a s Exemption(s ) singles gets taxed at 28 percent, resulting in a n additional cost of $1,086.