The Other Marriage Penalty: A New Proposal to Eliminate the Marriage Penalty for Low-Income Americans
David Blankenhorn and Alex Roberts
Institute for American Values, 2006 - 12 pages
David Blankenhorn and Alex Roberts
Institute for American Values, 2006 - 12 pages
There is a growing consensus among family scholars that marriage has a significant influence on people's well-being. Studies consistently find that married adults are happier, healthier, and wealthier than their unmarried peers. Their children tend to fare better in life as well; for example, they are significantly less likely to use drugs, have emotional problems, or get into trouble with the law.[4,18]
As the benefits of marriage have become increasingly clear in recent years, the U.S. government has moved to promote and strengthen the institution, particularly among fragile families and low-income Americans. The 1996 welfare reform legislation, for example, sought to encourage marriage as a way to reduce poverty. More recently, the federal government's Healthy Marriage Initiative has been funding programs to promote healthy marriages, particularly among low-income parents.
Yet, there remains a serious structural disincentive to marry for many poor Americans. The U.S. tax and transfer (welfare) systems frequently impose substantial financial penalties on low-income couples who choose to marry. In relative terms, these marriage penalties tend to be much greater than those experienced by non-poor couples, and in some cases amount to family income losses of 20 percent or more. These marriage-discouraging financial penalties markedly undermine efforts to strengthen marriage among low-income Americans.
This research brief provides a general introduction to the issue of marriage penalties and describes the uniquely high marriage penalty imposed on many low-income couples. The brief also features a new proposal to solve the problem.
All tax systems must make a basic decision: Should the government tax all adults as individuals? Or, should it tax the family unit?
Since the establishment of the income tax in 1913, the U.S. government has handled this issue in three different ways over time, and each method of taxation has affected marriage differently.
Between 1913 and 1948, the U.S. government taxed all adults as individuals. This policy meant that marriage did not affect one's tax burden; two individuals paid the same amount whether or not they were married. Starting in 1948, however, the government began to tax the married couple as a single unit. Husbands' and wives' incomes were added together and then assessed using a tax schedule with doubled brackets – that is, tax brackets were twice as large for married couples as they were for individuals. This tax system tended in practice to create so-called "marriage bonuses" for couples. Why? Because allowing couples to share income for the purpose of taxation meant that the primary earner's income was taxed at a lower rate. (This system is sometimes called "income splitting" because it effectively splits a couple's income evenly among spouses for the purpose of taxation.)
In 1969, the government took a third position towards marriage. That year, Congress established tax brackets and a standard deduction for married couples that were no longer twice as large as those for single adults. Under this system, some marriage bonuses persisted, but many couples began to face a marriage penalty – either because their standard deduction was reduced, or because their joint incomes pushed them into a higher tax bracket, or both. This basic situation has persisted until today, albeit with some significant changes along the way.
Although one cannot say for sure how many couples now face marriage penalties and bonuses – the ratio is constantly changing due to demographic shifts and changes in the tax code – a reasonable estimate would be that about 45 percent of couples pay a marriage penalty, 45 percent receive a marriage bonus, and 10 percent face neither.[1,8]
Over the years, the issue of marriage penalties and bonuses has caused considerable controversy. Some argue that married couples should be taxed at a higher rate because married couples can often live more cheaply than two single individuals. The majority of Americans, however, have not supported that idea, and have instead tended to believe that marriage penalties are fundamentally unfair. After all, as the tax expert Eugene Steuerle has pointed out, economies of scale are produced by many living arrangements – dormitories, retirement homes, cohabitation, and so on – and yet only marriage, a moral and legal promise, is taxed. And, if marriage produces economies of scale and important social goods, common sense tells one that the government should strive to support the institution and avoid policies that are corrosive to it. For these and similar reasons, many argue that the government should reinstitute income splitting, "marriage bonuses" and all. They argue that, because couples generally pool their resources, allowing them to split their income for tax purposes is an acknowledgement of reality; any apparent gains in income by virtue of marriage are in fact gained through the marital commitment itself, and therefore do not constitute a "bonus."
Owing in large part to the consensus against marriage penalties, the federal government has in recent decades taken steps to ease the marriage penalties placed on some married couples. The flattening of tax rates in 1986, for example, sharply reduced the marriage penalty (although there was some subsequent backsliding).[5,17] The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 also made a substantial dent in the marriage penalty. But it is currently slated to expire in 2010. Thus, the government has taken real steps to reduce the marriage penalty. But these efforts have never fully solved the problem, and they have been characterized by impermanence.
In some ways the situation for low-income couples mirrors that of the general population. A significant number of low-income couples face a federal tax penalty upon marriage, but, the EGTRRA has, at least for now, made a substantial dent in this problem.[1,6]
However, most low-income couples also participate in governmental assistance programs, and these programs often impose marriage penalties of their own. Accordingly, many poor Americans face a much more serious financial barrier to wedlock than does the rest of the population.
Government assistance currently tends to create marriage penalties for two main reasons. First, it targets benefits towards needier families. After a family's income rises past a certain economic threshold, its benefits are gradually reduced. Some programs such as Medicaid actually cut all benefits at once after a certain level of income is attained. Second, the assistance system allows a married-couple family to have only very slightly more income before its benefits are cut – or, to use an analogy, the government does not significantly increase a married couple's "tax brackets." This policy means that almost any income brought into the household by a new spouse will lead to a loss of benefits for the family. Thus, in the same way marriage might move a couple into a higher tax bracket or cause their standard deduction to be reduced, marriage can quite suddenly transfer a low-income family to a significantly reduced level of benefits.
Such a system encourages surreptitious cohabitation. Many low-income parents will cohabit without reporting it to the government so that their benefits won't be cut. Other parents might live near each other, perhaps with the father staying at his parents' house. In both cases the calculus is the same: Avoid marriage because marriage would result in a substantial loss of income for the family.
Consider the following example: A single mother lives with her two children in California and works half-time at $7 per hour. The father, meanwhile, works full-time at $7 per hour and lives nearby. Under the current system, the mother will receive a significant amount of governmental assistance. (Governmental assistance is usually attached to the children). The father will pay a modest amount in taxes. He will also have to pay child support to the government to help defray the cost of his children's benefits. The two adults' combined disposable monthly income will be about $2,963. What happens if the mother and father decide to get married? They will receive some bonuses: The father will no longer pay taxes and child support and will instead actually receive a modest amount of money from the IRS. But, in the government's eyes, because the father will now be directly supporting his children and the household income will be significantly higher, the government will cut a substantial amount of the family's benefits. These cuts will greatly outweigh the bonuses, and the family's income will shrink to $2,552 per month. (See Figure 1.)
|Figure 1. Low-Income Family in California: Changes in Monthly Income Due to Marriage|
|Couple Lives Apart or
|Medicaid/ SCHIP||3 of 3||0 of 1||3 of 4||4 of 4||Gain|
|TANF= Temporary Assistance to Needy Families; WIC= Special Supplemental Nutrition Program for Women, Infants, and Children; SCHIP=State Children's Health Insurance Program. The numbers provided here assume that the mother works for 20 hours a week at $7 per hour, has two children ages 1 and 5, and participates in the specific programs indicated above. It is assumed that the father works 40 hours a week at the same wage and is father to all children. This table is based on Table 1.A of "Financial Consequences of Marriage Decisions."|
As the chart indicates, tying the knot would cost this family $411 per month, or nearly $5,000 per year in lost benefits. That is a very substantial financial penalty for a low-income family! Conversely, if the couple forwent marriage and instead stayed apart or cohabited without reporting it to the government, as many indeed do, they would gain from this decision alone approximately $5,000 more per year in disposable income.
As this example suggests, the current tax and transfer (welfare) systems are not integrated entities with clear and consistent rules pertaining to marriage. They are instead a patchwork of many smaller programs with different rules that can in turn affect marriage in a variety of ways depending on circumstances. (See Figure 2.)
|Figure 2. Programs that Can Penalize or Subsidize Marriage|
|Below is just a small selection of the tax and transfer programs that can penalize or subsidize marriage:|
The tax and transfer systems can even sometimes provide marriage bonuses for some low-income couples. If, for example, an unemployed single mother in New Jersey marries the working father of her children, the couple will lose some benefits but they will also become eligible for the Earned Income Tax Credit (EITC) and will no longer have to pay child support. Their yearly income will increase by about $3,000. Also, in cases where an unemployed father marries the mother of his children, it tends to drive up that family's need but not their income – which can often mean a marriage bonus.
How many low-income couples face a marriage penalty and how many face a bonus? Unfortunately, it is impossible to know for sure because everyone's situation is unique. But the consensus among experts is that most low-income couples with children face a significant marriage penalty.[5,11] One study finds that the median unmarried poor couple stands to lose 12 percent of its income upon marriage, with the average loss being about 13 percent. It also found that the median married poor couple stands to gain 16.2 percent more income by getting divorced and that the average gain resulting from the divorce is 34.2 percent. In other words, the tax and transfer systems offer a sizable "divorce bonus!" Although this study uses data from 1990 and is therefore not completely current, it does accurately convey what is at stake for low-income couples who want to marry (or are considering divorce).
It is important to reiterate that there is an underlying reason why most poor couples face marriage penalties: Benefits are high for families with children earning $0-$10,000, but benefits steadily decline as families push towards the $30,000 income mark; they disappear in the $30,000 to $40,000 range. This benefit regime is altered only slightly for married couples. So, when low-income parents get married and their incomes are tallied, it usually causes a reduction in their benefits.
Another key point is that, while the tax system generally creates small marriage bonuses for poor couples, the transfer system creates large marriage penalties. The main problem for low-income couples is the marriage penalty in the transfer system – an issue that has so far not been addressed by Congress or American society more broadly.
To what extent does the marriage penalty prevent poor couples from getting married? Unfortunately, the academic research does not provide a precise answer to this question. A number of studies investigate how EITC penalties and certain welfare policies affect marriage rates – but few if any studies track individual couples, the specific penalties they face, and their consequent marital decisions.
Nevertheless, the existing studies do analyze important aspects of the marriage penalty, and a majority find that these penalties have a real but moderate impact on low-income couples' marital decisions.[3,7,10,16,19] In other words, specific financial disincentives in the tax and transfer systems discourage marriage at least moderately. This finding is not surprising, since financial concerns are a major reason why low-income couples choose not to marry.
Moreover, it would be reasonable to assume that if studies gauged the total marriage penalties faced by low-income couples, not just certain disincentives, they would find a stronger effect.
There is another reason to believe that marriage penalties may have a greater impact than we can necessarily measure at the moment: The copycat effect. If people see that their peers lose income upon marriage or otherwise become aware of marriage penalties, it may discourage them from getting married. In this way, marriage penalties may have a diffuse and long-term negative impact on marriage as an institution that cannot easily be measured.
Many low-income couples do marry, and for them the decrease in government benefits at the time of marriage can be a huge burden. Losing 20 percent of one's income can be crippling, especially when one is already under economic stress. It is also important to note that, once low-income couples marry, the "marriage penalty" also equates to a "work penalty." Each additional dollar earned is effectively "taxed" at a high rate because it causes a 30, 40, or 50 percent loss in benefits or more. When a couple's income nears the limits prescribed by Medicaid, a few extra dollars in income cause thousands of dollars in benefits to be lost. What all of this means is that the two most important routes out of poverty – marriage and work – are heavily taxed under the current U.S. system.
The current system also encourages fraud and dishonesty. Under current rules, low-income couples have a very clear financial incentive to cohabit and conceal it from the government. And many do. According to Eugene Steuerle, "Cohabitation has become the tax shelter of the poor." Clearly, this aspect of the tax and transfer systems is a problem. We do not want a benefits structure that both promotes fraud and discourages the moral and legal commitment of marriage.
In sum, for most low-income couples who want to maintain families, the current tax and transfer systems are corrosive influences. It penalizes wedlock and encourages parents to form more fragile relationships, often in the form of concealed cohabiting unions. Academic research shows that, relative to marriage, cohabitation produces poorer outcomes for parents and their children. Simply put, marriage promotes stability, happiness, and even increased workplace productivity, in ways that other family forms such as cohabitation do not.[4,18] Yet our current system actually encourages low-income couples to cohabit rather than marry. Those low-income couples who do marry are often hit with a major financial penalty. They might lose 10, 20, or 30 percent of their yearly income just for getting married. Such income losses constitute a major hardship and will inherently place strain on the family. Worse, the transfer system offers most low-income couples a divorce bonus. They can raise their income, often significantly, by dissolving their marriage. Our current system therefore provides a comprehensive set of incentives against marriage and for divorce for most low-income couples. Few non-poor Americans have to face such a family-unfriendly environment.
It is true that the marriage penalty helps the government to keep resources targeted toward the poorest persons in our society. But beyond that, the current system serves no one's interests and actively undermines family formation and stability. The marriage penalty certainly undermines government's efforts to strengthen the institution. It makes sense for us to fix this problem.
Fixing the marriage penalty will take effort and money. If we are not firmly committed to the project at the outset, we will not likely make the investments needed to see it through. Therefore, it is of the utmost importance that government and society make the ending of the marriage penalty for low-income Americans a matter of principle. We need a clear vision and goal at the outset.
As a second step, the government should, when and where possible, revise specific tax and transfer programs so that they do not penalize marriage, or at least penalize it so heavily. Low-income married couples should be permitted to make at least somewhat more money before their benefits are reduced. Some obvious options for reform include: allowing income splitting, allowing individual filing for married couples, or reducing the benefit phase-out rate for married couples.
The economists David Ellwood and Isabel Sawhill have already offered an analysis of these options for the EITC. They find that extending the "plateau" phase of the EITC for married couples – that is, allowing married couples to make more money before their benefits begin to phase out – would target relief towards those who face the more egregious penalties, while keeping costs down.
In addition, the government should consider making the marriage penalty relief aspects of the EGTRRA permanent and should continue to combat fraud by cohabiting couples. (The policy of collecting child support from fathers, for example, makes it more difficult for them to cohabit without being detected.)
But ultimately, the marriage penalty cannot be eradicated in a piecemeal fashion. There are simply too many programs and too many unique living situations to account for everything. Furthermore, the transfer system has increasingly come to be administered by the states, and this fact has added a whole new layer of rules and regulations to the assistance regime.
We therefore propose a new solution to end the marriage penalty for low-income Americans: Give low-income couples a refundable tax credit for the exact amount of their marriage penalty.
We believe that the surest way to eradicate the marriage penalty without overspending on broad structural reforms is to directly reimburse individual low-income couples for the amount of their marriage penalty.
There is already a technology to support such a reform. Released earlier this year by the Urban Institute and the Administration for Children and Families, the "Marriage Calculator" is an easy-to-use program that can determine a low-income couple's penalty. Anyone can go to http://marriagecalculator.acf.hhs.gov/marriage/calculator.php and use the Marriage Calculator. This technology could be used to solve the marriage penalty problem. As part of the process of filing taxes, low-income couples could – with the assistance of civil society and governmental organizations as needed – calculate their penalty and be reimbursed.
Importantly, there are already structures in place that could help put this refundable tax credit solution into practice. Consider the following example: A young, urban couple have a child and decide that they want maintain a family together. They would like to get married, but they have low income and are concerned about finances. They know that the government might reduce their benefits if they marry. They therefore make the decision to avoid marriage and cohabit without reporting it to the government. As it is, there are a host of organizations to assist such low-income couples with children, including community groups, nonprofits, churches, charities, and others. Imagine if the government were to say: "We will issue checks to offset low-income couples' marriage penalties." Certainly, that low-income couple who wants to marry but is concerned about finances might want to seize the opportunity. And certainly, the community groups would have a vested interest in helping them to do so. Think about it: Any community group with a computer could advertise: "We will help low-income couples wishing to marry calculate their marriage penalty and collect money from the government if they come to us." The organizations could, in other words, gain visibility and support by actively helping couples to ascertain their marriage penalty, fill out forms, and collect their reimbursement. The government could make computers available in public facilities so that every low-income married couple would be able to collect their marriage penalty relief.
The unique advantage of this approach is that it would conceivably allow us to solve a very complex problem in a relatively simple fashion. We could target and eradicate the marriage penalty without getting bogged down in an effort to reform the entire tax and transfer systems, an incredibly complicated undertaking that might prove impossible. The refundable tax credit approach also streamlines reform by making the individual responsible for its implementation. That is, government and civil society provide the tools – the forms, the access to the Marriage Calculator, the funds – but it is the individual couple that must do the work to get its check.
Of course, substantial issues remain. Who issues the check if marriage penalties are created jointly by the federal and state governments? It could be that just the federal marriage penalty is dealt with at first. Alternatively, the state and federal governments could each issue a check and jointly reimburse couples for their marriage penalty. (The EITC might offer a model in this regard). How would costs be kept down? One possibility is that couples receive marriage penalty relief for only the first two or three years of marriage. There are actually at least two good reasons for limiting relief in this way. First, marriage is a wealth-building institution: Couples tend to accrue resources and advantages from marriage over time and these gains naturally offset marriage penalties. Second, after two or three years of marriage and resource sharing, it becomes increasingly difficult to know what a couple's situation would be like had they not married. The government would essentially have to guess what such a couple's marriage penalty should be – hardly a sound basis on which to spend tax dollars. Thus, time-limiting marriage penalty relief makes sense because a couple's marriage penalty is most clear and severe during the first few years of marriage. A further difficult question is posed by Medicaid: How do we feasibly eradicate the marriage penalty in an expensive insurance program? These questions are difficult. But we think that they are ultimately solvable.
Certainly, as a pilot project or trial, we could try to eradicate the marriage penalty in one or several locales. The Administration for Children and Families has considered just such an effort as part of its Building Strong Families (BSF) initiative. We hope that there will indeed be a pilot program.
Another possibility, one which is being considered in the District of Columbia, is that states use TANF funds to fix the marriage penalty problem. TANF monies are dispensed by the federal government in the form of block grants and in many cases states do not spend all of the funds they are given. As a result, many states have acquired a surplus of money – often many millions of dollars – that can be spent as the state sees fit. We believe that these surpluses constitute and excellent resource for eliminating low-income marriage penalties, and we strongly urge states and governors to seize this opportunity.
After years of financially discouraging wedlock for low-income couples while creating incentives for divorce and non-marital cohabitation, we believe that it is now time for the government to send a new message and eradicate the marriage penalty once and for all for low-income Americans.
This research brief was commissioned by the National Fatherhood Initiative and supported by Grant No. 2006-DD-BX-K003 awarded by the Bureau of Justice Assistance. The Bureau of Justice Assistance is a component of the Office of Justice Programs, which also includes the Bureau of Justice Statistics, the National Institute of Justice, the Office of Juvenile Justice and Delinquency Prevention, and the Office for Victims of Crime. Points of view or opinions in this document are those of the authors and do not represent the official position or policies of the United States Department of Justice.
This research brief comes from The Center for Marriage and Families, based at the Institute for American Values. It was published in September 2006.
copyright 2006, Institute for American Values.