A Historical Analysis of the "Marriage Tax Penalty"

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INTRODUCTION

Increased individual marginal federal income tax rates have recently been adopted for "high income" taxpayers. As tax rate schedules become more progressive, the "marriage tax penalty" (MTP) is again becoming a topic of interest (i.e., Alm & Whittington [1993], and Schultz 1993]).

This paper explores the historical development of components of basic individual federal income taxation leading to MTPs and the less frequently addressed "marriage tax bonuses" (MTBs) or "subsidies". Insight is provided to correct for confusion in contemporary research efforts, with respect to the historical incidence (or lack thereof) of "marriage neutrality". A historical framework is developed which will be useful to future researchers as a means of examining the development of the entire federal income tax system. Within this general framework, a detailed discussion of MTPs and MTBs is presented. In addition, historical methods found to mitigate MTPs and MTBs are identified and their potential for application (and limitations) in future policy decisions is examined.

Basic historical tax law was reviewed to generate tax liabilities for married (filing jointly and with no dependents) and single, non-itemizer taxpayers. The "adjusted gross income" (AGI) levels used were developed from Statistics Of Income(1) (SOI) data provided by the Internal Revenue Service (IRS). The first such IRS publication (June 1918) emphasized descriptive statistics of 1916 tax returns, providing lesser information for the 1914 and 1915 tax years. Detailed data for 1913 individual federal income tax returns was omitted from analysis, due to the inconsistency of this ten month period (i.e., March 1 through December 31, 1913) with future tax years.

Analyses of MTPs and MTBs are based on the calculation o approximately 727 "short form" (i.e., non-itemized) tax returns for first (low income(2)) quartile, third (high income(2)) quartile, and weighted average-based taxpayer AGI levels.(3) (Appendix A provides a detailed list of these income levels for any tax researcher who is interested in a historical analysis of the tax law and its effect on a broad base of taxpayers.[appendix a omitted) All analyses presumed wages to be the only source of income.

The potential for marriage tax bonuses have exceeded that for marriage tax penalties in both frequency and amount, for first through third quartile-based taxpayer AGI levels throughout the history of our current system of federal individual income taxation. Such historical findings suggest that solutions to present and future MTPs must simultaneously address the exposure to revenue losses attributable to MTBs.

MTPs were effectively mitigated, throughout this range of taxpayer AGI levels via the variable standard deduction (1944 through 1963) and its predecessor, a revised "earned income credit" (1934 through 1943). The "two-earner deduction" (1982 through 1986) and its predecessor, a ($500 maximum) "earned income" deduction (1944 and 1945), were also successful in reducing MTPs.

DEFINITION OF THE MARRIAGE TAX PENALTY

Definitions of the "marriage tax penalty" have varied. Fox [1988] defined and analyzed the two separate components of the MTP as the "rate factor" and the "base factor". Rosen [1987] did not distinguish between the (relatively recent) more significant "rate" and less vital "base" effects, but included the impact of the current "earned income credit" (EIC) in his calculations of MTPs and MTBs. McIntyre [1988] suggested that disaggregation of the EIC would have been more useful in Rosen's analysis, distinguishing between "spending" (EIC) and "tax" (combined "rate" and "base" effects) policy issues. Jagolinzer and Strefeler 19861 and Tilt and Spencer [1983] used a more fully developed definition of the MTP in an effort to identify (but not to model the relative impacts of) all tax provisions resulting in different tax liabilities based solely on marital status. …