The marriage tax penalty refers to the fact when two people marry, they pay more taxes than they do when they are single. This happens when the two persons have roughly the same income.
The mirror image of the marriage tax penalty is the marriage tax bonus, that is when two spouses have disparate income or one spouse decides to stay at home, they pay less tax than they do if they don’t marry.
It turns out that marriage tax penalty and marriage tax bonus have been studied extensively by economics professors. It’s well known within the academic circles that three desirable objectives can’t be satisfied at the same time:
- Horizontal Equity: households with the same income pay the same tax
- Progressivity: higher income pays a higher rate of tax
- Marriage Neutrality: the tax system should stay neutral to the decision to marry
It’s very similar to the time-cost-quality triangle: you can have any two but not all three.
A key concept is called the unit of taxation, in other words, whether taxes are levied on an individual person or on a family.
The current US tax system uses a family as the unit of taxation. It achieves objectives #1 and #2, but it fails in objective #3. Some people receive a tax incentive to marry while others are penalized for marrying.
Most other developed countries use the individual as the unit of taxation. The same person pay the same tax whether they are single or married. This system achieves objectives #2 and #3, but not #1. Under this system, a one-earner household pays a higher tax than a two-earner household with the same income.
Although it seems unfair under an individual unit of taxation system to tax a one-earner family more than a two-earner family with the same income, it’s actually fair. When you recognize the value of the household work taken up by the stay-at-home spouse, the one-earner family produces more and therefore should be taxed more.
According to a research paper I read, Canada, UK, Japan all base their taxes on individuals. Only 9 countries in 30 OECD countries base their taxes on families. In the last 30 years, several countries also moved away from joint taxation like in the US to individual taxation.
The United States is once again in the minority relative to the rest of the world on this issue. Why am I not surprised?
Alm, James, 2005. Thinking About The “Marriage Penalty”, a PowerPoint presentation.
Alm, James and Mikhail I. Melnik, 2004. Taxing The “Family” In The Individual Income Tax, Public Finance and Management, Vol. 5, No. 1
Cleveland, Gordon and Michael Krashinsky, 1999. Tax Fairness for One-Earner and Two-Earner Families: An Examination of the Issues. CPRN Discussion Paper No. F07.