January 11, 2013
Tax Foundation: Effects of Marriage on Tax Burden Vary Greatly with Income Level, Equality
Joint filing has been a source of confusion ever since the filing status was created in 1949. Marriage has the potential to create a significant tax penalty, but it can also lead to a tax bonus in other situations, and for most taxpayers, determining the effect is anything but simple.
To illustrate how filing status affects tax liability, we’ve created a chart (above) that plots the two most important variables against each other—on the Y axis, equality of incomes between the two spouses, and on the X axis, total household wage income. The color represents the theoretical marriage penalty or bonus for a household with only wage income, no children, and no itemized deductions.
In general, there tends to be a marriage tax bonus when the two partners have widely disparate incomes and a marriage tax penalty when they have similar or equal incomes. There are two countervailing forces at work—on the one hand, the higher tax rate brackets kick in at greater income levels for joint filers than for single filers, but on the other hand, adding two incomes together can more than compensate for this effect. The need to balance these two effects is inherent in any tax system with a joint filing status—efforts to reduce the marriage bonus for certain filers will necessarily lead to a marriage penalty for others and vice versa.
With disparate incomes, a bonus results, because the addition of a small income to a much larger one is usually not enough to lift the return into the raised bracket, but in other cases, the combination of two incomes of similar size can bring the return into the higher tax bracket even despite the generally raised bracket levels for joint filers. The strongest impact is therefore on two-earner couples. If a couple has one wage earner and the nonworking spouse is trying to decide whether or not to re-enter the workforce, he or she will need to consider the high marginal tax rates that will be levied on the second salary.
Marriage penalties tend to affect low income and high income couples, but not middle income ones—low income couples because of the marriage penalty inherent in the structure of the Earned Income Tax Credit (EITC) and high income couples because the 28 percent rate bracket and above for joint filers begins at less than twice the amount for single filers. Middle income couples are much more likely to receive a marriage bonus simply because there is no penalty inherent in the bracket structure for the 25 percent rate levels and below—for joint filers, each bracket begins at exactly twice that for single filers.
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It is my impression that some countries, such as Denmark, base tax rates on the earnings of the individual. Are there indeed countries that don't recognize joint-filing status at all?
It is obvious that the "marriage penalty" or "marriage benefit" leads folks to marry or divorce when financially convenient, which makes it a pretty dumb policy. Of course, marriage brings many benefits outside of tax benefits, such as those relating to health insurance. It also penalizes the kids of the poorest, since the man has to be long gone for the family to max out in welfare benefits.
Posted by: Jimbino | Jan 12, 2013 12:02:18 PM
Thanks for posting this.
This is an income redistribution from 2-earner families to sole breadwinner families, no?
This seems particularly bizarre since 2-earner families are more stable, less likely to divorce, etc. Especially when the father then does half the unpaid work of parenting, the children tend to do better, are healthier (including having fewer emotional problems). They then consume fewer tax dollars in social programs as well. This seems to make particularly unfair the income redistribution from them to other families that consume a lot of the programs of government spending.
I have a blog on this topic (linked through my name "ND") that looks at this issue of joint taxation of earnings as it will be applied to parties to Colorado's upcoming civil unions law. The civil unions law in Colorado (which can be used by heteros as well as same-sex couples) has a particular position that may allow each party to be taxed individually at the federal level.
Posted by: ND | Jan 13, 2013 11:20:29 AM
Also, I think that this diagram does not take into account distribution of benefits in Social Security and Medicare? Including that aspect would intensify the redistributive effect from red to green and would also fill in the white spot in the middle bottom, which is where the Bush Tax Cuts put an inadequate patch on this problem.
Posted by: ND | Jan 13, 2013 11:34:18 AM
> The need to balance these two effects is inherent in any tax system with a joint filing status—efforts to reduce the marriage bonus for certain filers will necessarily lead to a marriage penalty for others and vice versa.
That's not true.
A marriage differential (benefit and/or penalty) is a consequence of variable (progressive and/or regressive at some point) marginal rates and taxing a married couple based on their total income without regard to who earned what. If we got rid of either one, we could also eliminate the marriage differential.
I've heard that the joint filing status came about because folks in community property states were claiming that a non-working spouse actually earned half of the income. (Yes, that spouse has a claim on half of the income, but "actually earned" for tax purposes seems different to me.)
Posted by: Andy Freeman | Jan 14, 2013 1:53:05 PM