I was glad to see that Ramesh received my bat-signal about the taxation of married couples — specifically, the favorable treatment of those with a breadwinner and homemaker — the other week. He and I have been amicably disagreeing on the subject for about a decade now, and as it happens, I have a new report out today through the Manhattan Institute that breaks these issues down more thoroughly.
There are a lot of tax-code provisions that have some bearing on marriage and children — the child credit, the child-care credit, the earned-income credit, and the head-of-household and married-filing-jointly statuses, to name a few. I’ve long written about these features and how they work, but I wanted to figure out how they really add up when you combine everything.
So I wrote a computer program that simulates the “tax life” of a broadly middle-class couple. Using a data tool embedded in the report, the user can select each individual’s income level, whether or not the couple is married, and how many kids they have. You can even have the couple contribute to a 401(k), or, if the couple is married with kids, have the secondary earner take some years off to watch children rather than being out of the workforce permanently.
It’s an admittedly simplistic representation of our tax system and the diversity of lives people lead — for example, these couples live entirely in the year 2022, à la Groundhog Day, and they’re either married or unmarried the whole time. But in broad strokes, it illustrates how the system treats different family configurations.
Users can treat the tool as their own personal Rorschach test, but here are a few comparisons that stood out to me:
- Take a median earner, and toggle whether or not he’s married to a spouse with no income. In this case, lifetime income taxes fall from about $200,000 to roughly $125,000 — an example of the marriage bonus for a traditional breadwinner household. This happens because married tax-bracket thresholds are double the single ones, except for the extremely high-income. If your income doesn’t change, but your bracket thresholds rise, your taxes go down.
- Similarly, take two median earners and toggle whether they’re married. No, the tool isn’t broken; there’s only a tiny difference in the results (stemming from the standard deductions for 65-year-olds). Where breadwinner couples get a huge marriage bonus, two equal earners who marry are only held harmless.
- Now, add two kids to the median earners’ family and toggle marriage again. In that case, there’s a marriage penalty, because unmarried parents can use the head-of-household status — and the higher-bracket thresholds will no longer double if they get married, which is necessary to stop taxes from rising when two equal earners wed. (Other important changes that occur with the addition of kids are the child credit, which reduces taxes significantly for parents in general, and the child-care credit, which is smaller, requires more income to benefit from, and of course helps only those with documentable child-care expenses.)
- Lastly, look at two lower earners — 25th-percentile workers — with two kids. The Earned Income Tax Credit is absolutely brutal to them, because it phases out only a little more slowly for married couples than for single parents. If these poor suckers get married, they lose about $70,000 over the course of their lives. If that sounds implausible, check out this tool to do the math for 2023 yourself. A $30,000 earner with two kids gets almost five grand. If he marries another $30,000 earner, that benefit is completely gone.
Ultimately, I think it’s hard to justify both the bonuses given to breadwinners and the penalties imposed on dual earners with kids. As I explain in the report, a potential solution would be to tax married Americans as individuals rather than on their joint income, but allow the higher-earning spouse to use head-of-household status if kids or a disabled spouse are present.
I do understand the nuance Ramesh spells out: This system would no longer tax all married couples with the same combined income equally. Sometimes I’m simply okay with that. For example, I have no problem taxing an $80,000 earner with a stay-at-home spouse differently from a couple where two people must work full-time to pull in $40,000 each. The former couple is far more fortunate, earning the same amount of money in half the hours, and in a progressive tax system the fortunate pay higher taxes.
However, the system would also reward couples for rebalancing the work they do among themselves, because it doesn’t directly consider how many hours it took someone to earn income. If each member of a couple earns the same wage, they might be taxed less if both work 30 hours a week than if one works 45 and the other 15, because the 45-hour worker could push into higher tax brackets. Some on the left want to prod couples toward “equity” in paid work, but I don’t think this is a legitimate aim of government policy.
Yet, we are dealing with mathematically inescapable trade-offs here, and this strikes me as a better one to strike than the current system, where breadwinners receive a large marriage bonus while dual earners with kids are penalized.