Marriage Penalty Legislation: A Comparison of Alternative Proposals

Publication Date: June 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

President Bush's tax proposal and H.R. 6 (passed by the House) have different approaches to the marriage penalty. The Administration proposal, in addition to rate changes, has a second-earner deduction for 10% of income (up to $30,000) earned by the lower earning spouse. H.R. 6 would increase the standard deduction and width of the 15% rate bracket for joint returns to twice the size of singles, eliminating the penalties for taxpayers in the 15% and 28% brackets but adding to any marriage bonuses. This report compares these alternative proposals. (H.R. 1836, signed by the President on June 7, includes these latter proposals along with rate cuts).

Taxes can go up or down as a result of marriage, depending on the income of the two spouses. These penalties and bonuses arise from the progressive tax structure and the decision to impose taxes on a household basis.

For much of the middle class, marriage penalties are low. For couples without children, the maximum marriage penalty at 2001 income levels for the 60% of taxable returns subject to the 15% marginal rate in 1997 is $225; most couples that itemize have no penalty at all. The second-earner deduction in the administration proposal virtually eliminates the marriage penalty for these couples. Even in the 28% rate, which covers another 26% of taxable returns, the second earner deduction along with the flatter rates results in no or negligible penalties. Overall, these taxpayers account for the middle 75% of joint returns. Taxpayers with children could have small remaining penalties, depending on how penalties are defined. Most of those in the 15% bracket who might have still have penalties that are significant relative to income are removed from the tax roles entirely through the additional child credits.

Lower income couples may incur penalties through the Earned Income Credit (EIC) under either proposal, although it is difficult to address EIC marriage penalties and bonuses. The 12% of taxpayers in higher brackets may have remaining penalties. A large fraction of these returns do not have large penalties because their marginal tax rate is the flat capital gains tax rate. Any penalties are substantially reduced or eliminated, however, due to the lower rate structure in the Administration proposal.

The important difference between H.R. 6 and the Administration proposal is that H.R. 6 expands marriage bonuses in most cases while the Administration proposal generally reduces them due to flatter tax rates. H.R. 6 combined with rate cuts would increase bonuses in comparison to the Administration proposal and, in many cases, in comparison to current law.

Measurement of the marriage penalty for couples depends on the allocation of children for tax purposes. When married couples are compared with cohabitating singles, where issues of incentives and fairness suggest attention be focused, cohabitating singles are less likely to have children and when they do, have low incomes unlikely to be subject to regular income tax. Thus, the issues of measuring the marriage penalty for families may be relatively unimportant. This report will be updated to reflect legislative developments.