Marriage Tax Penalty: An Overview of the Issues

Publication Date: June 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

Both Democrats and Republicans have expressed interest in reducing the marriage tax penalty. The House passed H.R. 6 in late March, 2001, which is similar to legislation proposed and passed in 106th Congress but vetoed for budgetary reasons. President Bush also proposed marriage penalty relief in the form of a second-earner deduction. The final bill, H.R. 1836, which was signed into law by the President on June 7, contains the provisions of H.R. 6. It eliminates the marriage penalty for a large fraction of couples but at a cost of increasing marriage bonuses.

A marriage penalty arises for some families because family income is combined and subject to progressive tax rates. Other couples, however, experience bonuses because the exemption amounts and rate brackets are larger for the joint returns filed by married couples than for singles' returns. Approaches to addressing the marriage penalty include expanding standard deductions and rate brackets for joint returns (the approach in H.R. 6), optional separate filing, and second-earner deductions (the President's proposal). Marriage penalties at lower income levels also arise because of the earned income tax credit (EITC).

It is not possible to measure the marriage penalty or bonus precisely because the taxes a married couple would pay as two singles depends on the division of unearned income, itemized deductions, and the custody of children. When children are allocated based on typical observed behavior, the Congressional Budget Office has estimated (before considering H.R. 1836) that 37% of married couples have penalties ($24 billion), 3% are unaffected, and 60% have bonuses ($73 billion). Even if children are assigned in a way to minimize taxes, 43% of joint returns had penalties of $32 billion and 52% had bonuses of $43 billion.

This analysis suggests that any proposal to reduce taxes for married couples would increase horizontal inequities that generally tend to penalize singles, based on an ability-to-pay standard and using the relative poverty scales to measure relative ability-to-pay. (At high income levels, larger families with children pay the heaviest taxes, but at low and middle income levels, the highest taxes are paid by single individuals and the lowest are paid by families with children).

Our analysis also suggests that optional filing may be an efficient approach to eliminating marriage penalties at the smallest revenue cost, but would add to tax complexity. Expanding standard deductions and rate brackets (as was done but limited to the first rate bracket in H.R. 1836) for joint returns is simple, but would cost the most and would expand marriage bonuses. Second-earner deductions add some minor complexity but, while not as target-efficient as optional filing would be more targeted than general tax reductions for joint returns. Per dollar of revenue loss, second earner deductions are most likely to reduce behavioral distortions with respect to labor supply of married women, while joint return reductions are least likely to reduce these benefits. This report will be updated as legislative developments occur.