What's the sense in the marriage tax penalty?

March 23, 2013 10:49 AM

Can anyone explain the politics behind the marriage tax penalty?

As a professional who makes good money with a long-term significant other in the same boat, I came to realize that under the current tax system we might stand to lose over $250k over our careers in federal income taxes if we got married as compared to filing single. I'm all for progressive taxation, but am having a hard time making sense of this marriage penalty. What is the political argument in favor of this?

posted by drpynchon to law & government (16 answers total)

http://www.ncpa.org/pub/ba445

Basically, we have gone back and forth from penalty to bonus for dual income married people once we adopted a joint filing system because due to the nature of progressive marginal tax rates, it's impossible for two joint incomes to be treated identically to two separate incomes at all rates of income and, importantly, at all income disparities. Congress has demonstrated they'd like the penalty or bonus to be small so various adjustments have been made for singles, for joints, to credits, etc so that typical people don't see much difference right now. The most political part besides that our taxes are progressive at all is that it's complicated, whatever is the method, and that it changes often enough to be confusing, and for that you can thank tax industry lobbyists and politicians making their mark on the tax code.
posted by michaelh at 11:02 AM on March 23 [2 favorites]

I'd suggest taking a look at the wikipedia page on the Marriage Penalty. What it boils down to is this:

It is mathematically impossible for an income tax system to have all three of these features simultaneously: joint filing for married couples; marginal tax rates that increase with income; and independence of a couple's tax bill from their marital status.

In other words, this isn't the result of politics per se; it's a consequence of the math, and something has to give.

posted by Tomorrowful at 11:03 AM on March 23 [5 favorites]

I believe it's related to the notion that "2 can live as cheaply as one". The policy was developed in recognition of the fact that single people, living separately (which is how things were done, back in the day), spend more on housing, for example, than a married couple.
posted by she's not there at 11:03 AM on March 23 [1 favorite]

The basic argument is this-- there are three different things that most people think the tax system should do, but it is mathematically impossible to do all three.

One is to have progressive tax rates, so that not just the amount of taxes but the marginal rate of taxation increases for those who are richer.

The second is to have the tax system be indifferent to the distribution of income within a married couple. That is, having one person make $250k per year should be taxed at the same rate as having two people make $125k per year. This avoids having incentives to shift or obscure family income, and reflects a common belief that a married couple is a joint economic unit. ("couples equity")

The third is to have a tax system that is indifferent to whether a couple gets married or not. That is, two people making $125k per year don't have their taxes go up if they get married. ("marriage neutrality")

Our current tax system does the first and second but not the third. You could imagine having a tax system that did the first and third, but that would be unpopular among people who favor the second. And you could imagine having a tax system that did the second and third, but that would be a flat tax, and most people are against those.

There's a law professor at Yale who recently argued that it would actually be more fair if we violated both the second and the third principles, a little bit, rather than violating one of the two a lot. You can read his article here.
posted by willbaude at 11:05 AM on March 23 [10 favorites]

Here's a report from the CBO (albeit from 1997). On preview, it says pretty much what willbaude has said.
posted by hoyland at 11:10 AM on March 23 [1 favorite]

She's not there has the answer. The tax system gives discounts to people for their expenses- either itemized or via the standard deduction. A married couple will theoretically have fewer expenses than two single people making the same amount, so their tax bill goes up for the same amount of money. Two single people making $50,000 each have less disposable income than a married couple making $100,000 if all things are equal.

It helps to envision a progressive tax system as giving discounts to poorer people rather than how many people view it, ie, soaking the rich.
posted by gjc at 11:25 AM on March 23

Other folks have given great explanations for why the marriage penalty should exist on its own (two living for one, remove incentives for moving around family income, etc). I'd like to add that marriage comes with a relatively small yearly tax penalty, but a pretty huge once-in-a-lifetime tax advantage: Following one person's death, the surviving member of a married couple gets to pay 0% in estate taxes, whereas the surviving member of an unmarried couple may end up paying some pretty onerous taxes on things like the family home, etc.

I think people would be a lot less eager to get rid of the marriage penalty if it also meant getting rid of the estate tax advantages.
posted by eisenkr at 11:55 AM on March 23 [5 favorites]

Except there are no estate tax advantages for the vast majority of married couples. Your estate currently has to be over $5million for it to matter.

But as others have said, it's not really a marriage penalty. It's a reduction in the historical financial advantages of being married.
posted by Justinian at 12:34 PM on March 23 [1 favorite]

The US income tax was designed at a time when unmarried cohabitation was inconceivable outside of the dregs of society, so it's not like anyone could choose not to be penalized, and married women working was both uncommon and regarded dimly by many when it did occur, so its discouragement by the tax code wasn't going to arouse strong opposition.

Overcoming inertia to change it is hard. Even when cohabitation is more acceptable, there's still no perception that people are remaining unmarried for tax reasons. Married women working is more common and less suspect ... but as with any big, long-term tax cutting it means finding another tax to raise or spending to cut. Don't forget that there's a small marriage bonus if you have a stay at home wife, which the reform of the marriage penalty might easily eliminate, which would complicate things.
posted by MattD at 12:36 PM on March 23

But as others have said, it's not really a marriage penalty. It's a reduction in the historical financial advantages of being married.

Thanks everyone. While the progressive point made about fewer expenses as a couple cohabitating didn't occur to me and makes sense, it's still a disincentive towards marriage from my standpoint. As a couple who are both financially independent with good income, but without large estates and without any special attachment to the institution from a social/religious standpoint, the tax hike is a major disincentive if we may be perfectly happy to cohabitate without marriage. Perhaps the fairer thing would be to turn the argument on its head and force cohabitators to file jointly or account for the savings that comes from cohabitation rather than attaching the progressive aspect of the tax to marriage itself.

there's still no perception that people are remaining unmarried for tax reasons

Well at least in our case, I suspect we may do just that until the estate tax implication start to become meaningful. I know, romantic right?
posted by drpynchon at 12:44 PM on March 23

Except there are no estate tax advantages for the vast majority of married couples. Your estate currently has to be over $5million for it to matter.

On the federal level, sure. But some states have state-level estate taxes kicking in for estates valued at as little as $1 million.
posted by phoenixy at 12:51 PM on March 23

Don't forget that there's a small marriage bonus if you have a stay at home wife...

Shockingly, families where there is a "stay at home husband" rather than a "stay at home wife" also qualify for this bonus.
posted by hydropsyche at 12:54 PM on March 23 [10 favorites]

Others have covered the mathematical piece of it, but I think it's worth noting that Congress has gone back several times to try to eliminate or at least mitigate the marriage penalty for low- and medium-income families, but hasn't done the same for high-income families. In fact, if you have two spouses who are each earning around $100k each, you start running into needing to think about the Alternative Minimum Tax (AMT); if being married flips you from each paying according the regular brackets into paying the AMT instead, the tax bite can jump up quite a bit simply from being married.

I've heard the marriage penalty called the "two-earner penalty" and I think that gives some insight into why Congress has left the penalty in place for high earners while it is trying to fix it for lower-income households. On the left, feminists aren't exactly thrilled with it but it's pretty far down the list of the major feminist organizations' priorities, and so the general Democratic strategy of raising raising revenues by increasing taxes on high earners overwhelms any political pressure you'd see from that quarter. On the right, there's not a whole lot of pressure to create policies that encourage married women to work outside of the home; Republicans are more likely to push for policies that reduce taxes on high earners generally and not on dual-income households specifically.
posted by iminurmefi at 1:53 PM on March 23

as little as $1 million
Yeah, still not the vast majority.
posted by Glinn at 4:58 PM on March 23

there's still no perception that people are remaining unmarried for tax reasons


I know two couples who are doing just that. If they marry they lose a lot of money from their tax refund. Both plan on staying engaged until their children are grown, then they may marry if the tax loss isn't too much.
posted by SuzySmith at 5:15 PM on March 23

as little as $1 million

Or sometimes even less
posted by IndigoJones at 7:45 AM on March 24 [1 favorite]