Depending on the circumstances, married couples in America can either owe more tax together than they would if they were unmarried – what we’d call a marriage “penalty” – or, they can owe less tax as a married couple than they would if they remained single—a marriage “bonus." While the Economic Growth and Tax Relief Reconciliation Act (one of the much debated “Bush tax cuts”) and subsequent legislation ended many common sources of penalties, they nonetheless remain for many low- and moderate-income families.
These penalties are a significant burden on married couples and thwart efforts to improve economic security. The good news is that a wide range of sensible policy responses exist that may promote marriage, family stability, and economic security among low-income families who suffer from these penalties.
In 2011, for the first time, the majority of new mothers in the United States under 30 years old were unmarried. This could be the result of multiple factors including changing norms, career aspirations of women, and the declining availability of viable young men.
Yet, the marriage penalty faced by working mothers may also play a role. In fact, recent evidence suggests that tax and transfer policy can reduce marriage, particularly among low-income families.
For many low- and moderate-income families, the Earned Income Tax Credit (EITC) represents the largest source of marriage penalties and bonuses in the federal income tax system. Although these have been moderated in recent years by allowing the EITC to phase-out at a higher threshold than it does for single parents, a single mother with modest earnings who marries a working man will still likely see her EITC reduced, causing a significant marriage penalty.
Take a twenty-one year old woman earning around $16,000 annually. When she has her child, this young mother will qualify for an EITC worth over $3,200, a child credit (CTC) worth $1,000, and food stamps. In many states, she will also qualify for child care, housing, and other subsidies. She could also find assistance to enroll in college programs tailored to her situation and receive generous financial aid. Thus, for many young women, motherhood no longer causes them to lose income or educational opportunities.
Marriage, on the other hand, can impose a significant cost to low-income mothers. Except for the refundable child credit, virtually all other programs have reduced benefits for moderate-income families. In the scenario described in the table below, the joint tax liability of the married couple would be almost $2,800 more than if the partners remained single.
Fortunately, there is no shortage of suggestions for how to fix the marriage penalty.
One popular idea, advanced by the National Taxpayer Advocate and others, would be to separate out work and family provisions in the tax code. The family credit would reflect the costs of maintaining a household while the worker credit would provide an incentive for low-income individuals to work. Steve Holt and Elaine Maag, one of the authors of this article, also explored combining the Making Work Pay credit, EITC, and CTC into two credits—one based on work and one based on children.
The main stumbling block to shifting to a worker credit may well be its cost. The EITC costs about $55 billion annually and is targeted to only families with incomes below $46,000. An individual worker credit not constrained by income could easily face costs many times this amount. These wide-reaching proposals would only work in the context of broad tax reform.
Another idea, proposed by the National Marriage Project at the University of Virginia, suggests that when single mothers marry, they and their spouses should be allowed to continue, for a few years, to pay the same federal taxes as before marriage.
While there is little program cost, this policy would create significant tax inequities. All married couples with the same number of children and the same income would not pay the same taxes.
A more modest solution would be the New Mothers Tax Relief (NMTR) proposal advanced by Robert Cherry, one of the authors of this article. This proposal would extend substantial EITC benefits to all lower- to middle-class married couples. It does this by maintaining the maximum EITC benefits until a couple’s earnings reach $40,000 and then phasing out credits slowly. As a result, married couples with a qualifying child and family income between $36,000 and $58,000 would receive at least $2,000 more in tax credits than under the current EITC program. To limit annual costs, only families with a child under six years old would be eligible.
The NMTR proposal virtually eliminates the federal penalty for the vast majority of working single mothers and working men considering marriage. Its most significant effect, however, may be on those already married lower- and middle-class couples with a newly born child. The financial pressures they face create marital tensions and disruptions. By providing these couples with a few thousand dollars worth of benefits, these financial tensions are eased and marital disruptions may be reduced.
There has been significant discussion about how to reverse marriage rate decline. Solutions to the marriage penalty must be included in these conversations. Our tax code can be used to help promote economic security and family stability.
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Elaine Maag is a senior research associate at the Urban-Brookings Tax Policy Center and Urban Institute.
Robert Cherry is a professor of economics at Brooklyn College, CUNY.
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