Fixing the Marriage Penalty

beautiful couple enjoying embrace of each other and tenderly smiling
beautiful couple enjoying embrace of each other and tenderly smiling

What if there is a problem that Washington agrees on, but no one is fixing it?

Secondary income earners--often women due to their lower income in the marriage--are currently disincentivized from earning a salary, and many people are disincentivized from marrying in the first place. This has impacted even more couples with the recognition of same-sex marriage in Obergefell, which expands the number of two-income marriages and renews interest in eliminating these disincentives.

The problem is that the federal income tax brackets for married people are larger than for single people to accommodate two incomes, but not double. As a result, two-income households are pushed into higher tax brackets more quickly than if they had remained single. Meanwhile, one-income households benefit from marriage because their lone income gets the larger brackets intended for two incomes. This creates the so-called marriage penalty or marriage bonus for many married couples, depending on whether the secondary income earner stays in the workforce after marriage.

For example, say a woman earns $75,000 in 2015. Her marginal taxation rate is 25%. Once she marries a man earning $80,000 and becomes the secondary income earner in the marriage, her marginal taxation rate jumps to 28% by virtue of the marriage alone, even if both of their incomes stay the same.

At least one couple has divorced and re-married to avoid this tax penalty. The husband and wife first traveled to Haiti to divorce on the grounds of incompatibility despite sharing a hotel room, and remarried the following January. When November came, they traveled to the Dominican Republic to divorce based on incompatibilities that made their life together unbearable. They remarried the following February. The U.S Court of Appeals for the Fourth Circuit suggested the application of the sham transaction doctrine in this context, usually reserved for commercial transactions.

For a long time, commentators have offered various solutions to the tax penalty, but they are not easy to implement. For example, it has been suggested to stop taxing people based on their marital status, even though married couples are treated as one economic unit in other contexts. Or, to double the tax brackets for all married people, even though it would maximize the marriage bonus for one-income marriage households who do not need double tax brackets--this solution was thus implemented only at the lower income tax rates.

However, if lawmakers are serious about eliminating the marriage penalty, there is one solution that solves the problem with minimal change--create a fifth tax filing status for two-income married couples, whose tax brackets are double those of single filers. Currently, the only options are for 1) single filers, 2) married people filing jointly, 3) married people filing separately, and 4) head of households. A fifth filing status for married two-income earners--with double brackets--would allow continued treatment of families as a single unit under the tax code, without creating a marriage penalty or a marriage bonus for couples who do not have two incomes.

To prevent one spouse from working a nominal job to trigger the double brackets to accommodate a spouse's significant income, spouses might have to earn some percentage of each other to qualify for the double brackets. This targets the marriage penalty without creating an expensive marriage bonus.

For a society concerned about the record number of people not marrying and not participating in the workforce, we have ignored the marriage penalty in the tax code for too long. For an administration worried about how women fare in the workforce, it is surprising that nothing has been done to neutralize the tax obstacles.

Let's stop inviting Uncle Sam to weddings. It's high time.

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