Phony figures, Marriage Penalty Hype & EITC

[kelley <oudies@xxxxxxxxx>]

The Biggest Marriage Tax Is the Hardest One to Solve

Though not as often discussed, the biggest "marriage penalty" of all
clearly stems from the "earned-income tax credit." This tax rebate for
lower income working families is computed and phased down exactly the same
for single parents as for married couples with children. For example, two
cohabiting single parents each making $15,000 can get as much as $2,870
apiece in tax rebates. But if they marry, their tax rebates are eliminated.
As a result, in the worst cases, two-earner couples with four children and
a joint income of between $20,000 and $35,000 can face marriage penalties
exceeding $5,000. Other EITC marriage penalties are less gigantic, but they
can hit some two-job married couples who have children and are making up to
$50,000 with thousands of dollars in added taxes just for being married.

Eliminating EITC marriage penalties could be prohibitively costly--$20
billion to $25 billion a year--unless offset by some pretty hefty tax hikes
on a lot of the modest income single parents the program is mainly intended
to help, and it would probably make the EITC program even harder to
administer. It's worth noting, however, that congressional Republicans who
want to spend even larger sums--with no offset--to reduce marriage
penalties on the highest income married people haven't entertained the idea
of targeting marriage penalty relief at couples in the middle of the income
scale.


http://slate.msn.com/Features/MarriagePenalty/MarriagePenalty.asp#Note1


What "Marriage Penalty"?
Phony figures in the tax debate.
       As they talk about tax simplification, both the Republican Congress
and the Democratic president have been enthusiastic about creating
disparities among taxpayers of similar incomes--especially when it comes to
treating investment income more favorably than wages. But now many in
Congress are making a great cause of one particular differential: the one
between married and unmarried couples. So strong is the pressure to do
something about the so-called "marriage penalty" that the stalled tobacco
bill gained momentum in the Senate this week from the inclusion of a
provision to give an income tax break to low and moderate income married
couples.
       For most couples (those making up to about $60,000 a year), the main
"marriage penalty" comes from the fact that the standard deduction for a
married couple is less than the standard deduction for two unmarried
individuals--$1,400 less for childless couples and $3,400 less for couples
with children. If two roommates earn $20,000 each, this difference means
they will pay $210 more in taxes if they are married than if they are not.
(Click </Features/MarriagePenalty/Note1.asp>here if you're interested in
another marriage penalty on the working poor that no one seems upset about.)


Higher income couples typically itemize, so they are not affected by the
standard deduction. But they face rate schedules that are different for
singles and marrieds. If two partners earn $40,000 each, a decision to get
married could, on its face, cost them more than $1,000.
       But these kinds of calculations vastly overstate the marriage
penalty. Totally eliminating the penalty would cost something like $42
billion a year. If Congress wants to reduce or eliminate this penalty, it
must either do without the revenue or make up the difference in some other
way. Since married couples pay about three-quarters of all income taxes,
almost all ways of making up the revenue will place most of the burden
right back on married couples.

Illustration by Mark Alan Stamaty
For instance, that $42 billion could be covered by a 6 percent or 7 percent
surtax on everyone. But then the $42 billion gross tax cut for marrieds
would net out as only about a $13 billion cut for them--accompanied by a
$13 billion tax increase on unmarried taxpayers. That works out to only
about a $120 tax cut for the typical married couple (and a $67 tax increase
on the typical single). So, unless you're prepared to load the entire tax
increase on singles--not likely--you should take all those "marriage
penalty" figures floating around the media and divide them by at least four
(</Features/MarriagePenalty/Chart.asp>see chart).
        In other words, it's not logical to measure the marriage penalty by
comparing what married couples pay now with what they'd pay if overall
federal taxes were a lot lower. Saying that taxes would be lower if taxes
were lower is true, but not edifying. The correct comparison is with a
revised tax system that raises as much as current law.
       (Of course, there's the option of not making up the revenue and just
passing a big tax cut for married couples. But that necessarily entails
reducing government services from what they'd otherwise be, and the losses
from that would probably be borne by marrieds and singles in roughly
similar proportions to the benefits they'd get from the tax change.)
       Consider another example. Blind taxpayers are allowed a larger
standard deduction than sighted people ($1,050 more for a blind single,
$1,700 more for blind married couples). This tax break costs a piddling $30
million a year, or about 24 cents per sighted taxpayer. But if we thought
of it as a "sight penalty" and calculated it as the added tax a person pays
now for the privilege of being able to see, it works out to something like
$208 per sighted taxpayer.


The "marriage penalty" dates back to 1969. Before that, the tax code's
treatment of married and single taxpayers was straightforward. Each member
of a married couple was considered to enjoy exactly half its total income,
and each was taxed on that income at the same rates as single people. But
this meant that a single person earning $80,000 would pay more taxes than
two married people with the same total income (because more of the married
couple's income would fall in the lower tax brackets). So in 1969 a new,
more favorable singles rate table was adopted in response to protests that
the system discriminated against them.
       A couple in which one spouse earns all the income is still better
off married than never married, at least for tax purposes. A couple whose
earnings are roughly equal is better off unmarried than married. A married
couple that divorces with a separation agreement to split their combined
incomes, including investment income, down the middle gets the best tax
deal of all. Under a progressive tax system, the only way to eliminate the
marriage penalty is to go back to relatively higher taxes on singles.
However you fiddle with the rates, there will always be a perceived
"penalty" on somebody. But calculated honestly, the penalty is a lot
smaller than people claim.