No one likes paying taxes. But this year, some of the biggest losers are married working women, who are being discouraged from working by high effective marginal tax rates, both at the bottom and the top end of the income scale.
Other losers are working women, or unemployed women who receive benefits such as food stamps and Medicaid, who postpone marriage because it is just too expensive.
The labor force participation rate of prime-age working women has been declining over the past decade, especially since 2007. In 2003, 76% of prime-aged women were in the labor force. Ten years later, in 2013, this declined to 74%.
In the U.K., women’s labor force participation rates, at 80%, have grown over the same period — even though in 2001 women in the U.S. and the U.K. were participating in the labor force in the same proportion, about 76%. (See chart below.)
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The U.K. has no marriage penalty in its tax code because married couples file separately and have their own personal exemptions (about $17,000 per person). So marriage does not push a woman into a higher tax bracket. The U.K. has three rates, 20%, 40% and 45% (for taxable income over $250,000).
Here is the real war on women: In the U.S., when single women work and are considering marriage, higher rates discourage marriage. Sometimes high tax rates result in women quitting the workforce altogether.
Working women are disproportionately represented in the top fifth of the income distribution, where combined federal and state marginal income tax rates can reach over 50%. Frequently it is their work that pushes the family into the top brackets. Transportation, child care and professional clothing are additional costs to moving into the workforce.
Census Bureau data in the table at the top of this story show that in 2012, in the top fifth of earners, 78% of households were married couples, and 5% of households were women living alone. In the top 5% of income earners, 81% were married couples and 4% were women living alone.
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In contrast, in the bottom fifth of income earners, 17% of households were married couples, and 36% were women living alone.
The same pattern holds for earners. In the top fifth, 76% of households had two earners, and in the bottom fifth, only 5% had two earners.
Mothers are more affected by the marriage penalty than other women because they are more likely to move out of the labor force to look after their children. They are also more likely to return to work when their children are in school or have left home.
America could follow the U.K.’s example and move to single, instead of joint, filing. This is not popular because all tax rates would have to rise to generate the same amount of tax revenue. Alternatively, a flatter tax rate or a deduction for the second earner are two ways to reduce the marriage penalty.
The tax-reform plan released by House Ways and Means Chairman David Camp lowers the top tax rate to 25%, but a surtax raises this to 35%, so women would still face a substantial marriage penalty close to what they face today, when the top rate is 39.6%. Over the period from 2014 to 2023, taxes on individuals — including repeal of the alternative minimum tax — would decline by about $600 billion. Without AMT repeal, individual taxes would rise by $743 billion.
Alternatively, working wives would be helped by a deduction for second earners. The tax code had such a deduction from 1981 to 1986. Congressional Research Service senior specialist Jane Gravelle proposed a second earner deduction in hearings before the Senate Budget Committee on April 8. She said: “Secondary earners (typically married women) have a larger labor supply response to wages than primary earners, although this differential has been narrowing in recent years.”
Gravelle continued: “They also tend to face higher taxes when deciding whether to participate in the labor market than most other workers, because their tax rate begins at the rate on the last dollar of income earned by their spouse.”
In a paper published by the Brookings Institution in December, University of Maryland economists Melissa Kearney and Lesley Turner calculate that if two people who each earn $25,000 get married, they will take home less than 30% of the second earner’s paycheck, due to taxes and phase-outs of transfer payments.
A full-time worker earning $25,000 a year with two children and a spouse who stays home would qualify for almost $5,000 in earned income tax credit. But if the spouse goes into the workforce, also earning $25,000, the family would not qualify for the EITC.
Kearney and Turner suggest that secondary earners be allowed to deduct 20% of earnings up to an income level of $60,000. This would phase out at $110,000 of family income, so it would help low- and middle-income women. The cost: $8.2 billion a year, which Kearney and Turner propose to pay for by getting rid of the spousal exemption.
Of course, even though the benefits might be significant in terms of increasing economic activity and luring second earners into the workforce, tax-reform proposals in America are limited by the Congressional Budget Office’s scoring conventions. CBO takes limited account of potential economic growth from lower rates.
In Italy, new Prime Minister Matteo Renzi can stand up and announce that he is cutting payroll taxes by $138 million. When Canada cut taxes in the early 1990s, sending its deficit plummeting and its economic growth soaring, it did not have to ask the CBO for permission.
American women are shunted into higher tax brackets, discouraged from working, discouraged from marrying, and given every incentive not to pursue advancement. As politicians vie to capture the women’s vote, someone should propose ending the assault on women’s progress known as the marriage penalty.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.
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