No one likes to pay taxes, but secondary earners — often married, working women — are punished the most under the present tax system.
Their income is added on to that of their spouse, often pushing both of them into a higher tax bracket. That discourages some married women who have taken time off to look after children from reentering the labor force. Two Republican candidates, Gov. Jeb Bush and Sen. Marco Rubio, have proposed different ways of fixing the problem.
Bush’s plan, released this week, would allow second earners to take their wage-and-salary income and file as single earners. They would not have to file as “married filing jointly” or “married filing separately,” which results in a higher rate. As written, no matter what their spouses’ incomes, their initial tax rates would be zero.
Rubio’s solution has the advantage that it doubles the size of the tax brackets, rather than giving tax breaks to the spouses of upper-income individuals.
Bush’s plan works out particularly well for women who are married to men in the top tax bracket. Bush proposes three rates to replace the current seven-rate system. The top tax bracket would be 28 percent, and the other two tax brackets would be 25 percent and 10 percent.
Say you’re Melinda Gates, married to Bill Gates, one of the richest men in the world. Under the Bush plan, Bill Gates’ income would be taxed at a marginal rate of 28 percent, down from over 40 percent currently. If Melinda Gates took a job, her first $11,300 would be free of any tax. Her earnings from $11,301 to $43,750 would be taxed at 10 percent, and subsequent earnings up to $97,750 would be taxed at 25 percent. Only earnings above that level would be taxed at her husband’s rate of 28 percent.
At the bottom of the income scale, women providing secondary income would still be discouraged from getting married by the phase out of benefits such as Affordable Care Act premium subsidies, food stamps, the earned income tax credit and the child credit. The spouses of these women are likely to be in the 10 percent bracket, earning between $22,601 and $87,500.
For low-income women, the difference in their initial rate as single filers and their husbands’ rate would be far smaller — about 10 percentage points instead of 28 percentage points. Once they made $22,601, there would be no difference in rates. True, they would have no marriage penalty, but their tax rate would be the same as their husband’s. When Melinda Gates reached $22,601, her rate would be 10 percent but her husband’s would be 28 percent.
For another way to address the marriage penalty, consider Rubio’s plan. He proposes two rates, 15 percent and 35 percent. Income up to $75,000 for singles and $150,000 for married couples would be taxed at 15 percent, and income over that amount would be taxed at 35 percent. Single filers would have a credit of $2,000 and joint filers would have a credit of $4,000. Children would have their own partly refundable tax credit of $2,500. Since the tax brackets for joint filers would be twice the amount for singles, the current marriage penalty would disappear. Even better, ending the marriage penalty does not require a giveaway to upper-income households.
The Tax Foundation has calculated that Bush’s plan would increase the after-tax incomes of the top 10 percent of the income distribution by 11 percent and of the top 1 percent by 16 percent using dynamic scoring — that is, after accounting for increases in economic growth. In its Modeling Notes, the Tax Foundation says that these estimates do not include “the option for second-earners to file separately.” The Tax Foundation admits that this provision would have an effect on GDP and revenues, but no data are available to model the precise effect.
The largest share of two-earner families are in upper-income brackets. New Consumer Expenditure Survey data from the Labor Department released earlier this month show that the top fifth of income earners have an average of 2.1 earners per household, compared with 1.3 earners per household for the middle fifth. The lowest fifth of the income distribution has on average one earner for every two households, so practically no two-earner households. This means that the major beneficiaries of Bush’s marriage-penalty would be upper-income households.
Even without the marriage-penalty giveaway, the Tax Foundation calculates that on a dynamic basis Bush’s tax plan reduces federal revenues by $1.6 trillion over 10 years. With the marriage-penalty fix, it would reduce revenues still further.
It’s important to fix the marriage penalty, which hurts women more than it does men. Women are more likely to move in and out of the workforce as their children are born, go off to school and leave home altogether. Most American women have children at some point in their lives and take some time out of the paid workforce to care for them. These women should not be discouraged from reentering the workforce.
Both Bush and Rubio have tax proposals that are better than the current tax code and would raise economic growth. At least on the issue of the marriage penalty and ending the current system that discourages married women from working, Rubio’s plan is superior.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. This article originally appeared in MarketWatch and in e21: Economics for the 21st Century.