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Journal Issue: Marriage and Child Wellbeing Volume 15 Number 2 Fall 2005

The Hefty Penalty on Marriage Facing Many Households with Children
Authors: Adam Carasso C. Eugene Steuerle

Possibilities for Reform

Given the hundreds of billions of dollars in marriage penalties and subsidies processed each year through the nation's social welfare system, the prospects for reform may seem remote. But as recent tax legislation makes clear, elected officials are occasionally prepared to take sweeping action—-even if their attention so far has focused mainly on those with incomes above the median.

We offer four options for reform. The first two, in our opinion, deserve special consideration as newer, although untried, approaches. The other two options have been applied in specific circumstances, but both would require major adjustments in benefit and tax structures if they were to be carried out on a wider scale. A combination of these approaches, nonetheless, could be used to lessen—-and for many, remove—-current marriage penalties.

A Maximum Tax Rate for Low- and Moderate-Income Families
A primary focus of self-labeled “supply-side” economists for the past thirty years has been to set a maximum marginal tax rate for higher-income individuals. That maximum rate, ranging from about 28 percent to 39 percent (and down from 70 percent in 1980) was incorporated into tax reform during both the early 1980s and the early 2000s, although proponents had pushed for rates as low as 20 to 25 percent. Yet the maximum effective marginal tax rate for lower- to moderate-income households is often far higher. As noted, single people typically may find their 30 percent marginal tax rate jumping to 50, 60, 80, or even 100 percent when they marry someone with children. To implement a maximum rate would require coordination and one-stop shopping for many of the nation's social welfare programs—-but this action would go far toward reducing marriage penalties.

Individual Wage Subsidies
Although the EITC is sometimes considered so, it is not a true wage subsidy. Many workers with very low wages become ineligible for the EITC when their income is combined with that of a spouse. A wage subsidy based on individual wages, whether hourly or annual, would avoid this problem. Recent comments by First Lady Laura Bush, among others, have focused renewed attention on the plight of many men who can receive costly “public support” only if they break the law and enter the corrections system. Otherwise, most of the contact these men have with the social welfare system involves facing huge marriage penalties. Rather than being family breadwinners, many find themselves able to help their children financially only by moving out or never marrying. Individual wage subsidies would help make it possible for a low-wage man or woman to marry someone with children without losing substantial income and welfare.

Universal Programs
A universal program or tax credit—-one that goes to households with children without diminution of benefits regardless of marital status or income—-clearly would not create a marriage penalty. Many government spending programs, such as public education and Medicare, fall into this category because they are not means tested. The recent adoption of a more universal child credit in the tax code reduced marriage penalties in exactly this manner.40

Mandatory Individual Filing or Choice of Filing
If married individuals were either required or given the option to file as single individuals, they could avoid marriage penalties. Many other nations, such as Canada, Australia, Italy, and Japan, allow or require individual filing for married couples for income tax purposes.41