Jason Fichtner is a senior research fellow at the Mercatus Center at George Mason University. Jacob Feldman is a research analyst at the Mercatus Center at George Mason University. They are the authors of a new study, "Taxing Marriage: Microeconomic Behavioral Responses to the Marriage Penalty and Reforms for the 21st Century."
Some sociologists claim that marriage improves the lives of couples and their children, yet the number of married adults in the United States has declined by more than 20 percentage points since 1960. While the reasons for this decline vary, for many, the U.S. tax code discourages marriage. Even among households with equal earnings, the tax code penalizes some marriages while others receive a bonus. Bonuses predominantly occur among married single-earner households while marriage penalties mostly occur among two-earner couples. However, marriage penalties are growing as more women are employed. These penalties could be eliminated by allowing people to choose between filing taxes jointly with their spouses or as single-earners. The existence of marriage penalties and bonuses create three socially undesirable consequences.
First, marriage penalties are regressive, leading to cohabitation among the poorest of society instead of encouraging marriage and family stability. In particular, marriage penalties are assessed against low-income families receiving the Earned Income Tax Credit, or EITC. The EITC provides tax breaks to working lower-income taxpayers based on the number of qualified children and is phased-out as household income rises. Two non-married workers receiving the EITC could actually see their after-tax income decrease if they married. For example, the phase-out of the EITC for two non-married workers with two children potentially begins at $34,180 while the EITC for the married couple begins decreasing at $22,300. Although the decision to marry shouldn't be based on money, the reality and stress of making ends meet may drive low-income workers to not marry and even drive some marriages into divorce. Whether tax policy should encourage marriage or not is open to debate. But, at the very least, the tax code should not penalize marriage.
Second, the marriage penalty and bonus promote unfairness among households with the same income. A single-earner household with an annual income of $60,000 could receive a $3,465 marriage bonus using the standard deduction, while a two-earner household with annual incomes of $30,000 each could receive a marriage penalty of $1,083. For many middle-class families, the tax brackets for married couples filing jointly for any given tax rate is roughly twice the amount as a non-married worker, thereby subjecting more income to a lower tax rate. However, as more women have pursued careers over the last 40 years, the percentage of households with two-earners increased from 34 to 77 percent. More two-worker marriages now face a choice between staying married and having lower household income due to the marriage penalty or divorce and increased take home pay.
Third, while some may wish to promote marriage with tax bonuses, there are economic costs to consider. For married couples receiving bonuses, a stay-at-home spouse is discouraged from returning to work if he or she desires to do so. Traditionally, the marriage bonus was thought as compensating stay-at-home moms for their work in the home. Today, instead of entering the labor force where the first dollar of income is subject to the lowest tax rate of 10 percent for a single filer, joint income filing requires a stay-at-home mom to return to the labor force at a tax rate subject to the husband's next marginal dollar of income—for example, a 25 percent tax rate if the husband has $60,000 of taxable income. Although married individuals have the option of filing separate tax returns, filing under the tax status "married filing separately" imposes limits on tax deductions, narrower tax brackets, and higher marginal tax rates.
Today, the United States is only one of seven developed countries with joint income filing for married couples. Ideally, marriage should be treated in a tax neutral manner from a financial and labor perspective. At a minimum, married taxpayers should be given the freedom to choose which tax status is best for them. Granting married taxpayers the choice to file as married or single would at least eliminate the marriage penalty and end the tension between financial wealth and marital status.