U.S tax policy and the "marriage penalty"

Great Debates
1

Why in the world should the U.S. government care if you’re married or not for the purposes of computing taxes? Well, it shouldn’t. There should be one set of brackets that apply to everybody regardess of marital status.

In this thread over in GQwe are researching facts regarding how much tax is paid by two people filing as single, and the same two people filing married/joint. The facts appear to show that when both partners in a couple earn $75K or more, it is more economical to file as single. I compiled some data in an Excel spreadsheet that can be downloaded from http://www.seiglefamily.com/data/marriedtax.xls (direct link to spreadsheet).

2

It bugs me when people act as if the government went out of its way in the tax code to deliberately penalize two income marrieds when that is certainly not the case. When the code was enacted that rates and filing statuses were set up to make it fair for the typical married couple, which at the time was with one bread winner and one spouse who worked at home with the kids. Over time that family model has changed for reasons that have nothing to do with the tax code, and DINK families (double income no kids) have been yowling about how unfair it is that they have to pay taxes.

I’m not saying the tax tables don’t need to be adjusted for the current reality. I’m saying the term “marriage penalty” is deliberately inaccurate and prejudicial.

3

Even given the history you’ve provided, it is neither inaccurate not prejudicial. All the history shows is that the initial change wasn’t intended to penalize anyone. But the failure to fix it as the family model has changed means that a higher tax is imposed on some couples who choose to marry. Intentional or not, a higher tax imposed on a certain subset of people for making an otherwise non-economic decision can fairly be described as a penalty.

As I wrote in the other thread, perhaps it would better be called a feminism penalty since it only burdens couples in which both spouses work. You describe the complaint about it as “yowling,” coming from DINK families, but the kid part is largely irrelevant. For many couples, the child tax credit still doesn’t outweigh the higher tax cost of marriage. And for some people, $500 or $1000 a year is a lot of money.

4

If you want a better example of the marrage penalty.

Take a woman who has children living with a man. If they make approx the same income. She can file single with dependant children, and he will file single. If they get married they can now file married. Now if he also has children then it becomes a double hit. Filing married in each case will mean more taxes with out a change in income.

Now I do realise that in most houses both spouces do not make the same income. My home is 60/40.

5

Well, let’s face it, most married couples completly intermingle their income and expenses. So, how would they split out their itemized deductions then? Half to each? Or as a % of inocme earned?

If we got rid of the “marriage penalty” (and zamboniracer is completely correct) we’d have to get rid of the “marriage bonus” where most couples save significantly by filing Joint.

Look at your own chart- it starts hitting when both earn over $75K. Most people don’t earn that much.

This has been debated before and Congress has taken a few steps to reduce the “penalty”:

6

We spend three years living in sin before we got married - it wasn’t hard to divvy up deductions.

7

The entire American tax system is based upon ability to pay and not fairness. Let’s get real: how fair is that some people pay little to no taxes while others pay millions? It isn’t. But we tax based upon ability to pay.

I am looking at my situation as a single guy and it would take very little extra expenses to have a partner living with me. Cable is a fixed cost regardless of how many people are here. Same with internet. Electricity would go up slightly. Rent payment is the same. Food would go up slightly. Yet doubling the household income is huge. A single make 75k is living nowhere near the lifestyle of a couple pulling in 150k.

And there are certainly benefits of being married. One of you can contribute to a Roth IRA even though he/she didn’t work. Married people are more likely to take mortgage interest deductions. They are more likely to directly benefit from taxes for schools since they are more likely to have children. They get survivorship benefits from pensions and I believe SS.

So I am not feeling bad for people suffering from this supposed penalty.

8

If we cast aside the prejudicial terms “penalty” and “bonus,” there is no reason why taxes should be different for people of the same incomes (regardless of what those incomes are) just because they are single vs. married.

I don’t care who is favored in what situations. My point is that there should be nobody favored at all in any situation based on marital status. Why would Congress enact a tax code that does so?

9

Proponents of the progressive tax system (and I am included) say that paying according to ability to pay is the very definition of fairness. But ability to pay should be defined only by your income, not how efficiently you *choose *to spend it.

If you earn more, then you should pay more taxes, but our system ensures that you can never be worse off after taxes if the only thing that changes is your income going up. But it *does *create a situation where your taxes change overnight by making absolutely no change other than getting married.

OK, so two people sharing a household is more economical than one. Single people can have roommates, too. Lots of them do. But there is no “Single With a Roommate Filing Separately” set of tax brackets to take into account that these people are economizing on living expenses. Why should some married people pay more or less than single people in exactly the same economic situation?

People with mortgages are also paying property taxes (there is a deduction for that, too, but you still pay more in taxes than if you don’t pay property taxes).

Schools are tax-supported not to benefit the parents of the children who attend, but to benefit society by providing educated citizens. And taxes that support schools are generally property tax or other county tax, which is unrelated to federal income tax, and usually unrelated to state income tax.

Pensions are private, not provided by the government (except for government employees), and are taxed. So whether a survivor gets pension payments or not is not governed by federal law but is a private matter between an employer and their employees and irrelevant to the discussion.

Social Security is not funded by income tax (i.e., does not appear anywhere on your 1040), it has a separate tax, so that’s irrelevant too, but might be a separate debate.

10

How is it a penalty if you have a choice of filing single or jointly when married? You pick the way that nets you less in taxes and go that route. It would be a penalty if you didn’t have the choice. Unlike single people without kids, who usually get the Single and Without Kids penalty. :slight_smile: What we view as penalties are relative to our own situations.

11

You don’t have a choice of filing single if you are married. You have the choice of filing separately, but its a different tax table than single after $65,000 in income. Which is why it really only hits people with two pretty high incomes (or people with one really high income and one small income). Its actually a benefit to file married/jointly if you have a smaller household income.

12

what’s the significance of filing separately?

13

The question isn’t completely clear (do you mean “what does it mean,” or “why would you do it,” or “what difference does it make”?), but if you are in the “married” status you may choose to file either jointly or separately. If you file jointly you fill out one form 1040, one set of paperwork, for all income and deductions combined. If you file separately, you each file a return, separating out incoming and deductions. If you are married you can choose to file either way, there is no qualification for either way. In some cases there is a slight advantage to filing one way or the other.

If you are unmarried you must file as “single” (or “head of household,” if you qualify).

The tax brackets for “married filing separately” are different than for “single.”

14

It might be helpful to explain how all this developed historically. After all, Canada is similar in many ways, but there is no “marriage penalty” (except in Quebec, which bases many deductions on total family income).

Historically, there were no income taxes until WWI. Even then, the ordinary working zhlub didn’t pay them–they were for rich people. And there were no joint returns and no income splitting. Except in California and a couple other states whose basic laws were based on Spanish civil law (which may have been based on the old Roman code). In those states, income was always considered to be joint, half going to each spouse. This produced a basic unfairness. Taxes were lower if you lived in one of these states. Income splitting was introduced to level the field. (During WWII, taxes were raised enormously, the top bracket hitting 91%.)

This worked well for the then-typical single income couple since they paid a lower overall tax. But then another unfairness arose. If the spouses filed separtely and one spouse took the standard deduction and the other one itemized deductions, using, for example, mortgage interest as a major item, then they were indeed taking advantage of the system. So lower standard deductions were introduced for separate filers. Now it is unfair in the other direction, especially when the spouses have roughly the same income, and that is what the fuss is about.

Canada avoided some of this by never having income splitting, never having a standard deduction, and never allowing deductibility of mortgage interest.

Both systems still have substantial built-in subsidies for home-owners as opposed to renters. In Canada, you have to have equity before you get the subsidy. For example, the house my wife and I occupy has a market value of over a half million dollars. That represents a genuine investment and we pay no taxes on the proceeds of that investment. If, for example, I traded houses with our next-door neighbor I would suddenly acquire a rental income of, say, $40,000 without a single change in my lifestyle and if you think that is not a subsidy, you are not thinking it through. A friend of mine recently sold his house and moved to a condo. He will pay taxes on what he earns by investing the difference. but had moved to a rental apartment, he would have to pay taxes on the total investment income, not half of it.

But I digress. The point is that the tax system is inherently unfair but the reasons are largely historical and explained by how we got there. If I were dictator, I am sure I could create a much fairer system and it would certainly not build in a marriage penalty.

15

I’m not sure if you’re referring to how it was in the past but Canada does have a “Standard deduction,” if you mean what I think you mean, which is an across-the-board standard deducation on all incomes.

16

Couple A1 and A2 work at forty-hour-a-week jobs paying $75,000 each. They split the work of maintaining the house, shopping, and raising their children as best they can.

Couple B1 and B2 have a different arrangement. Spouse B1 works at a demanding job requiring frequent overtime and travel, paying $150,000. Spouse B2 stays at home, doing all of the shopping, housework, and most of the raising of the children.

Couples A and B have the same household income. Each has exactly the same lifestyle in material terms.

Is it fair that Couple B pay vastly more in taxes than Couple A? Because that’s the consequence of a progressive tax system which ignores marriage.

17

Freddy the Pig, you can have a different bracket for joint income without penalizing couples in which both spouses work. You simply allow the married couple to file as if they were single. The only problem with that approach is the argument that people living together should be taxed more. But I would rebut that argument with the following question:

Couple A1 and A2 work at forty-hour-a-week jobs paying $75,000 each. They split the work of maintaining the house, shopping, and raising their children as best they can. They are not married.

Couple B1 and B2 work at forty-hour-a-week jobs paying $75,000 each. They split the work of maintaining the house, shopping, and raising their children as best they can. They are married.

Is it fair that Couple B pay vastly more in taxes than Couple A? Because that’s the consequence of a progressive tax system which taxes marriage instead of whether you’re living with another tax-paying adult.

18

Never mind.

19

Okie dokie.

20

When you marry, it becomes undeniable that you’re sharing household expenses with another wage earner. So it’s mainly a question of the IRS being able to identify people who are living together vs those who are single.

But I’d go along with the idea of taxing people the same regardless of their family situation so long as that applies to whether or not you have children as well as whether or not you are married.