Better ways to fix what’s left of the income tax marriage penalty
Last week Forbes magazine ran a commentary by two Notre Dame professors about the income tax penalty faced by low-income couples who marry.
The Bush tax cuts attempted to make tax rates “marriage-neutral”; for most middle-class taxpayers, there is now, in fact, little if any difference between filing as a married couple or as unmarried singles. … [But a] single parent earning $21,000 with two children would receive an earned income credit and child tax credit of $5,460. Say that same parent is living with, but not married to, another single parent with two children who earns the same amount. Their combined income is $42,000. Unmarried and filing their taxes separately, they would receive a total of $10,920 in earned income credits and child tax credits. If they were to marry and file jointly (listing four dependent children), they would receive only $3,400 in earned income credits and child credits. So it would cost them $7,520 to be married. To make the situation worse, this “penalty” will occur every year, adding up over time to a huge amount.
AtMP believes that taxing people based on their marital status is wrong, and that it’s especially wrong to tax lower-income people more heavily than higher-income for the exact same behavior (in this case, marrying). Naturally, we’re less concerned than those professors about rising rates of cohabitation. More importantly, we’ve heard more creative solutions than the two options they propose:
If you “remove” the marriage penalty by lowering the credits for single taxpayers, you invoke the wrath of those who would say you’re “raising” taxes (by reducing their credits) on people who can least afford it. On the other hand, if you raise the credits for married taxpayers to the point where getting married offers the same tax result as being single, you’ve got a budgetary issue–where is the money to compensate for these additional credits going to come from?
In fact, we printed another professor’s more creative solutions in our newsletter last year!
Given the many forms of modern families, two policy alternatives are clearly preferable…. First, policymakers should expand the definition of family for tax purposes to include unmarried opposite- and same-sex couples, single parents, cohabiting unmarried family members, and perhaps even platonic roommates demonstrating economic interdependence. These families share the same kind of expenses, responsibilities, and liabilities as married families. There is no reason for the tax system to treat them differently. Under an expanded definition of the family unit, “marriage” penalties would become “family” penalties, and doubling tax brackets for families would benefit all multi-person households.
Second, we could abandon the family as a unit of taxation altogether and move to a system of individual filing. This approach would effectively eliminate all marriage tax penalties. As importantly—and unlike preserving the family as a unit of taxation—individual filing would eliminate the secondary-earner bias in the tax system that currently taxes the first dollar earned of the lesser-earning spouse (disproportionately women) at the higher rates associated with the last dollar earned of the primary-earning spouse.
Either approach—expanding our concept of “family” under the family tax unit or adopting as the norm the individual unit—would more effectively address the concerns of the modern American family in its various forms.
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economics & poverty, taxes
Comments 2
October 6th, 2009 at 4:34 pm
The reader should be aware that for every 3 married couples that pay a marriage penalty, 5 married couples get a marriage bonus. And on average, marriage bonuses exceed penalties by $30 billion (in 2004). This $30 billion subsidy is paid for by unmarried / single people. See http://www.unmarried.org/federal-income-taxes.html for more information.
This unfair subsidy was tripled by 2001 and 2003 tax legislation. This legislation is set to expire at the end of 2010. But it is likely to be renewed and made “permanent” before then, unless we unmarrieds stand up and protest paying $30 billion higher taxes to finance this net marriage bonus subsidy.
October 7th, 2009 at 3:36 pm
[QUOTE] Given the many forms of modern families, two policy alternatives are clearly preferable…. First, policymakers should expand the definition of family for tax purposes to include unmarried opposite- and same-sex couples, single parents, cohabiting unmarried family members, and perhaps even platonic roommates demonstrating economic interdependence. These families share the same kind of expenses, responsibilities, and liabilities as married families. There is no reason for the tax system to treat them differently. Under an expanded definition of the family unit, “marriage” penalties would become “family” penalties, and doubling tax brackets for families would benefit all multi-person households. [END QUOTE]
I’m not thrilled that people living alone or not in relationships that are approved by federal bureaucrats (or ATMP for that matter) should be massively subsidizing (on average in the thousands of dollars) federally-approved relationships.
Expanding marriage tax benefits to certain federally-approved non-married relationships increases the share of the tax burden on those who have to pay for these expanded tax breaks — those living alone and those not in federally-approved relationships and living arrangements.
In particular, many elderly women will suffer under this proposal. Half of women over 65 are widows, and once they pass age 65, only 2% of widows remarry. No wonder – there are 145 over-65 women per 100 over-65 men. Thus laws and business practices that discriminate against the uncoupled and others not living together in federally-approved relationships discriminate more heavily against women than men, especially elderly women.
Especially galling in the above was the wording “and perhaps even platonic roommates demonstrating economic interdependence”. Wow, why perhaps? Why should platonic relationships demonstrating economic interdependence be a “maybe” for subsidies, while subsidies for sexually intimate couples are beyond question? (And are sexually intimate couples always more economically interdependent than platonic roommates?)
Anyway, why should economically independent people subsidize economically interdependent people? And how to demonstrate economic interdependence anyway — when crunch time comes in a big way, e.g. major illness and medical expenses, are we sure our lover (or platonic roommate) will come through or walk out?
I live alone in a 60-unit townhouse complex, as do many of my neighbors. But nonetheless, we take care of each other.