Marriage_Penalty

Title As a couple is walking down the aisle after they have just been married, the only thing that is probably on their mind is the love that they have for each other. But afterwards, whether simply hours or up to many months later, almost half of those couples will discover something they may not like. They will owe “Uncle Sam” anywhere from a few dollars to more than a thousand dollars more in taxes. The Congressional Budget Office estimates that 43 percent of all married couples pay an average of $1,480 more in taxes each year than single people that earn the same income (Hederman, 2000). This tax penalty is completely unfair to these hard-working Americans that fall into the certain range of the tax code. While this may not prevent couples from marrying, some may delay until the next tax year to avoid the impending income loss. This marriage “penalty” tax came about through changes in the tax code over the years. In 1913, when the tax code was first implemented, United States citizens had to file taxes separately, whether married or not. This caused an unfair advantage to couples in community-property states, since they could claim exactly half of the total household income instead of the exact portion that each spouse earned. Therefore, if a husband made all the income for the household, then in these states each spouse could file taxes on half the total income. This, in turn, would lower each person’s taxable income and lower their overall taxes, so they would get more money back, which is called a marriage “bonus”. In 1948, the government changed the tax code, allowing all married couples to use “income-splitting”. Stein, a senior economist to the Joint Economic Committee (1997) states that with income-splitting, couples, in this time, would owe 42% less than they would if they were single. Finally, in 1969, the government responded to the concerns of single people, by making changes. Tax rates and marginal brackets were shifted for married couples, causing married couples to be more prone now to a marriage penalty, particularly couples in which the incomes of each were approximately equal. The number of tax rates was reduced between 1981 and 1986, which lessened the penalty that affected married couples, but in 1993 the number was raised. According to the census bureau, the median household income is $39,657. At this income, the difference between taxes of a married couple and an unmarried couple is $210. If the average American couple gets married and owes more money, then there a serious problem with the tax structure. The marriage penalty tax needs to be eliminated, because it is an unfair tax on almost half of hard-working married couples. Problems with the Marriage Penalty Tax When the tax code was implemented, there was an advantage to getting married. In most families the husband was the only one who worked, and the tax rates were set to that. When the code was changed to allow “income-splitting,” married couples received a large marriage “bonus,” because each person could claim exactly half the total income for the family. This would shift the taxable income into a lower tax bracket, and the couple would get the extra tax money paid throughout the year back in a refund. Through all the tax code and social changes, there is no longer such a bonus. It is more likely to see dual-income families, which changes their taxation. As the couples’ incomes equalize, they are more likely to suffer a marriage penalty, which occurs when a couple’s income is taxed throughout the year, at a rate based on their individual income. At the end of the tax year, when the couple files their income taxes, they are required to split their income equally. If there is a clear “breadwinner”, then the spouse who has made more money has paid more taxes. Upon filing, the spouses’ reported income has now lowered and the amount of taxes owed during the year has also lowered. The lower earning spouse does indeed report a higher income requiring a greater amount of taxes owed, but this would be done at a lower tax rate. The extra amount owed by the lesser income is more than offset by the lesser amount owed by the breadwinner, and this couple receives a bonus. In a dual-income family where the incomes are equal, there is little or no difference between the combined income and the income split in half for tax filing. An inherent problem is that the standard deductions for two single people and a married couple are not the same. According to the tax code the standard deduction for two single people is $4,300 each, for a total of $8,600 for the two of them. The total deduction for a married couple is only $7,200, which means an additional $1,400 of income becomes taxable for the married couple. In a single-income family, when the income is split, $2,900 of the income is now non-taxable, causing a lower amount of taxes owed. In a dual-income family where the incomes are approximately equal, though, the extra $1,400 is now taxed and the couple will end up owing. Another problem is that the marginal tax rates for a married couple are not twice the amount as the rates for two single people. The tax code states that for the two single people, the 15% tax bracket extends to $25,750. The same tax bracket for a married couple does not double that to $51,500. Instead, it stops short at $43,050, meaning $8,450 is then taxed in the next bracket of 28%. That means that a married couple that makes a combined $60,000 gross income ($30,000 each) would pay $1477.50 more than an unmarried couple making the same amount. An additional inequality in the tax code is that if married couples with children itemize deductions they are not penalized as much. This is unfair to a working couple without property or children. According to an article from the Lancaster New Era (2000), an entry-level plumber who earns $24,900 and is married to a short-order cook who earns $24,750 would suffer a $900 penalty, or a carpet installer who earns $31,500 and is married to a licensed practical nurse who earns $32,300 would owe an additional $1,100. Couples who are starting out their lives together should not have to pay more of their hard-earned money to the government; conversely, they should be able to use that money to save for the future. Reform of the tax code is also needed because “traditional” family structure has changed. In the early days of the tax code, the typical family had a mother who stayed at home and cared for the home and the children, typically earning no income, and a father who worked and earned the household income. The way the tax code is in 2000, these types of families still benefit by receiving a marriage “bonus.” However family structure has changed greatly. A 1997 Congressional Budget Office report on marriage and the federal income tax found that between 1969 and 1995, the proportion of working-age married couples with both spouses earning paychecks increased from 48.4% to 71.8% (Kong, 2000). The tax code should reflect such social changes and should be reformed. Possible Solutions for Elimination of the Marriage Penalty Tax There are a few possible solutions for eliminating the penalty. Each has advantages and disadvantages. In each case, the solutions depends on how much money would be spent on it, and how it would affect either married couples or singles. Married couples currently receive a bonus may not be willing to give up any of that money and single people will not want married couples to be enjoying a bonus instead of a penalty. Congress must exercise caution in choosing a solution, otherwise, according to MacGuineas (2000) “it should brace itself for the ensuing flood of complaints about the resulting ‘singles tax penalty’.” One solution would be easiest explained as the “choice approach.” The idea here is to give couples the option of filing their taxes jointly or individually. This option is currently in place, but for people who suffer the penalty, couples with near equal incomes, the tax brackets are exactly the same. If they are taking a standard deduction, they would owe very nearly the same amount either jointly or separately. In this solution though, if couples decided to file separately, then the tax brackets for this would equal that of a single filer, which would essentially eliminate the penalty. Unfortunately couples who receive the bonus under the current structure would continue to receive it and would actually receive more if the bill increased the standard deduction to equal double that of a single filer. This would also cost the government up to $89 billion over the next five years. Another possible solution would be to return to the tax structure that existed prior to 1948, where all people were taxed as individuals, regardless of marital status. This would mean that filers would be taxed at the rates of a single person, all standard deductions would be the same, and it would eliminate the marriage penalty. This would conceivably be of little or no cost to the government, because the money that would be paid out to the couples no longer suffering from the penalty would all come from the couples that are lucky enough to receive the marriage bonus. The biggest opposition would come from the couples that would no longer receive a bonus. Most hard-working Americans would not willingly want to offer up a bonus given to them by a quirk in the tax structure. Another problem with this would be deciding whether all married couples would be able to split incomes. If this were allowed then married couples benefiting from income splitting, and most likely receiving a bonus because of it, would continue to benefit from it, and may possibly receive a larger bonus. This solution would not discourage a marriage or even make them want to wait until the new tax year to get married, since there would be no more penalty. This, in turn, could also encourage more and more dual income families. Becker (2000) states that when Sweden introduced individual taxation in the 1980’s, it was a key factor in the growth of married women in the labor force, now the highest rate in Europe. Another possible solution is in a flat tax rate. Although it has faced opposition, all people would pay the same percentage of taxes regardless of income. In addition to raising the standard deduction for a married couple to double that of a single person, then it would eliminate all penalties. Unfortunately, the government would have to decide on that tax rate. The result would be too costly to the government if the tax rate were too low; conversely, it would be met with opposition from the American people if set too high. Best Solution for Eliminating the Marriage Penalty Tax The best most economic way to eliminate the marriage penalty tax is to introduce individual taxation. Although it would eliminate any marriage bonuses, it would cost the government virtually nothing. In some cases couples might consider divorce in December each year, in order to be able to file taxes as individuals, and then remarry in January. Individual taxation would eliminate the need for this. It could also avoid the need for legislation regarding homosexual and patrimonial partnerships (Becker, 2000). Marriage usually affects the incomes of a typical family, since couples must make decisions regarding child care and household duties. Further, individual taxation would boost labor-force participation of “secondary workers”, mainly married women, since they would be taxed in the normal tax bracket, rather than at the higher rate when added to the husband’s income. There is no reason that the average American married couple should have to pay more taxes than any other average American. Current and Proposed Legislation to Eliminate the Marriage Penalty Tax There has been a bill (HR 4810) that passed through the House and the Senate, but was subsequently vetoed by President Clinton. It seems to be difficult to get anything ironed out on this, because there is just too much partisan bickering. Both sides agree that this marriage penalty should be repealed, but neither can agree on how it should be done. The bill that did make it through congress was a republican bill that would have increased the standard deduction for a married couple to twice that of a single person. It would have also expanded the 15 percent tax bracket for married couples to double the same bracket for a single person. This would have essentially eliminated any penalty that a couple would suffer, but Clinton vetoed it because he said it would favor higher-income families over the families that need the break. It would have cost the government too much money, because while eliminating the penalties for middle and lower-income families, it would have also given a high-income family a higher break. It would have done this by making less of their income taxable with the increased standard deduction, and making less of what was left taxable at higher rates because of the wider 15 percent tax bracket. The House tried to override the veto, but they fell short of the two-thirds vote needed. The topic of marriage tax reform is a hot topic of debate for the 2000 presidental candidates. Al Gore’s proposed plan would increase the standard deduction for married couples. This would not eliminate the penalty, though, because it single income families would benefit from it as much as dual income families. George W. Bush’s proposal is to reduce taxes by ten percent for dual income families. This does not go far enough, since it does not depend on the equality in incomes between spouses. Dual income families where there is a distinct difference in incomes do not suffer the penalty and most enjoy a bonus. So they would likely receive a larger bonus while the families with equal incomes may not have the penalty removed. This would also be too costly for the government. The marriage penalty tax is a serious problem in the tax structure that can be fixed and should be eliminated. No couple should have to pay more taxes to the government just because they decided to enter a sacred institution. Marriage is a blessed event and something that will make two people happy for the rest of their lives and the government should be waiting at the end of the aisle with it’s arms open to congradulate, not with it’s pockets open, taking hard earned money from the happy couples. So the legislators need to end their partisan bickering and reinforce to the American people that marriage is a sacred institution. They should eliminate the marriage penalty tax.