Marriage penalty; tax cut to married couples

Great Debates
1

In this New York Times (free registration req’d) article about Bush’s tax cut:

The Washington Post mentions that the cut includes

Now, a couple things, quite apart from whether the tax cut is really an effective economic stimulus:

First, could someone explain to this ignorant Canuck what the “marriage penalty” is? (If it means that married people pay more in taxes than single people, then it’s probably bad–see below.)

Second, here’s my response to a tax cut to married couples:

1. A philosophical objection: To quote then-Justice Minister Pierre Elliot Trudeau of Canada, “The state has no business in the bedrooms of the nation.” In this context, the state has no business attempting to encourage one form of household arrangement over another. That’s the government telling the citizens what’s a normal and acceptable way of life. Further, it’s putting its money where its mouth is. Libertarians should be quite upset about this particular cut. (Then again, they probably don’t like taxes much anyway, so…)

2. A second philosophical objection: People should marry for love, not money. [sub]TV audience: “Awwww!”[/sub]

3. A practical objection: People who marry, or stay married, for tax purposes, would, I imagine, be likely to have hostile relationships destructive to their children’s well-being. The state shouldn’t give people who shouldn’t be married reasons to stay married.

Responses?

-Ulterior

2

The way the US tax code is structured essentially lowers the tax rate for single-income married couples, or primary-income and minor supplementary income households. For two-adult families in which both adults have an income, a married couple may pay more taxes filing jointly as married than they would filing as individuals.

For a single-income household like my own (my royalty checks don’t count as “income” in this model) married-filing-jointly gets the benefits of a tax code written when single-income households were the norm.

3

Someone with more knowledge will probably have more to say but my impression looking at the tax form is that the “marriage penalty” reflects the fact that two-income families could conceivably pay more than single folk.

For example, if you are single your standard deduction in 2001 was $4550 but if you were married and filing separately it was $3800. Also, if single your tax bracket boundaries were at $27050, $65550, $136750, and $297350 whereas if you are married filing separately they were at $22600, $54625, $83250, and $148675.

I am not sure what happens if you file jointly instead or separately (and you can choose either)…It is too late for me to figure that out. I presume the reason for having the bracket that way and such is to prevent people from juggling around who they say has what (non-wage) income in order to attempt to get around being in higher tax brackets. I’m not sure if the fix will equalize the boundaries or do something involving the “married filing jointly” part.

Okay, so that is only minimally helpful. Is there an accountant in the house?

4

This is basically correct, but I want to clarify one point. A married couple with two incomes cannot avoid the marriage penalty by filing as indivicuals.

New Jersey income tax treats a joint return as equivalent to two individual returns, where each spouse has half the income. As a result, a couple will never havve to pay more income tax just because they got married. They cannot reduce their income tax by getting divorced.

OTOH, if Prof december and I got divorced at the end of each year and remarried early the next year, we would save enough income tax to pay for a very nice series of wedding parties.

5

I don’t see how that’s a penalty, though. It doesn’t cost as much to feed two people together as it does to feed two people seperately. Housing is also cheaper when split up, as well as utilities (depending). Perhaps this factor was taken into account when writing the code.

6

People who marry, or stay married, for tax purposes have bigger issues that would be destructive to thier children’s well-being than Bush’s tax cut. The tax cut wouldn’t be big enough to be an incentive for normal people.

7

Yee-haw! One of my favorite subjects!

The year that Microbug and I married, we actually made the front page of the local rag due to our taxes. You see, we sat down and started figuring our taxes… they seemed a bit high. So we figured out what they’d be if we could file singly; the difference was over fifteen hundred bucks!

I figured we could just file separately- I mean, surely we weren’t being penalized just for being married, right? I called my uncle, a CPA, and asked him- and found out that no, we couldn’t just file singly.

Needless to say, we were a bit pissed.

I sent off emails to every concerned politician I could think of. Over the next few months we got a few responses… Kay Bailey Hutchins said, basically, “Yeah, it sucks- vote for me, and I’ll try to fix it.” Some other politico said, “That’s just the way it is- vote for me anyway.” :rolleyes:

A little while later, the Statesman (local rag) contacted us, and asked if they could do a story on us. It seems they’d gotten our names from Hutchins. Long story short, there was our picture, April 15th, front page.

That was, uh, about five years ago. There’s still no change, and now that we’re making more money, our taxes versus unmarried are even higher. We’ve stopped figuring it out each year, 'cause it just depresses us.

I don’t really understand- the administration says they WANT more married families… but they make it cost more to BE married. sigh

True story- I told a friend about this, and when his girlfriend said that maybe it was time for them to wed, he said he’d give her 2K every year for the two of them to take a nice vacation, if they didn’t get married. They didn’t get married, and use that money for a good holiday every year.

8

I’m pretty sure it’s possible to do accounting in some financial situations such that “married filing separately” produces different taxation results than “married filing jointly”, however. I’m afraid I don’t remember which situations this applies to; it’s the sort of thing that an accountant or tax lawyer would be able to evaluate.

I could construct a hypothetical situation that might work, but as I am not an accountant, a tax lawyer, nor any longer working for either, I’m not sure that my hypothetical situations would hold water.

9

Thank you all for the fill-in about the marriage penalty. It sounds pretty silly. Wouldn’t it make sense, then, to reformulate the tax policy towards married couples so that it’s the sum of what the two individuals would otherwise pay in taxes?

Saen:

  1. What do you mean by “normal” people? Economically, since we’re talking about a monetary incentive? Socially, in some sense of a “normal” approach to married life?

  2. More substantively, here’s the thing: People who are in love and, thus, want to get married, are going to get married whether there’s an incentive to do so or whether they would go on as normal without getting married. But people who aren’t in this happy category may indeed be persuaded by such an incentive. You’re right that they already have a lot of issues; why compound them?

-Ulterior

10

The standard Econ 101 response is that there is no logical way to fix the marriage penalty unless you are willing to give up one of three major criteria. The big one is progressivity: that rich people should pay a higher percentage fo their income. The marriage penalty is worst when couples bump themselves up into a higher tax bracket. The cost is worst when their incomes prior to marriage are very different.

A related problem is the way Social Security works for spouses. If you are a working man married to a non-working woman (or vice versa), you jointly get 1.5 of your normal benefits. If the woman chooses to work, however, the benefits only go up to 2 times (or, one share for each earner). That means that the previously non-working spouse (traditionally, women) have a much lower incentive to work, because they already get half a benefit for doing nothing.

11

This raises an interesting question:

When and why did the marriage penalty come about?

Look at all the fuss about trying to get rid of the marriage penalty – discussions of principle, accounting, social impact, etc. Even President Bush is not proposing to eliminate the marriage penalty, but merely to reduce it.

There was no fuss at all about enacting it. IIRC there was no marriage penalty when I got married in 1964. At that time, being married could only lead to lower taxes. Somewhere along the line, the tax formula was quietly changed in a way that more-or-less reversed the situation. (Although if only one spouse has income, then marriage can still reduce the combined federal income tax.)

Here are some questions I’ve long wondered about:[ol][]When was the marriage penalty enacted? Was it part of the Bush 41 tax increase? The Clinton increase? []Who was behind the modified formula? Someone in Congress? Bureaucrats in the IRS? Some lobbying group?[]Who realized the impact of the change in formula at the time? Surely some accountants must have tested the formula before it was enacted. Did anyone in Congress know? Did the President know? Did anyone in the media know?[]Why wasn’t the public made more aware of this major philosophical change? Was this an oversight or a deliberate withholding of information?[/ol]Is there an expert researcher, like Duck Duck Googler maybe, who can find the genesis of the marriage penalty.

12

It seems the root of the penalty go back to the Revenue Act of 1948.
It was exacerbated by various measures after that, but since it it time to play Baldurs Gate II, I leave that reading to others.

13

Thank your, Brutus. That’s a terrific cite.

BTW for those who don’t take the trouble to read the cite, the “marriage bonus” or “singles penalty” goes back to 1948, not the marriage penalty.

The marriage penalty seems to have resulted from an effort to undo the singles penalty, which arguably overshot the mark. It started in some cases in 1969. It was then affected by tax acts in 1981 and 1986.

14

The “marriage penalty” issue has always been around. I recall a freaking “Love Boat” episode that dealt with this in the 70s (Married couple got divorced every year at tax time to save taxes, go on Love Boat while “divorced,” are tempted by others, come back together and realize marriage is more important than saving money, crew smiles benignly at them. Credits roll.)

But while the issue has been around forever, the penalty has not. There is no such thing as a marriage penalty. What is referred to as “the marriage tax” is merely an artifact of a progressive income tax system; to wit, it is impossible to generate a progressive taxation formula that results in equal taxation to couples and individuals in all situations.

Let’s look at three couples, the As, Bs and Cs.

  1. The As are a single-worker family; Mr. A stays at home and makes nothing. Mrs. A makes $100,000/year. Applying a hypothetical tax rate, and after taking standard deductions, etc. they pay a federal tax of $20,000/year.

Next year, they get divorced. Both incomes remain the same. Suddenly, Mrs. A is taxed at a single rate and has less deductions, cause she isn’t supporting Mr. A anymore. Her individual tax is now $30,000. Mr. A pays nothing.

Same two people, but suddenly they are paying a total amount of taxes $10,000 higher than the year before.

This is a “singles penalty” if you wish to think of it that way, but I don’t see anyone bitching about that. :smiley:

  1. The Bs are a two-income family, both making $50,000. Before they got married, their combined tax was $15,000. Now that they are married, they are in a higher tax bracket, despite their increased deduction, and their total tax is $20,000. Marriage penalty.

  2. The Cs are a two-income family, one making $90,000, the other $10,000. Before they got married, their combined tax was $28,000, because the $90,000 individual income was taxed highly. Now that they are married, their total tax is $20,000. Marriage benefit.

Now, here’s the catch - if you alter the progressive taxation scheme to eliminate the extra tax the Bs pay, either the As, the Cs, or single taxpayers will pay more. You can shift the inequity from one group to another, but you cannot eliminate it.

Sua

15

Sua, as I was reading the thread I was formulating a post just like yours in my head. Glad you saved me the trouble :slight_smile:

And, to shift the discussion a bit, lets think about the policy behind taxing the As, the Bs and the Cs. The As (single people) are already taxed highly. Fair enough. Society likes marriage, so we decided to tax singles more than married people.

What about Bs compared to Cs? Which does society like more, two spouses who make roughly the same amount of money, or two who have a large disparity? Well, I see two groups of married people – those with kids and those without. As a policy matter I don’t mind catering to the group with kids because they are important. Further, I think it is more beneficial for children to grow up with parental contact than without. No, I am not saying all latch-key kids are horribly deprived, I’m just saying that given the choice between a latch-key kid and a kid with a parent who does not work as much, I think the later is better off. Therefore, as a policy matter, I don’t mind taxing the Bs more than the As because it encourages people to stay home with their kids.

16

Is that really “fair enough”? because it still seems decidedly unfair to me (the single, non-home owning, childless taxpayer).

17

amarinth, this is one of those instances where the mathematics of the situation actually requires a value decision, because it is impossible (barring (a) going to a flat tax, or (b) treating everyone as an individual for tax purposes) to make this “fair” - someone will always end up paying more in taxes than others in the same economic situation based solely on their marital status.

The policy question has to be “who gets screwed?,” not “how to we avoid screwing anyone?”

I don’t necessarily agree with Pencil Pusher, but you have to say more than you did.

IOW, you have to demonstrate why it would be better to screw over the married-with-kids set than yourself.

Me, I think the best argument is that, if having kids were discouraged through taxation, airline flights would be more pleasant. :smiley:

Sua

18

Just something else to think about when talking about correcting the marriage penalty. Because some people really like the idea of “parent stays home with the kids” these families - who already get a break (they are the married As and the Cs) are often included in proposals to give a break to the Bs. I’ve heard this phrased as “We are the ones who really need the break, we are the ones making financial sacrifices for our kids” ignoring, of course, the fact that they are the ones already getting the break.

19

I don’t disagree with the equity arguments presented by Sua, amarinth, and Pencil Pusher. However, what I dislike about the marriage penalty is that it influences peoples’ actions in the wrong direction. The singles penalty that existed before 1969 encouraged marriage. The marriage penalty that exists today discourages marriage.

I am not marriage-neutral. I believe marriage is generally better for society. An obvious reason is child-rearing. Single parenthood is socially acceptible today, and that’s too bad. Children with only one parent tend to have lost out.

A second reason is that marriage tends to lead to stability. People certainly have the right to lead unstable lives, but the stable tend to contribute more to society, while the unstable people tend to be more of a burden.

A more subtle advantage of marriage is the civilizing of men. It’s my experience and observation that married men tend to be better citizens than single men, on average. Of course, there are many, many exceptions, so this statement should not be taken as a slur on any particular bachelor.

20

Flat tax please.