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The Unfairness of the Marriage Tax Penalty

March 31, 2021, 8:00 AM

Wisconsin Republican U.S. Representative Glenn Grothman recently criticized the Covid-19 relief bill by pointing to the marriage penalty that is embedded in the earned income tax credit, the EITC. He then inexplicably used the penalty in the Democratic-backed bill to take a swipe at the Black Lives Matter movement, claiming they did not honor the traditional married family. Representative Grothman is just wrong about the BLM point. The group seeks to value all families, and there are many in all of our communities that do not fit the traditional married family model. On the other hand Representative Grothman is absolutely correct about the problem of the marriage penalty in our tax code.

Still, it doesn’t seem fair to lay the blame at the feet of the Democrats or attribute the problem to the Covid-19 relief bill, as though that is the law that created the problem. The marriage penalty has been lurking throughout the Internal Revenue Code for some time. Both Democrat and Republican administrations have contributed to the problem. Both parties have, at times, taken a stab at reducing the problem. But so far no one has succeeded.

How the Marriage Penalty Arose

Before 1948, it was almost impossible to have a marriage penalty in our tax law. That is because every taxpayer filed a separate return. The modern joint return was created by Congress in 1948. It is perhaps important to point out that this did not occur because of any well-thought-out policy analysis about what the ideal taxpaying unit should be. It happened because of geographical discrimination caused by a single tax case decided by the U.S. Supreme Court in 1930, Poe v. Seaborn. This case, involving a married couple from Washington State, determined that because income earned by a spouse (in those days almost always the husband) was in fact owned by the community that income should be taxed half to the husband and half to the wife. And, because there was but one single tax rate schedule in those days, and it was progressive, this ruling automatically lowered the tax burden for all couples living in community property states.

In essence, the husband’s income, if taxed to him, would be taxed at the top brackets. But if instead the top half of his income could be taxed to the wife, then she would enjoy applying the lower tax brackets at the bottom of the scale to that income. As tax rates rose in the 1930s and 1940s, the value of this income splitting became even more obvious. Spouses in non-community property states engaged in numerous attempts to split their income between them by agreement or by transfers in trust. Almost all of these attempts failed. Income splitting would only work in community property states. As a result, traditional separate property states considered adopting community property systems just for the income tax benefit. Pennsylvania, in fact, became a community property state for about three months before Congress solved the income-splitting problem with the joint return.

Under the 1948 version of the joint return the brackets for married couples were widened to be double that of single taxpayers. As a result, it didn’t matter who “owned” the income between the spouses. And it didn’t matter whether they lived in community property states or separate property states. The aggregate income of all married couples would be taxed equally. This, at the time, satisfactory solution to the Poe v. Seaborn problem did not last long.

In the early 1950s single taxpayers supporting children in their households rather than spouses asked why they could not split their income on a joint return with their children. By comparison to married couples, they were being overtaxed. That’s when we got head of household tax rates, not quite as good as married couples, but not as discriminatory as before. Next came true single taxpayers who complained that they were being taxed unfairly. As single people, they were not sharing a home with someone else (although that of course has changed in recent times) and therefore they did not enjoy the economies of scale that married couples did. Furthermore, they didn’t have someone living with them who could clean the house and cook the meals. Single taxpayers had to do all of that themselves or hire someone to do it. Congress listened and in response lowered the single tax rates a bit. And these events created the first stage of the marriage penalty in the tax code.

The penalty became obvious when women, including wives, started entering the labor market in higher numbers. By the 1960s and early 1970s two-earner married couples began to realize that they paid excess taxes just because they were married. Two single taxpayers, living together, would often pay thousands of dollars less, simply because they were not married and therefore did not have to file a joint return. One couple notoriously divorced each year at the end of December so that they could file their taxes as single (your marital status for tax purposes is determined on the last day of the tax year) and then remarried in early January. The IRS pursued them and ultimately they lost in the U.S. Tax Court and on appeal. (As an aside, many tax scholars criticized the IRS approach in this case, worrying that the IRS would not determine who was or was not married rather than relying on established state law on marriage and divorce.)

Modern Impact of the Marriage Penalty

Finally, during the George W. Bush administration, the marriage penalty caused by the different rates in the tax schedules was virtually erased. But the problem was actually only resolved for taxpayers at the lower tax brackets. However, the bracket penalty still exists for higher bracket taxpayers. Under the Tax Cuts and Jobs Act, passed in 2017, a married couple filing a joint tax return hits the highest marginal bracket when their combined taxable income reaches $600,000 (indexed for inflation). If the same couple consisted of two unmarried, cohabiting individuals earning equal amounts of taxable income, they would not hit the top marginal bracket until their combined incomes reached $1 million. That is simply unfair.

And despite the bracket penalty solution for lower income taxpayers, they suffer a marriage penalty in many other ways. One of the worst is the penalty mentioned by Representative Grothman. A single low-earning individual who is entitled to the EITC will begin to lose that needed tax credit as income rises. And if that individual marries someone with additional income that must be combined on a joint return, that individual could lose the credit altogether.

A similar marriage penalty arises for low income taxpayers who are receiving social security. Social security receipts are not taxed at all to low income taxpayers. But if such a taxpayer marries and has to combine his or her income with that of the spouse, causing the aggregate income to exceed the threshold amount, the social security recipient will start owing taxes on those payments.

And, there are numerous penalties that affect higher income married couples. Take the mortgage interest deduction, for example. A single taxpayer is entitled to deduct interest on a qualifying mortgage of up to $750,000. If two unmarried individuals buy a home together and both share the purchase money mortgage, they can deduct interest on a qualifying mortgage of up to $1.5 million. That, too, is not fair.

But perhaps the most egregious recently-enacted marriage penalty was introduced in the Tax Cuts and Jobs Act of 2017. In order to support the massive tax cuts being made available to high income taxpayers, that Act reduced the itemized deduction for state and local taxes (sometimes called the SALT deduction) to a maximum of $10,000. That tax change is often described as a penalty aimed at blue states like California and New York, both of which have high state income and property taxes. Just to give you an example: the median income in the zip code where I live is over $225,000. That will seem high to many. But it is Northern California where the median home price is almost $4 million. (No, I do not own a $4 million home.) Even if one makes $225,000 a year, that is not enough to purchase a median priced home.

My point is that taxpayers making $225,000 in Northern California are not particularly rich. The state income tax on that amount of income is over $17,000. Yet, under the Federal tax code, that taxpayer can only deduct $10,000. Assume that well-off, but not rich, taxpayer marries someone with a similar amount of income. The two spouses between them are limited to a maximum deduction of $10,000. They are paying $34,000 in state income taxes between them, but can only deduct $10,000. If they were not married, they could deduct $10,000 each for a total of $20,000. Again, not fair.

Some argue that allowing a deduction for mortgage interest deductions and for property taxes paid on a residence is improper. Those expenses are no more than the cost of a private choice to own a home rather than rent. I agree with that argument. Those deductions do smack of personal consumption and payment for personal consumption should not be deductible in an ideal income tax. But the state income tax is a bit different. All workers are subject to their state income tax (if there is one; remember some states impose no state income tax). Allowing a deduction for state income taxes paid is a fairness measure. Tax policy scholars call this horizontal equity. Taxpayers who make the same amount of income should be taxed equally. Taxpayers who make income in some states are inevitably subject to higher state income taxes than taxpayers in other states. Allowing a deduction for the taxes paid is an attempt to equalize the tax liability of taxpayers who live in high income tax states compared to those in low income tax states.

How to Remedy the Marriage Penalty Problem

My bottom line point is this: Marriage should not penalize any taxpayer under our tax laws. Congress should stop treating two married taxpayers, both earning income, as a single taxpayer. That is, in large part, what creates these built-in marriage penalties. The Biden Covid-19 relief bill does not create marriage penalties. Far from it. That bill treats individuals as individuals. Each individual making under $75,000 is entitled to a $1400 stimulus check. If you are married to someone making under $75,000 you and your spouse each get a check. You are not treated as one.

The problem of the marriage penalty is not attributable to the Biden bill. It is attributed to the tax code and it is time to fix that inequity. No taxpayer should face higher taxes solely because he or she marries another taxpayer. The U.S. is one of only a handful of developed countries that uses a joint tax return. Canada never has. The U.K. abolished its joint return in 1990. We should do the same and end the marriage penalty. But even if we don’t abolish the joint return, there are places in the tax code where we can end the penalty that is created by treating two taxpayers married to each other as one. (I call that “tax coverture.”) We could calculate the EITC without aggregating spousal income. We could determine how much of social security payments should be taxed on the basis of the income of the recipient rather than aggregating the recipient’s income with that of a spouse. We could allow each spouse to deduct up to $10,000 of state income taxes. That would be a start.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information
Patricia Cain is a professor at Santa Clara University School of Law and is a national expert in federal tax law and sexuality and the law.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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