The Hefty Penalty on Marriage Facing Many Households with Children

Abstract

Over the past seventy years Congress has enacted dozens of tax and transfer programs, giving little if any attention to the marriage subsidies and penalties that they inadvertently impose. Although the programs affect both rich and poor Americans, the penalties fall most heavily on low- or moderate-income households with children. In this article, Adam Carasso and Eugene Steuerle review important penalties and subsidies, explain how they work, and help fill a big research gap by beginning to provide comprehensive data on the size of the penalties and subsidies arising from all public programs considered together. Marriage penalties arise because of the combination of variable U.S. tax rates and joint, rather than individual, filing by married couples for benefits and taxes. If graduated taxes were accompanied by individual filing or if all income and transfers were taxed at a flat rate, there would be no marriage penalties. Specifically, the penalties are a result of policymakers' efforts to achieve the goal of progressivity--giving greater tax and welfare benefits to those with lower income--while trying to keep down program costs. Thus benefits in transfer programs fall, sometimes steeply, as households earn more income. Combining the direct tax rate in the tax code and the benefit reduction rates in the transfer system can result in extremely high effective marginal tax rates for many low- to moderate-income families-rates far higher than those of families earning over 90,000 dollars. These high rates lead to the marriage penalties because additional income brought into a household by marriage thus causes other benefits to be reduced or lost altogether. In extreme cases, households can lose a dollar or more for every dollar earned. In recent years lawmakers have begun to try to reduce marriage penalties, primarily by reforming welfare and cutting taxes, but huge penalties remain. The authors offer several options for reducing or eliminating the marriage penalty and recommend two in particular. The first is to set a maximum marginal tax rate for lower-income individuals, similar to the maximum rate set for highest-income individuals. The second is to provide individual wage subsidies to lower-income earners, so that such workers who marry can combine their income with that of their spouse without incurring penalties.

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