Marriage Penalties and Bonuses: Couples Without Children

Despite all of the attention focused on marriage penalties, it may be surprising to know that for the middle class,marriage penalties are small or nonexistent,particularly in cases where the penalty is well-defined. According to data from the Internal Revenue ServiceStatistics of Income, about 60% of joint returns thathave tax liability before credits paid taxes at the 15% rate in 1997; for these taxpayers, the marriage penalty can beno larger than $225 (measured at 2001 incomelevels). 26% of joint returns fell in the 28%bracket in 1997. 6 is designed to eliminate the marriage penalty arising from standard deductions and rate brackets, so the penalty is zero in each case. However,the administration proposal virtually eliminates the penalty as well. The lower rates of 10% for the first$12,000 of taxable income reduce the penalty to $150 and the second earner deduction reduces it further, to $75. 6 are approaches that eliminate or virtuallyeliminate these middle class marriage penalties, with H.R. The Administration proposal and its rate cuts lower the marriage bonus at very low income levels, because it lowers the rates from 15% to 10%. 6 has smaller bonuses than theAdministration proposal. In addition to the comparison of H.R. 3 and H.R. In this case the bonuses tend to be smaller for the Administration proposal than either forcurrent law, or for H.R. 6 ,however, expands the bonus because it increases the 15% rate bracket for married couples to twice that of singles. For the 31% bracket, which includes about 3.3% of joint returns, the maximum penaltiesassuming even division of income and full taxabilitybegin at about 0.9% of income, rise to a peak of 1.3% and then fall to 1.2% at the top of the bracket; theadministration proposal will reduce those penalties to0.3%, largely because the former 28% and 31% brackets are now combined into a single 25% bracket. These data do suggest that if our concern is about a comparison to cohabitating couples, there are two important groups: couples, mostly young, who do not havechildren and, in the case of couples with children, mostly lower income couples. These couples may experience a penalty due to the earned income credit, but, as noted earlier, none of the proposals are really focused on the EIC and it is difficultto devise a way of correcting for marriage penalties without undermining much of the purpose of the EIC. Conclusion

This analysis of the effects of legislative proposals on the marriage penalty indicates that for the middle class,the marriage penalty, which is already relativelysmall, will be essentially removed by the rate reductions and second earner exemptions in the administrationproposal, capturing essentially the same penaltyelimination objective of the original marriage penalty legislative proposals in the previous Congress. H.R. 6 combined with the rate cuts and credits portion of the proposal passed by the House as H.R. 3 would increasemarriage bonuses compared to the Administration proposal with the second earner deduction, and in many caseswould increase bonuses compared with currentlaw.
President Bush's tax proposal and H.R. 6 (passed by the House) have different approaches to the marriage penalty. The Administration proposal, inaddition to rate changes, has a second-earner deduction for 10% of income (up to $30,000) earned by the lowerearning spouse. H.R. 6 wouldincrease the standard deduction and width of the 15% rate bracket for joint returns to twice the size of singles,eliminating the penalties for taxpayers in the 15%and 28% brackets but adding to any marriage bonuses. This report compares these alternative proposals. ( H.R. 1836 , signed by the President on June7, includes these latter proposals along with rate cuts).
Taxes can go up or down as a result of marriage, depending on the income of the two spouses. These penalties and bonuses arise from the progressive taxstructure and the decision to impose taxes on a household basis.
For much of the middle class, marriage penalties are low. For couples without children, the maximum marriage penalty at 2001 income levels for the 60% oftaxable returns subject to the 15% marginal rate in 1997 is $225; most couples that itemize have no penalty at all. The second-earner deduction in theadministration proposal virtually eliminates the marriage penalty for these couples. Even in the 28% rate, whichcovers another 26% of taxable returns, the secondearner deduction along with the flatter rates results in no or negligible penalties. Overall, these taxpayers accountfor the middle 75% of joint returns. Taxpayerswith children could have small remaining penalties, depending on how penalties are defined. Most of those in the15% bracket who might have still havepenalties that are significant relative to income are removed from the tax roles entirely through the additional childcredits.
Lower income couples may incur penalties through the Earned Income Credit (EIC) under either proposal, although it is difficult to address EIC marriage penaltiesand bonuses. The 12% of taxpayers in higher brackets may have remaining penalties. A large fraction of thesereturns do not have large penalties because theirmarginal tax rate is the flat capital gains tax rate. Any penalties are substantially reduced or eliminated, however,due to the lower rate structure in theAdministration proposal.
The important difference between H.R. 6 and the Administration proposal is that H.R. 6 expandsmarriage bonuses in most cases whilethe Administration proposal generally reduces them due to flatter tax rates. H.R. 6 combined with rate cutswould increase bonuses in comparison tothe Administration proposal and, in many cases, in comparison to current law.
Measurement of the marriage penalty for couples depends on the allocation of children for tax purposes. When married couples are compared with cohabitatingsingles, where issues of incentives and fairness suggest attention be focused, cohabitating singles are less likely tohave children and when they do, have lowincomes unlikely to be subject to regular income tax. Thus, the issues of measuring the marriage penalty forfamilies may be relatively unimportant. This reportwill be updated to reflect legislative developments.
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