Congress packed its bags and left town last week without resolving the “fiscal cliff.” As things stand, the George W. Bush tax rates will expire Jan. 1, leaving us all liable for sending trillions more to Uncle Sam each year. As much as President Obama would like to claim this only affects the top 1 percent of taxpayers, poor and middle-class married couples are going to be hit hard by the return of the marriage penalty.
That’s because our overly complicated tax system is the blunt instrument of social engineering for politicians. They’re so busy trying to insert advantages for one special interest over another that they don’t thoroughly think through their proposals. The way the tax code treats married couples compared to individuals is one of the most egregious example of unintended consequences, as explained in a study released last week by Mercatus Center scholars Jason Fichtner and Jacob Feldman.
The United States is in the minority among developed countries by requiring married couples to file jointly. This ends up penalizing both marriage and the participation of married women in the labor force. Simply by saying the words “I do,” low-income couples can find themselves owing as much as 18 percent more to the Internal Revenue Service. This creates a financial incentive for cohabitation or divorce over marriage.
At the lower end of the income scale — salaries in the $30,000 to $50,000 range — the Earned Income Tax Credit is the primary culprit. Under the 1994 tax laws, a couple eligible for this benefit would have received a tax refund of $359 if married, and an eye popping $4,076 if they chose to shack up, each filing separately as a head of a household. The exact amount of the penalty depended on family size, where a dual-earner married couple with two children earning less than $20,000 was subject to a marriage penalty in excess of $2,000, while a childless couple’s marriage tax penalty was about $200.
The Bush tax cuts addressed the problem by allowing a maximum deduction of $3,000 for dual-earner households. These reforms, however, simultaneously expanded benefits for single filers, and left intact much of the inequity. Under 2012 tax rules, the Mercatus scholars calculated a dual-earner household with a strictly middle-class income of $60,000 was hit with a marriage tax of about $1,000, while a household with each spouse earning $150,000 paid just over $4,300 in extra taxes simply for being married.
The flip side of this arrangement is that single-earner households tend to get a marriage bonus. When, for example, only the husband works and earns $60,000 in income, the couple enjoys a marriage bonus of just under $3,500. If the husband and the wife each earned $30,000, for the same $60,000 in total income, they’d face a penalty.
Government needs to get out of the business of deciding how people should live, because the half-hearted tinkering of politicians is rarely successful. We’d be far better off with a flat-tax system that treats everyone equally. In the meantime, Mr. Obama needs to stop pretending that his obstruction of legislation to renew the Bush tax cuts only affects the rich. Low-income couples shouldn’t have to pay more for doing the right thing.
Nita Ghei is a contributing Opinion writer for The Washington Times.