Wisconsin Republican Representative Glenn Grothman recently criticized the Covid-19 relief bill by pointing out the marriage penalty included in the EITC's earned income tax credit. He then inexplicably used the punishment in the Democrat-backed bill to throw a blow at the Black Lives Matter movement, claiming they did not honor the traditional married family. Representative Grothman is simply wrong about the BLM point. The group tries to value all families, and there are many in all of our communities who do not fit the traditional married family model. Representative Grothman, on the other hand, is absolutely right about the issue of the marriage penalty in our tax code.
Still, it doesn't seem fair to blame the Democrats or attribute the problem to the Covid-19 Relief Act, as if that is the law that caused the problem. The marriage penalty has been lurking across the Internal Revenue Code for some time. Both the Democratic and Republican governments have contributed to the problem. Both parties have at times tried to alleviate the problem. But so far nobody has made it.
How the marriage penalty came about
Before 1948, our tax law made it almost impossible to impose a marriage penalty. That's because each taxpayer filed a separate tax return. The modern common return was initiated by Congress in 1948. It is perhaps important to note that this did not happen because of a well-designed policy analysis of what the ideal taxpayer unit should be. It did so because of geographic discrimination caused by a single tax case filed by the US Supreme Court in 1930, Poe v. Seaborn, was decided. In this case, involving a Washington state couple, it was found that one spouse's income (almost always the husband in those days) was actually owned by the community and half of the income was owned by the husband and half should be taxed by the wife. And since there was only one tax rate plan at the time and it was progressive, that ruling automatically lowered the tax burden for all couples living in jointly owned states.
In essence, if the husband's income were taxed for him, it would be taxed in the upper brackets. But if instead the upper half of his income could be taxed for the woman, 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 division of income became even clearer. Spouses in non-community owned states have made numerous attempts to share their income between them by agreement or fiduciary transfer. Almost all of these attempts failed. Income sharing would only work in communally owned states. As a result, traditional separate real estate states considered introducing municipal real estate systems only for the income tax benefit. In fact, Pennsylvania became a jointly owned state for about three months before Congress resolved the income-sharing problem with joint return.
In the version of the joint tax return of 1948, the brackets for married couples were expanded to double the brackets for individual taxpayers. As a result, it did not matter who “owned” the income between the spouses. And it didn't matter whether they lived in jointly owned states or in separate owned states. The total income of all married couples would be taxed equally. This at the time satisfactory solution to the Poe versus Seaborn problem did not last long.
In the early 1950s, individual taxpayers who supported children in their households, rather than spouses, asked why they couldn't split their income between returning with their children. Compared to married couples, they were overwhelmed. That was when we got the household tax rates that weren't quite as good as married couples, but not as discriminatory as before. Next came real individual taxpayers who complained that they were being unjustly taxed. As a single person, they did not share a home with anyone else (although that has changed recently, of course) and therefore did not enjoy the economies of scale that married couples had. In addition, they had no one with them to clean the house and cook meals. Individual taxpayers had to do all of this themselves or hire someone to do it. Congress listened and then lowered the uniform tax rates a little. And these events created the first stage of the marriage penalty in the tax code.
The punishment became apparent as women, including wives, entered the labor market in greater numbers. In the 1960s and early 1970s, two-earning couples began to realize that they were paying excess taxes just because they were married. Two single taxpayers who lived together often paid thousands of dollars less simply because they were not married and therefore did not have to file a joint tax return. A couple were notoriously divorced in late December each year so they could file their taxes as single (their marital status for tax purposes is determined on the last day of the tax year) and then remarry in early January. They were prosecuted by the IRS and ultimately lost in US tax court and on appeal. (That being said, many tax scholars criticized the IRS approach in this case, fearing that the IRS would not determine who was or was not married instead of relying on applicable state marriage and divorce law.)
Modern effect of the marriage penalty
Eventually, during the George W. Bush administration, the marriage penalty caused by different tax rates in tax plans was virtually eliminated. However, the problem has actually only been resolved for taxpayers in the lower tax brackets. However, there is still a bracket penalty for taxpayers in higher classes. Under the Tax Cut and Jobs Act passed in 2017, a married couple filing a joint tax return will reach the highest marginal group when their total taxable income reaches $ 600,000 (indexed for inflation). If the same couple consisted of two unmarried people living together who earned the same amount of taxable income, they would not be in the top tier until their total income reached $ 1 million. It's just unfair.
And despite the bracket penalty solution for lower-income taxpayers, they face marriage sentences in many other ways. One of the worst is the punishment mentioned by Representative Grothman. A single low-income person eligible for the EITC will lose the required tax credit as income increases. And if that person marries someone with additional income that needs to be combined when they return together, that person could lose the credit altogether.
A similar marriage penalty applies to low-income taxpayers who receive social security. Social security receipts are not taxed at all for low-income taxpayers. However, if such a taxpayer marries and has to combine his income with that of the spouse, causing the total income to exceed the threshold, the Social Security beneficiary will begin to owe tax on these payments.
And there are numerous penalties that affect higher-income 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 people buy a home together and both share the purchase money mortgage, they can deduct up to $ 1.5 million in interest on a qualifying mortgage. That's not fair either.
But perhaps the most egregious marriage penalty recently imposed was introduced in the Tax Cut and Employment Act of 2017. To support the massive tax cuts made available to high-income taxpayers, this law reduced the individual state and local tax deduction (sometimes referred to as the SALT deduction) to a maximum of $ 10,000. This tax change is often described as a penalty for blue states like California and New York, both of which have high state incomes and high property taxes. To take just one example, the median income in the zip code where I live is over $ 225,000. That will seem high to many. But it's Northern California where the median home price is nearly $ 4 million. (No, I don't own a $ 4 million home.) Even making $ 225,000 a year isn't enough to buy a mid-price home.
My point is that taxpayers who earn $ 225,000 in Northern California aren't particularly wealthy. State income tax on this amount of income is over $ 17,000. However, under federal tax law, that taxpayer can only deduct $ 10,000. Suppose the wealthy but not rich taxpayer marries someone with a similar income. The two spouses between them are limited to a maximum deduction of $ 10,000. You pay $ 34,000 in state income taxes between them, but can only deduct $ 10,000. If they weren't married, they could deduct $ 10,000 each for a total of $ 20,000. Again not fair.
Some argue that it is inappropriate to allow a deduction for mortgage interest deductions and property taxes paid on a residence. That cost is no more than the cost of a private decision to own a home rather than rent it. I agree with this argument. These deductions smell of personal consumption, and the payment for personal consumption should not be deductible given an ideal income tax. But state income tax is a little different. All workers are subject to their state income tax (if there is one; keep in mind that some states do not have state income tax). Allowing a deduction for state income taxes paid is a fairness measure. Tax politicians call this horizontal justice. Taxpayers who earn the same income should be taxed equally. Taxpayers who earn income in some states are necessarily subject to higher state income taxes than taxpayers in other states. Allowing a deduction for taxes paid is an attempt to offset the tax liability of taxpayers living in high income tax states compared to those in low income tax states.
How to fix the problem of marriage punishment
My conclusion is: marriage shouldn't punish a taxpayer under our tax laws. Congress should stop treating two married taxpayers who both earn incomes as a single taxpayer. It is, in large part, what creates these built-in punishments for marriage. The Biden Covid-19 Auxiliary Act does not provide for any marriage penalties. Far from it. This calculation treats individuals as individuals. Anyone making less than $ 75,000 is eligible for a stimulus check of $ 1,400. If you're married to someone who makes less than $ 75,000, you and your spouse will each receive a check. You are not treated as one.
The problem of the marriage penalty is not due to the Biden bill. It's assigned to the tax code and it's time to fix that inequality. No taxpayer should pay higher taxes just because he or she marries another taxpayer. The US is one of the few developed countries that use a common tax return. Canada never has. The UK abolished his joint return in 1990. We should do the same and end the marriage penalty. But even if we don't abolish the joint tax return, there are places in the tax code where we can end the penalty that arises when two married taxpayers are treated as one. (I call this "tax concealment.") We could calculate the EITC without aggregating the spouse's income. We could determine how much social security contributions should be taxed based on the recipient's income, rather than aggregating the recipient's income with that of a spouse. We could allow each spouse to deduct up to $ 10,000 in 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.
Information about the author
Patricia Cain is a professor at Santa Clara University School of Law and a national expert on federal tax law, sexuality and law.
Bloomberg Tax Insights articles are written by seasoned practitioners, academics and policy makers to discuss developments and current issues in taxation. To make a contribution, please contact us at [email protected].