Originally published in the NTA Encyclopedia of Taxation and Tax Policy, Second Edition, edited by Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle. The encyclopedia is available in paperback from the Urban Institute Press. Order online at www.uipress.org or call toll-free 1-877-847-7377
Leslie A. Whittington
Updated by James Alm
Georgia State University
An increase in federal individual income tax liability solely as a result of marriage.
When two individuals marry, their income tax liability as a married couple may exceed their combined income tax liabilities as singles. This additional tax burden resulting from marriage is referred to as a "marriage penalty" (or "marriage tax"). Marriage can also reduce the federal tax liability of two people, in which case the reduction in tax is called a "marriage bonus" (or "marriage subsidy").
This concept is easily illustrated using a hypothetical couple. Assume that in 2001 two people each have an annual income of $30,000. Assume also that each uses one personal exemption of $2,900 and that each takes the standard deduction of $4,550. Each has an income tax liability of $3,383, and their combined tax liabilities as singles total $6,766. If they were to marry and use the standard deduction for married couples filing jointly ($7,600) and two personal exemptions, then their married tax liability would be $7,172. This hypothetical couple would pay $406 more in federal income taxes as a married couple than they would as two single individuals. This difference in tax liability ($406) is the so-called marriage penalty.
It is also easy to construct examples in which combined taxes fall with marriage. If one person in this couple had most of or, especially, all the family income, then the couple would experience a reduced income tax liability-a marriage bonus- as a result of marriage. For example, a single individual with income of $60,000 would have a tax liability of $11,198. If this individual were to marry someone with no income (and no income tax liability), then their taxes as a married couple would decline from $11,198 to $7,172, giving them a marriage subsidy of $4,026.
In general, the existence and magnitude of the marriage penalty depends on the distribution of income across the two partners because its calculation requires comparing taxes as single versus taxes as married. One common misconception is that married people have the choice of filing as single or married. A married couple can elect to file separate tax returns in lieu of a joint return. However, the tax rate schedule applied to married taxpayers filing separately is not the same as that used for single taxpayers, so that the total tax liability of a couple rarely differs if they file separately rather than jointly. Very few married couples file separate tax returns.
The creation of the marriage penalty
There is no explicit federal policy in the United States for penalizing or subsidizing marriage. The marriage penalty results from two general features of the federal individual income tax code: the use of the family as the taxable unit and the imposition of progressive taxation. Many features of the tax (and transfer) system create these marriage nonneutralities. According to the U.S. General Accounting Office (1996), there are 59 provisions in the individual income tax code that contribute to a marriage tax or subsidy, and over a thousand federal laws in which benefits received or taxes paid depend in some way upon marital status.
An income tax system could instead have the individual as the unit of taxation, taxing each member of the marital unit on his or her own income. Such a tax system would be "marriageneutral," meaning that the tax liability of a couple would not change with marriage. The income tax systems in many countries exhibit marriage neutrality because the unit of taxation is the individual, not the family.
The individual income tax in the United States was largely marriage-neutral before 1948 because the tax was levied individually. However, in community property states wives had a claim to the income of their husbands, allowing the husband and wife to each report half of the joint income; with progressive marginal tax rates, this "income splitting" resulted in a marriage bonus. This treatment led to geographic inequity, which became more problematic as rates rose, and states whose property laws derived from common law began to follow suit. After World War II, Congress extended community property treatment to all married couples, and in 1948 the practice of income splitting between spouses was adopted for all couples. This allowed couples to aggregate their income on a joint tax return, and it doubled the width of each tax bracket for married couples. Each spouse was effectively assessed taxes on half of the joint income regardless of how much of the income that spouse actually earned. This was a major shift in the orientation of the federal income tax because it changed the unit of taxation from the individual to the family.
Originally, family taxation was advantageous to married couples because it lowered their average tax rate and thus commonly resulted in a marriage subsidy. However, single taxpayers were relatively disadvantaged, and this penalty on singles grew over time. Despite subsequent statutory changes designed to alleviate the burden, income splitting meant that a single taxpayer’s liability could be as much as 40 percent higher than that of a married couple with equal income.
The Tax Reform Act of 1969 addressed the disparity between single and married persons by creating a new tax schedule for single taxpayers, under which the differential between the tax liability of a single person and that of an equal-income married couple could not exceed 20 percent. There was no actual change in the tax burden imposed on married persons, but the introduction of the new single schedule caused their relative position to worsen. This change created the marriage penalty: in a reversal of the previous situation, the combined tax liability of two single people often increased with marriage. Since the reforms of 1969, numerous modifications have been made to the income tax laws that have altered the magnitude of the marriage penalty. However, most recent evidence documents that many couples still face a tax penalty because they are married. (For a comprehensive review of the history of the marriage penalty in the United States, see Bittker 1975.)
The magnitude of the marriage penalty
It is straightforward to determine the marriage penalty for a particular couple in the year that they marry. The calculation becomes much more complex when it involves couples who are already married because it hinges crucially on the assumptions made about the behavior of the people were they to split up. For example, if a married couple with two children and a home that is mortgaged were not married, what would they pay in taxes? Who would claim the children as dependents and therefore have the right to use the head of household tax schedule? Would both partners purchase homes and take itemized deductions? Would one spouse make alimony payments to the other? Would the spouses change their labor decisions? These issues would all affect the tax burden of the two former partners and thus the marriage penalty. Because the marital split is hypothetical, the value of the marriage penalty cannot be unambiguously determined, and there is no one precise algorithm for determining either the average value of the marriage penalty or the precise number of married couples who pay a marriage tax. Several reasonable approaches have been employed to estimate the probable magnitude and coverage of the marriage penalty. The general conclusion is that the tax effects of marriage-both positive and negative- can be quite large.
Recent estimates suggest that the percentage of married couples incurring a marriage tax has risen fairly steadily since the Tax Reform Act of 1969. According to Alm and Whittington (1996), about 57 percent of married couples in the United States now pay a marriage penalty, almost 30 percent receive a marriage subsidy, and the remainder experience no change in tax liability as a result of marital status. They also estimate an average marriage penalty that generally ranges from about $100 to almost $400, but this average masks large variations across the population. For example, among those who paid a marriage penalty in 1994, the average penalty was at least $1,200; for those incurring a subsidy, the average sub- sidy was roughly $1,100. Penalties and subsidies in excess of $5,000 for some couples are common. Feenberg and Rosen (1995) generate similar estimates, while estimates by the Congressional Budget Office (1997) suggest that a higher percentage of families receives a subsidy (51 percent) and a lower percentage pays a tax (42 percent). Dickert-Conlin and Houser (1998) demonstrate that lower-income individuals are especially likely to face a marriage penalty, owing to the interaction of transfers with the individual income tax.
Dual-income couples are most likely to incur a marriage penalty, especially if their incomes are similar and large. Single-earner couples are likely to gain a tax subsidy through marriage. The large increase in female labor force participation over the past few decades has been one contributing factor to the estimated upward trend in the percentage of families experiencing a marriage penalty and the general increase in the value of that penalty.
Can the marriage penalty be eliminated?
Eliminating the marriage penalty would require a major philosophical shift in the orientation of the federal tax system, away from the family as the unit of taxation and toward the individual as the unit. An income tax structure cannot be marriageneutral and progressive and also tax equal-income married couples equally. Contrast the hypothetical dual-earner couple discussed earlier with an equal-income couple with a single earner. Because the family is the unit of taxation under current law, the single-earner couple has the same marital tax liability as the dual-earner couple: there is equal treatment of married couples. However, suppose that the unit of taxation was the individual. The single earner in one couple would now have a tax liability of $11,198, while each individual in the dual-earner couple would have a liability of $3,383. Under a system of individual taxation, the single-earner couple would pay $4,432 more than the dual-earner couple, due largely to the progressive tax rates. This system of individual taxation would eliminate the marriage penalty or bonus and so would be marriage-neutral, but families with equal income would no longer be treated equally.
In general, a progressive tax system faces a trade-off: it cannot achieve both marriage neutrality and equal treatment of married couples. (See Alm, Dickert-Conlin, and Whittington 1999 for additional discussion.)
The marriage penalty and human behavior
Defining the taxable unit as the family rather than the individual is controversial. The principal arguments revolve around equity issues. However, there are also efficiency issues. For example, it is well recognized that the secondary earner in a couple will likely experience an increase in his or her marginal tax rate upon marriage, making market work less attractive.
Recent empirical research also provides support for anecdotal evidence that individuals consider the tax consequences of marital events in making decisions about marriage. Researchers have found that the marriage penalty negatively influences the probability (and timing) of marriage and positively affects the probability (and timing) of divorce. The marriage penalty also influences the likelihood that individuals live together as a legally married versus as a cohabiting couple. In most instances, however, the magnitude of the tax impact is small. (See Whittington and Alm 2003 for a summary of the empirical work.)
The appropriate tax treatment of the family is unclear and controversial. At a time when "family values" is increasingly the focus of public discussion, it is important to identify the magnitude of any impacts of income taxes on family structure, to estimate any behavioral responses to these taxes, and to design tax policies that either minimize these tax impacts or use any responses to taxes in the most appropriate manner.
- Alm, James, and Leslie A. Whittington. "The Rise and Fall and Rise . . . of the Marriage Tax." National Tax Journal 49, no. 4 (1996): 571-89.
- Alm, James, Stacy Dickert-Conlin, and Leslie A. Whittington. "Policy Watch: The Marriage Penalty." The Journal of Economic Perspectives 13, no. 3 (1999): 193-204.
- Bittker, Boris. "Federal Income Taxation and the Family." Stanford Law Review, 27, no. 4 (1975): 1388-1463.
- Congressional Budget Office. For Better or For Worse: Marriage and the Federal Income Tax. Washington, DC: Congress of the United States, 1997.
- Dickert-Conlin, Stacy, and Scott Houser. "Taxes and Transfers: A New Look at the Marriage Penalty." National Tax Journal 51, no. 2 (1998): 175-217.
- Feenberg, Daniel R., and Harvey S. Rosen. "Recent Developments in the Marriage Tax." National Tax Journal 48, no. 1 (1995): 91-101.
- U.S. General Accounting Office. Income Tax Treatment of Married and Single Individuals. GAO/GGD-96-175. Washington, DC: U.S. General Accounting Office, 1996.
- Whittington, Leslie A., and James Alm. "The Effects of Public Policy on Marital Status in the United States." In Marriage and the Economy: Theory and Evidence from the Advanced Industrial Societies, edited by Shoshana Grossbard-Shechtman (75-101). New York: Cambridge University Press, 2003.