Marriage penalty is here to stay, Baker Institute expert says

This year marks the 50th anniversary of the creation of the so-called marriage penalty in the U.S. tax system.

For the last half-century, many American couples have paid higher income taxes after they marry because they stop filing their tax returns as single individuals and instead file joint returns. Some of them also see reduced tax credits or lower tax preferences.

Credit: University

While many other couples end up paying less when they file jointly, elected officials have long discussed eliminating the marriage penalty. But the author of a new report suggests that’s unlikely to happen.

Joyce Beebe, a fellow in the Center for Public Finance at Rice University’s Baker Institute for Public Policy, outlines her insights in a new report, “The Marriage Penalty after the TCJA: Effects on High- and Low-Income Households and the Elderly.” The report summarizes the evolution of the marriage penalty in the U.S. tax system, reviews the magnitude of the penalty and discusses its influence on work and marital decisions. It also summarizes how the Tax Cuts and Jobs Act of 2017 changes the marriage penalty for different income and age groups.

As the tax code has evolved over time, the magnitude of the penalty has varied. Changes enacted under the TCJA have helped to limit its impact, according to Beebe. However, because of the “unattainable ideal” sought by the tax system — and the reality that it’s politically undesirable to give up the current progressive tax schedule or use the individual instead of the family as a tax unit — Beebe believes the marriage penalty is here to stay.

“The cause of the marriage penalty is rooted in three objectives of the U.S. tax system that are intrinsically conflicting,” Beebe wrote. “First, the system is designed to ensure that households with the same income pay the same amount of income taxes, regardless of who earns the income. A couple that earns $200,000 and $0 (individually) should have the same tax liability as a couple that earns $100,000 and $100,000. Because families can pool resources together in ways individuals cannot, the tax system views the family as a tax unit, instead of the individuals within the family.

“Secondly, the system maintains a progressive rate structure, meaning that taxpayers with higher incomes pay higher taxes at higher rates. Finally, the tax system is based on the belief that a couple’s marital status should not influence their tax liability; the system remains marriage neutral.”

Separately, these are all desirable goals, Beebe said.

“However, the ‘unattainable ideal’ that incorporates all three simply cannot be achieved simultaneously,” she wrote.

Prior to the TCJA, two unmarried people who both earn $100,000 would each pay $18,139 in taxes, or $36,278 total, Beebe said. After marriage, the couple would pay a combined $37,060 in taxes, an increase of $782.

“This is because joint reporting pushes some of the couple’s income into the higher 28% tax rate bracket,” she wrote. “For this couple, the tax system treats them jointly as a tax unit and maintains the progressive rate structure (satisfying the tax system’s first and second objectives), but they pay more taxes as a result of marriage, a violation of the marriage neutrality principle.”

Overall, the TCJA did not make many significant structural changes to the tax code that are dependent on marital status, Beebe said.

“The one provision with major revenue implications is the $10,000 limit per return on state and local tax deductions, which tends to increase married couples’ tax liability, compared to unmarried individuals,” she wrote. “However, this provision was not created to increase the marriage penalty. What the tax act has intentionally done to change the marriage tax landscape is lower the marginal tax rates and double the income brackets for marginal tax rates above 25% (except for the top earners), which reduces the marriage penalty.”

Other provisions have existed in the tax code long before the TCJA, Beebe said. As examples, she pointed to the earned income tax credit (EITC) income thresholds, the standard deduction amounts corresponding to the change of filing status, the Social Security benefit tax and Social Security inequality for dual-earner families

“However, this does not necessarily mean there will be no further discussion about the marriage penalty, because social and demographic changes may render it an increasingly important issue in the near future,” she wrote.

Policymakers are likely to go back in history to look for validated reform ideas, just as the TCJA has done, Beebe said.

“Several provisions, such as the difference in the Social Security base amount between couples and individuals, EITC income thresholds and standard deduction amounts, are easy to adjust if lawmakers desire to do so,” she wrote. “Nevertheless, certain policies that reduce the marriage penalty may end up enhancing the marriage bonus, tilting the pendulum the other way.

“Other provisions, such as the equalization of Social Security benefits for two- versus one-earner families and creating incentives for low-income married secondary earners with children to enter the workforce, require more fundamental changes to the current system,” she wrote. “However, they are worthy goals that reflect the long-term demographic trends of the U.S. economy.”

About Jeff Falk

Jeff Falk is associate director of national media relations in Rice University's Office of Public Affairs.