Over the next few months I plan to explain my deep hatred for the income tax. What most bothers me about the tax is not the amount that I pay (although I believe my wife and I pay more than usual for people with our incomes) but rather the sheer insanity of the entire system. We can certainly afford to pay our tax, so I am not trying to plead poverty. What bothers me is that I must spend several days each year just doing the paperwork. This year I finally relied on HR Block, and had to pay $610 dollars for the privilege. I read that in Sweden the government simply sends you a bill.
Then there are the perverse incentives created by the tax. Today I’ll discuss the marriage penalty.
Why is there so little discussion of the marriage penalty in the press? And why do both political parties seem to favor it? I can’t answer these questions, but will try to speculate anyway. I’d also appreciate your thoughts.
I first became aware of this problem after I got married. I noticed that the combined income of my wife and I pushed us up into higher tax brackets. Initially the problem was trivial. But as we got older and got promotions our income rose into the upper middle class range (low 6 figures) and then it became very noticeable. Suddenly we had to pay the AMT, although if we were single we would not earn enough to trigger an AMT tax. The official 15% capital gains tax rate became a joke, as the realization of significant capital gains can push you into the AMT, which can dramatically affect the tax on your non-capital gains income. I won’t bore you with all the confusing details, but I am shocked each year when I compute how much lower our total tax would be if we were both single.
Indeed the new health care bill makes the marriage penalty even worse for married couples earning between $250,000 and $400,000. Contrary to what Obama says, workers making $130,000 (married to each other) might have to pay higher taxes as a result of the health care bill. So it isn’t just the “rich,” the upper middle class will also be affected. Under the bill a cohabitating couple where each person makes $200,000 from interest, dividends, or rental income will pay an extra $5900 in taxes if married, but no extra taxes if “living in sin.”
You might think this is just some sort of unfortunate “glitch” in the tax code, and that it will be fixed once the authorities become aware of it. I think they already are aware of it. The marriage penalty has been around for decades; it would have been fixed if the government wanted to fix it. But why would the government be so opposed to people getting married? Isn’t marriage generally considered a good thing? My theory is that both parties want to fix it, but they can’t agree on how to do so, so nothing gets done:
- The Republicans might prefer a flat tax, which would avoid the problem of people getting pushed into higher tax brackets after they get married. But the Dems consider that sort of tax regime to be insufficiently progressive (especially given the regressive nature of payroll taxes.)
- The Dems might be willing to allow married people to file as a single person, but Republicans oppose that because they think it would favor working moms over stay at home moms. I.e. consider two families that live next door to each other. In one family both husband and wife make $100,000. In the other family the husband makes $200,000 and the wife is a homemaker. Under current law they pay the same amount of taxes, and I think Republicans are OK with that. If married people were free to file under the single person’s tax rates, then the family with two people each making $100,000 would pay less taxes than the person making $200,000. Actually, that seems very fair to me, as a family with someone making $200,000 plus a homemaker is much better off economically than a family where each spouse makes $100,000. In the latter case they still have all the chores to do at home, or else they’d have to hire maids and nannies.
Here is the bottom line. The government is discriminating against people according to their marital status. Two families that live side by side, each with two adults earning $130,000, might each pay very different amounts of taxes. The family where the two adults are legally married pay more taxes than the next door neighbors, who might tell all their friends and relatives that they are married, but in fact secretly got a divorce and are now living in sin. Does that seem fair?
BTW, this isn’t just a problem that affects the upper middle-class; low income workers also face a large implicit marriage penalty, as benefits like the EITC get phased out much more quickly if two low income people get married. Indeed in percentage terms this probably affects them much more than me. (Interestingly, as the marriage penalty got worse for low income workers, their marriage rate fell.)
My wife and I would be better off getting divorced. Unfortunately, women tend to be rather sentimental about marriage. So it may not be easy for me to convince my wife of the logic of this argument. But here’s something I can say for sure. If we did get divorced to save $80,000 to $100,000 in taxes over our lifetime, you’d never know about it. It would be between us and the IRS.
As a good libertarian I oppose having any government policies hinge on whether people are married or not. (I.e., governments should not recognize marital status.) I believe all upper-middle class libertarian couples should stay single, to help “starve the beast.” Let’s hope Megan McArdle’s recent ceremony was just for show, and that they “forgot” to have it formalized at City Hall.
Gay men may actually benefit when gay marriage is legalized at the Federal level, as the social pressure to get married is lower than for heterosexual couples. So they will be able to more easily choose the marital status that best fits their particular tax status—assuming that society doesn’t start pressuring gays to get married. Unfortunately, Americans often seem to want to either ban things or mandate them—with no in-between option of freedom.
I suppose some of my more conspiratorial readers think that Obama is increasing the marriage penalty because gays are an important part of the Democratic coalition. Please spare me! That would be about as likely as the first African-American President paying for health care with a tax that only hits white people.
PS. I do know that many gays are actually hurt by being forced to file as single.
PPS. I am one of what Joe Biden calls the “super-rich” who will be hit by the planned expiration of the Bush tax cuts for upper income people, and I make well under $150,000. So much for Obama’s promise not to raise taxes on people making less than $200,000. My income is a bit more than a Boston cop, but a lot less than a Massachusetts turnpike cop. I guess a Boston cop who is married to a highly-skilled nurse is also “super-rich.” Again, the money doesn’t bother me, I have plenty since I am a high-saving nut. What bothers me is the thought that when I retire I’ll be paying more taxes or getting less Social Security benefits to help those “unfortunate” guys who made just as much as me, but never saved anything. The guys who have garages filled with expensive toys.
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Great article. My fiancé and I have just recently found out about all the financial barriers to getting married. We were thinking of investing in another property – but with capital gains, and more taxes we’re second guessing this whole wedding thing! From what it sounds like, the only real benefit of marriage is that it makes things easier should one person die – marriage for death? Something doesn’t seem right about that…
You hit the nail on the head! Why isn’t this being talked about on the news? I just finished my 2010 year end tax planning with our CPA. My husband I are decided it was better off to be divorced. In addition to being in a higher tax bracket due to our combined income, I also have to pay Self-Employment taxes, in California! In addition to divorcing my husband, I’m encouraged by the IRS and the State to close my business and move to Texas or North Carolina! I am so upset (again) about how much we pay in taxes since our combined income puts us in a 42% tax bracket. We don’t qualify for any deductions since we “earn too much.” By the time I pay taxes, I net about $75k. I contribute $40k into my business overhead each year, I employ people, I take on the risks of owning and managing a business, yet I only net $75k.
If I had some incentives, I would create more jobs, possibly open another business, stay married and stay in California. Right now, being masrried, being single, owning a business and hard work doesn’t seem to be paying off. Hard Work = More Taxes for the IRS and the State! On top of this, my brother and father are both retired police officers with full salaries until age 65. My brother retired at age 42! And they get cost of living increases! And they get to earn full incomes on top of their retirement pay!
Am I in the twilight zone? I really don’t understand the value system the Government (our largest employer) is creating.
Thanks for the article. I should have thought about this 4 years ago before I got married. My wife and I both earn about 100K. And we have other income on top of that. We are getting nailed by the IRS. I need a divorce!!!!!