THE MARRIAGE PENALTY AND OTHER FAMILY TAX ISSUES (CRS Report for Congress)
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| Release Date |
Sept. 29, 1998 |
| Report Number |
98-653 |
| Report Type |
Report |
| Authors |
Jane G. Gravelle, Economics Division |
| Source Agency |
Congressional Research Service |
Summary:
Proposals to reduce marriage tax penalties have received attention: an increase in the joint return
standard deduction is included in H.R. 4579 , passed by the House on September 26.
The Administration has proposed an increase in the child care credit; a number of bills have been
introduced as well. Current law and proposed changes are addressed with respect to their effects on
equity, efficiency, and administrative feasibility.
Using an ability-to-pay standard in determining at what incomes families of different sizes are
equal, the current tax rules favor large families across most of the income scale, because of the more
generous treatment of families with children under the earned income tax credit (EITC) and the
recently enacted child credits. Married couples with one earner also benefit because the imputed
value of a spouse's services in the home is not taxed; working couples and heads of households with
children also benefit from child care credits. Essentially, these features establish single individuals and
childless working couples as paying the highest tax rates, based on the ability-to-pay standard, for all
but the very highest income taxpayers.
Two distortions of particular concern to family taxation are the effects on marriage and the
burden the tax system imposes on the earnings of married women, who are estimated to be the most
sensitive in their labor participation decisions.
The size and extent of marriage penalties and bonuses depend on assumptions made about
splitting unearned income and deductions, and, particularly, about the allocation of children. If
assignment is typical of what is more likely to occur when couples have children without marrying
or if they divorce, with children assigned to the mother who has the lower earnings, 37% of couples
have penalties of $24 billion and 60% have bonuses of $73 billion, for a net bonus of $49 billion. If
children are assigned in a way to minimize taxes, as assumed by the CBO in its base case for studying
tax revisions, 43% of joint returns had penalties of $32 billion and 52% had bonuses of $43 billion,
for a net bonus of $10 billion.
Approaches to addressing the marriage penalty include optional separate filing, general
reductions in tax rates for joint returns, and second earner deductions. The first approach targets
benefits to returns with penalties and to earnings of married women, although it might be complicated
and will differentiate taxes among married couples with the same income. A second earner deduction
has similar characteristics, although it is less targeted to penalties; it is also flexible and relatively
simple. Reducing joint return tax rates will be simple and keep rates the same for all married couples,
but does not perform very well on equity and efficiency grounds. Most of these approaches favor
higher income taxpayers; however, there are some options, including those focusing on the EITC,
that would favor lower income taxpayers.
The desirability of larger child care credits, and of refundable credits, depends on one's
philosophy about family needs and equity. There is little justification on equity grounds for proposed
credits for at-home parents. In general, the current tax system appears to make highly generous
adjustments for children.
