The Hefty penalty on marriage facing many households with children

Future of Children

Volumn 15, Issue 2, 2005, Pages 157-175

  Carasso, Adam ^a   Steuerle, C Eugene ^a,b  

^a URBAN INSTITUTE   (United States)

^b Urban Brookings Tax Policy Center   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

HOUSEHOLD; INCOME; MANAGEMENT; MARRIAGE; PUNISHMENT; REVIEW; TAX; UNITED STATES;

ADULT; CHILD; FAMILY CHARACTERISTICS; FEMALE; HUMANS; INCOME; INCOME TAX; MALE; MARRIAGE; POVERTY; UNITED STATES;

EID: 27944443275     PISSN: 10548289     EISSN: 15501558     Source Type: Journal    
DOI: 10.1353/foc.2005.0014     Document Type: Review

References (56)

1. That there could be hundreds of billions of dollars each year in marriage penalties and bonuses should not be surprising. Given that there were more than 112 million households in the United States in 2003, according to the Census Bureau, and that most ways a couple could divide up their income would result in hundreds and usually thousands of dollars of marriage penalties or bonuses (often in multiple tax and transfer programs), federal programs entail hundreds of billions of dollars in penalties and bonuses.
2. We will refer to marriage subsidies or bonuses; the two words are interchangeable.
3. Because transfer program eligibility and benefit rules are often state specific, we must choose one state as an example on which to run our simulations. We choose Pennsylvania, because the monthly TANF (welfare) benefits it provides are near or at the national median and also because its transfer programs' rules tend to be less complex than those of other states.
4. If he earned just $5,000, the couple would still be eligible, but would be at the very edge of Medicaid's income cutoff. In transfer programs like Medicaid, the benefit reduction schedule compensates somewhat for larger families-as a new person (the husband) joins the family, the income cutoffs for Medicaid benefit eligibility increase, but only slightly.
5. We will refer to TANF also as welfare.
6. See, for example, Wendell Primus and Jennifer Beeson, "Safety Net Programs, Marriage, and Cohabitation," paper presented at "Just Living Together: Implications for Children, Families, and Social Policy," Pennsylvania State University, October 30-31, 2000.
7. Robert A. Moffit, R. Reville, and A. E. Winkler, "Beyond Single Mothers: Cohabitation, Marriage, and the U.S. Welfare System," Demography 35, no. 3 (1998): 259-78.
8. See, for example, Gregory Acs and Sandi Nelson, "Should We Get Married in the Morning? A Profile of Cohabiting Couples with Children" (Washington: Urban Institute, March 2004);
9. Paul R. Amato's article in this volume;
10. and Robert I. Lerman, "Impacts of Marital Status and Parental Presence on the Material Hardship of Families with Children," paper prepared for the U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (July 2002).
11. Robert I. Lerman, "Marriage and the Economic Well-Being of Families with Children: A Review of the Literature," paper prepared for the U.S. Department of Health and Human Services' Office of the Assistant Secretary for Planning and Evaluation (July 2002); and
12. Robert I. Lerman, "Married and Unmarried Parenthood and Economic Well-Being: A Dynamic Analysis of a Recent Cohort," paper prepared for the U.S. Department of Health and Human Services' Office of the Assistant Secretary for Planning and Evaluation (July 2002).
13. For an attempt to quantify the returns to work for married households across all tax and welfare programs and across cohorts, see Jagadeesh Gokhale, Lawrence J. Kotlikoff, and Alexi Sluchynsky, "Does It Pay to Work?" Working Paper 9096 (Cambridge, Mass.: National Bureau of Economic Research, August 2002).
14. Robert A. Moffitt, "The Effect of Welfare on Marriage and Fertility: What Do We Know and What Do We Need to Know?" Discussion Paper 1153-97 (Institute for Research on Poverty, December 1997).
15. Marianne P. Bitler and others, "The Impact of Welfare Reform on Marriage and Divorce," Demography 41, no. 2 (May 2004): 213-36.
16. Those parents filing as head of household can claim a larger standard deduction and also benefit from a wider tax bracket than those who file as single.
17. James Alm and Leslie A. Whittington, "Marriage and the Marriage Tax," in Proceedings of the Eighty-Fifth Annual Conference on Taxation (Columbus, Ohio: National Tax Association-Tax Institute of America, 1993);
18. James Alm and Leslie A. Whittington, "Income Taxes and the Marriage Decision," Applied Economics 27, no. 1 (1995): 25-31;
19. James Alm and Leslie A. Whittington, "Does the Income Tax Affect Marital Decisions?" National Tax Journal 48, no. 4 (1995): 562-72;
20. James Alm and Leslie A. Whittington, "Income Taxes and the Timing of Marital Decisions," National Tax Journal 49, no. 4 (1997): 571-89; and
21. David Sjodquist and Mary Beth Walker, "The Marriage Tax and the Rate and Timing of Marriage," National Tax Journal 48, no. 4 (1995): 547-58.
22. See the article by Kathryn Edin and Joanna Reed in this volume.
23. Edin's ethnographic research seems to show that low-income households are fairly familiar with marriage penalties and their ramifications in the EITC. More moderate income households also display knowledge about penalties in education programs like the Pell Grant. However, the general understanding of marriage penalties in other transfer programs has not been widely examined.
24. See Joseph A. Pechman, Federal Tax Policy, 5th ed. (Brookings, 1987).
25. For a detailed history of marriage tax penalties, as well as family-related tax provisions, see Michael J. McIntyre and C. Eugene Steuerle, "Federal Tax Reform: A Family Perspective," prepared for the Finance Project (Washington: The Finance Project, July 1996);
26. and James Alm and Mikhail I. Melnik, "Taxing the 'Family' in the Individual Income Tax" (Andrew Young School of Policy Studies, Georgia State University, July 2004). Alm and Melnik also compare, in detail, how family taxation is treated in the United States with its treatment in other developed countries.
27. See Congressional Budget Office, "Update of Marriage Penalties and Bonuses" (September 1998);
28. and Congressional Budget Office, "For Better or for Worse: Marriage and the Federal Income Tax" (June 1997). Note, though, that aggregate estimates of bonuses and penalties fluctuate a lot from year to year, for a variety of reasons. As of the writing of this article, CBO has not published an update of the paper.
29. Adam Carasso and C. Eugene Steuerle, "How Marriage Penalties Change under the 2001 Tax Bill," Policy Discussion Paper 3 (Washington: Urban-Brookings Tax Policy Center, May 2002).
30. Where increases in penalties or decreases in subsidies do occur, they are fairly small. That is, the winners tend to win a lot, while the losers lose little.
31. J oint Committee on Taxation, "Estimated Budget Effects of the Conference Agreement for H.R. 1836" (U.S. Congress, May 26, 2001);
32. Joint Committee on Taxation, "Estimated Revenue Effects of H.R. 2896, the 'American Jobs Creation Act of 2003'" (U.S. Congress, August 1, 2003);
33. and Joint Committee on Taxation, "Estimated Revenue Effects of the Conference Agreement for H.R. 1308, the 'Working Families Tax Relief Act of 2004'" (U.S. Congress, September 23, 2004).
34. About 35 million married couples were affected by the legislation. Estimates from the Urban-Brookings Tax Microsimulation Model (version 0305-1).
35. C. Eugene Steuerle, "Valuing Marital Commitment: Radical Restructuring of Our Tax and Transfer Systems," Responsive Community 9, no. 2 (1999): 35-45. As many have noted, a tax system by itself cannot simultaneously be progressive in terms of rate structure, tax all households the same when they have the same income, and tax all individuals the same when they have the same income.
36. See Steuerle, "Valuing Marital Commitment," this note;
37. V. Joseph Hotz and John Karl Scholz, "The Earned Income Tax Credit," Working Paper 8078 (Cambridge, Mass.: National Bureau of Economic Research, January 2002)
38. ; and Robert A. Moffit, "The Temporary Assistance for Needy Families Program," Working Paper 8749 (Cambridge, Mass.: National Bureau of Economic Research, February 2002).
39. This example is taken from Jon Barry Forman, Adam Carasso, and Mohammed Adeel Saleem, "Designing a Work-Friendly Tax System: Options and Trade-Offs," Discussion Paper 20 (Washington: Urban-Brookings Tax Policy Center, June 2005).
40. This is calculated before tax credits are applied.
41. Economists believe, though, that it is the marginal tax rate-the rate applying to an individual's next dollar of earnings-that affects most that individual's incentives to work or marry. See Forman, Carasso, and Saleem, "Designing a Work-Friendly Tax System" (see note 25).
42. Note that this is a simple example. We have not included the phase-in of the child tax credit that would lower her effective marginal tax rate (because this credit is still phasing in at her salary level) or her Social Security payroll taxes, which would raise it again.
43. While SCHIP is not an entitlement program, except where it is run as a Medicaid expansion (twelve states only), families who meet the eligibility requirements are rarely turned away. While the economic down-turn that began in 2001 has hurt state budgets and challenged states' financing of current benefits, few states have responded with significant-and permanent-retrenchments in either benefit levels or eligibility. Pennsylvania's SCHIP program is run separately from its Medicaid program but has shown consistent enrollment numbers over the past several years, and the state has not resorted to wait lists or enrollment caps. See Vernon K. Smith, David M. Rousseau, and Molly O'Malley, "SCHIP Program Enrollment: December 2003 Update" (Menlo Park, Calif.: Kaiser Commission on Medicaid and the Uninsured, July 2004).
44. Child support is sometimes required from biological noncustodial parents. That money-except for $50 a month (in Pennsylvania)-effectively goes to the state's TANF agency as recompense for welfare benefits. See Primus and Beeson, "Safety Net Programs" (see note 6). In that case, the main effect is the same as taking away some of the TANF benefit, and thereby reducing the marriage penalties that can arise from TANF.
45. See Marcie Carlson and others, "The Effects of Welfare and Child Support Policies in Union Formation," The Fragile Families and Child Wellbeing Study, Working Paper 02-10-FF (Center for Research on Child Wellbeing, Princeton University, June 2004).
46. Although the child and dependent care tax credit is available in theory to anyone filing income tax forms, in practice, filers would need to owe tax to make use of the credit and to have child care expenses they can readily claim. That is why this credit is included in panel 2 rather than panel 1.
47. This example still omits some income-conditioned programs, such as school lunch and a variety of forms of college aid. Participation in multiple programs (say, four or more), although rare for the general low-income population, is not so rare for single-parent households. See Stephen D. Holt, "Making Work Really Pay: Income Support and Marginal Effective Tax Rates among Low-Income Working Households" (Holt & Associates Solutions, presented to the American Tax Policy Institute, March 2005). This monograph uses a data set of 3.2 million household records in Wisconsin in 2000, which matches benefits receipt information with unemployment insurance wage records, and state income tax records. The paper presents comprehensive findings on tax and transfer program participation in Wisconsin for 2000. Holt finds that a quarter of single-parent families with two children earning $18,000 a year or less participated in three tax and transfer programs, while another quarter participated in four programs. Six percent participated in five programs.
48. The maximum amount of benefits received ultimately depends on families' program eligibility and benefit levels (both of which are highly variable by state), marital status, and the number and age of the children. However, most families will encounter a benefit curve that is high at low incomes and falls off as more income is earned.
49. More details at each income level are available from the authors.
50. Holt, "Making Work Really Pay" (see note 32), reports comparable findings on the level of effective marginal tax rates affecting single parents in his Wisconsin study of program participation in 2000.
51. Data from the Urban Institute's National Survey of America's Families for 2002 suggest that 45.2 percent of cohabiting couples include one partner who earns three or more times what the other partner earns. The percentage of such cohabiting families is significantly higher when combined earnings are $30,000 or less.
52. When a person receives health insurance benefits from a job, one should technically add those benefits to the measure of total compensation. For instance, if a household getting Medicaid worth $5,000 loses this when the head takes a job offering $15,000 of cash and $5,000 of health insurance, then that household should be treated as if it earned $20,000 (not $15,000) and then effectively loses $5,000 of benefits. Other adjustments would be necessary in the calculation (for example, the EITC would still be based on $15,000 of earnings, not $20,000), but again the story line would not change much from what is presented here.
53. In their study of potential marriage penalties and bonuses, Gregory Acs and Elaine Maag have a similar finding for their sample of cohabiting couples. (As for marriage penalties and bonuses in total, however, they look only at cohabiting couples as defined in the National Survey of America's Families and only at penalties and bonuses within the tax system and TANF, whereas we consider the tax system plus a number of transfer programs and their impact on the much larger, additional groups of married or noncohabiting couples.). See Gregory Acs and Elaine Maag, "Irreconcilable Differences? The Conflict between Marriage Promotion Initiatives for Cohabiting Couples with Children and Marriage Penalties within Tax and Transfer Programs," NSAF Brief, series B, no. B-66 (Washington: Urban Institute, April 2005).
54. As an important aside, asset limits in transfer programs can also cause marriage penalties. These asset limits are often trivial amounts: $1,000 for TANF and $2,000 for food stamps. A single mother who receives these vital program benefits could lose them if she marries someone who has assets in excess of these amounts, even if his earnings are very low.
55. The child credit begins phasing out at 5 cents for every dollar earned above $75,000 (or $110,000 if the couple are married). So the child credit is means tested, but only at a relatively high level.
56. See Alm and Melnik, "Taxing the 'Family'" (see note 18), for details and many other examples.