Public Policy Update:  Splitting the Difference: Marriage Penalty Relief that Works for All Families by Pauline Connole March 2003 Welcome Home

The marriage penalty is back in the news, and with it the arguments about how to eliminate this inequity from the tax code and even whether or not such a penalty exists. Staff members of Family and Home Network recently attended a symposium on family tax equity sponsored by the Family Research Council. At this conference, Charmaine Yoest, mother of three and a fellow at the University of Virginia gave a presentation on the marriage penalty, with an emphasis on eliminating it by utilizing income-splitting.

What Is the Marriage Penalty?

The marriage penalty refers to the fact that many married couples pay more in taxes than they would if they were earning the same amount of money but were not married. This happens because the combined income of a married couple often pushes them into a higher tax bracket. In addition, some tax deductions and exemptions for married couples are not double that of singles. For example, for the year 2002 the standard deduction for a single person is $4,700, but the deduction for a married couple is only $7,850. The tax cut signed into law in 2001 included some marriage penalty relief but did not completely eliminate the penalty. A married couple making the median income still pays around $1100 more in taxes than an unmarried couple making the same amount.

Is There a Marriage Bonus?

Despite what looks like obvious unfairness to married couples, some people argue that the marriage penalty does not exist, and that there is actually a marriage bonus in the tax code. In a column in the New York Times, full of snide references to “Ozzie and Harriet” (“A Marriage Penalty, Except When it Isn’t,” 1/19/03), Edmund L. Andrews argues that married couples with children-- especially those with one parent at home--are the “big winners” in the current tax code. To make this argument he points out that a single person with a taxable income of $60,000 per year pays $4,643 more in taxes than a married couple with two children who have the same income. Even worse, in his view, a single mother with one child and the same income would pay about $1,800 more than the two-parent, two-child family.

But it does not take an economist to see that Mr. Andrews is hardly comparing apples with apples. The reason why a family of four pays less in taxes than a single person or a family of two has nothing to do with marital status or whether both spouses are employed. The tax code allows households to exempt a certain amount of income from taxation for each person in the household. This acknowledges the fact that it takes a certain amount of money for a person to be able to survive--whether that person earns income or not. Therefore a household with four people is going to pay less in taxes than a household with identical income, but with only one or two people. It would seem that Mr. Andrews is arguing that a spouse who does not earn income should not be counted as a person for tax purposes.

Marriage Penalty Relief:
Focusing on Two-Income Couples

Currently, the marriage penalty falls more heavily on couples with very similar incomes, less so on couples where one spouse makes much less money than the other or none at all. Because of this, many people, including Mr. Andrews, argue that marriage penalty relief should be narrowly aimed at households with two full-time incomes. Allowing married couples to file as if they were singles or giving these couples a special tax credit are two of the strategies proposed to address the marriage penalty. Mr. Andrews bolsters his argument in favor of targeting marriage penalty relief narrowly toward two-income couples by raising the specter of scary “conservative groups” trying to force women out of the workplace.

Marriage Penalty Relief:
Income-Splitting

David Blankenhorn, President of the Institute for American Values, points out in an article in The Weekly Standard (“For Richer, For Poorer,” 2/3/03) that income-splitting would help all families regardless of how a couple divides the wage-earning and child-rearing responsibilities. It would allow married couples to split their income exactly in half for tax purposes regardless of how the earning was actually divided between them. For example, a couple with a total income of $50,000 per year would be taxed in the same way as two singles each making $25,000 per year whether they each actually made $25,000 per year, one spouse made $40,000 and the other $10,000, or one spouse made $50,000 and the other stayed home. (This was actually the tax policy for married couples in the United States from 1948- 1969.) This would effectively eliminate the marriage penalty, but--unlike proposals to let each spouse claim only his or her own income--it would recognize that a marriage is more than just the sum of its income-earning parts.

A married couple or a family with children is not just a loose association of individuals, each with his or her own financial interests. As Blankenhorn says: “Every day, spouses cooperate, trade off, give freely to each other, and specialize according to talent and inclination.” In other words, a family is itself a single coherent economic unit and should be recognized as such. Such recognition includes acknowledging that unpaid labor within the home is just as important a contribution to the well-being of the family as paid labor outside the home.

Currently, the tax code allows business partners to split income in the manner described above precisely because it is impossible to determine how much of a company’s income can be attributed to any individual partner. The same thing could be said of a marriage. Some people object to the idea of treating marriages as if they were businesses partnerships, and these people have a point. But, as Charmaine Yoest points out, right now the tax code does not even give the institution of marriage as much respect as business partnerships, so this would at least be a step in the right direction.

Two Very Different Approaches

Some argue that income-splitting would unfairly reward at-home parents and penalize two-income couples, but this logic holds only if you think that taxing families equally is unfair, regardless of how they divide their income- earning and care-giving work. Some complain that it would set back women’s gains in the workplace and “force” them back into the home. But is recognizing and protecting the work done inside the home any less vital to today’s women than protecting employment outside the home? The fact is that 49% of married women with children under the age of eighteen work outside the home either part-time or not at all (compared to 48% who work full-time). In addition there are a growing number of fathers who are choosing to stay home or work part time. Couples with one income-earner have a median income approximately $26,000 less than that of two-income couples. These families need tax relief as much as families with two full-time incomes.

Americans seem to be in agreement that couples should not pay more in taxes just because they are married. Income- splitting respects the decisions made by married couples about how best to share responsibilities regarding income-earning and unpaid caregiving work.

For more information: The Institute for American Values: www.americanvalues.org The Family Research Council: www.frc.org