Our Anti-Feminist Tax Code
The US tax code remains a subtle but significant barrier to women’s equality in the workplace. Neither political party invests political capital in fixing the problem because tax reform is boring, complicated, and difficult, but a couple of straightforward changes could make the tax code much more conducive to women’s career success.
First, some background on the details of the tax code (skip if you already have basic working knowledge). The federal tax code has different tax brackets for individual and married joint filers. For 2016, individuals pay 10% on their first $9,275 of taxable income, 15% on dollars $9,275 through $37,650, with additional brackets reaching up to 39.6% on any income above $415,050. Married filers pay 10% on their first $18,550 of income, 15% from dollars $18,550 to $75,300, etc.
The brackets are twice as wide to reflect two earners, right? Right for the 10% and 15% brackets, but wrong thereafter. Single filers pay 25% on income between $37,650 and $91,150. Married joint filers pay 25% from $75,300 only up to $151,900 (only 1.66x the single filer threshold). The table below shows the full bracket map including the multiple of the married filer brackets relative to the single filer brackets. Note that the multiple comes significantly down from 2x such that for the 33% tax bracket, it’s actually the same for single and married couples.
For the same level of income, married filers pay less tax than single filers, which makes sense because married filers represent two people. But they don’t pay exactly half as much tax at every level of income; they pay a varying fraction depending on their income. What does this mean? It means that, for many couples, getting married can increase or decrease their tax burden, even though they’re still the same two people working the same two jobs. This should strike you as odd!
Imagine a couple with one breadwinner making $200,000 and the other partner earning nothing (Couple A). Before marriage, that couple would pay about $49,529.25 in taxes (assuming no deductions or state and local taxes) for an average tax rate of 24.8% and a marginal rate of 33%. That same couple after marriage with the wider brackets would pay $42,985.50 or 21.5% on average with a marginal rate of only 28%. That’s a marriage benefit of $6,543.75.
If the same couple with $200,000 of household income had two earners, each earning $100,000 (Couble B), then marriage would actually increase their tax burden by about $912. In short, the tax consequences of marriage are quite positive for couples with highly unequal incomes and quite negative for couples where both partners earn equal amounts. That’s tough to justify.
It also means that the marginal tax rate on a 2nd earner’s income is very high, particularly if the first earner makes a lot of money. Let’s go back to Household A in which the primary breadwinner earns $200,000 per year and the second partner earns nothing. What would happen if the second partner took a job that earned an incremental $50,000 per year?
First, the incremental federal taxes on that extra $50,000 wouldn’t start over at the 0% bracket since the couple files jointly. Instead, that income would begin at the couple’s current marginal tax rate of 28%, and much of the income would actually fall in the 33% bracket since the couple would cross the $231,450 threshold at the top of the 28% bracket. In total, the couple would pay almost $15,000 incremental tax (an effective 30% rate) on the second earner’s income.
In reality, that number understates the marginal tax burden. The second earner would certainly pay at least another 7.65% in payroll taxes off the top before even calculating taxable income. In all but seven states, the couple would also owe some state income tax. Finally, many deductions and credits phase out as income increases, so the couple would forfeit some amount of child tax credits or charitable contribution deductions for each additional dollar of income (on top of the higher marginal tax rate!). Conservatively, these items would add another $5,000–7,000 of tax burden to this couple, leaving less than $30,000 of net increased income from the second job.
If that family has a couple of children, they would need to budget roughly $23,000 to cover childcare costs (at the national average rate of $11,666 per child) that could otherwise be provided for free by the second earner. With both parents working, they’ll likely also want some support with cleaning and other household chores as well, say another $3,000 per year.
All told, the second earner’s $50,000 of wages has been whittled down to only $4,000 or so of net incremental income. With that little to show for a second full-time job, it’s not surprising that 37% of married couples only had one earner even as recently as 2012 according to Pew Data. And since men out-earn women in 62% of marriages, it’s statistically likely to be women giving up work, not men. In fact, the same Pew study showed that 84% of one-earner households have the husband as that primary breadwinner.
It’s true that the tax code hasn’t stopped the growth of dual earner households, which have risen from 25% of all households in 1960 to more than 60% today. It’s also true that many people might make the very legitimate choice not to work outside the home, even if the tax code didn’t encourage that choice. Even so, our tax code shouldn’t discourage second earners, particularly women who face plenty of other barriers to success in the workplace.
Finally, reforming the tax code to support second earners isn’t technically complicated. Congress has a few options to choose from. First, it could eliminate the concept of married filing altogether. Married couples would then file two individual returns, just like any other people. While this might cause some consternation with the pro-family crowd, it really shouldn’t. Filing taxes together doesn’t seem like the key to a lasting marital bond. In fact, (maybe unsurprisingly) taxes cause significant marital stress!
That said, eliminating joint filing might not be the right answer because it would create different inequities. For example, if all couples filed individually, a couple in which one person earns $200,000 would pay much more tax than the same couple with two people earning $100,000 each (compare the pre-marriage column for Couple A and Couple B above). While it would help second earners, it’s probably not a fair outcome either.
To avoid such a stark inequity between different married couples, another option would be a tax credit for second earners. A tax credit of say $3,000 for a second earner would lower his or her effective tax rate significantly. In our earlier example of a couple with a $200,000 earner and a $50,000 earner, the credit would reduce the second earner’s tax burden from $15,000 (~30%) to $12,000 (~24%) and leave the couple with $7,000 of after-tax, after-childcare income rather than $4,000. For many couples, that might tip the scales in favor of a second income. It also would avoid creating huge inequity between different married couples based on their income distribution, since the credit is only $3,000.
There are likely a number of other reform options as well. Any reform should aim to simplify the tax system and help (mostly women) second earners keep more of their pay checks. Both parties should be able to find something to like in such a proposal, even in our current era of partisan rancor.