President Biden’s American Families Plan includes many promising proposals. It expands early childhood education, supports paid family leave and vows to have an inclusive recovery from pandemic-caused job losses regardless of “gender, race or place of residence.” To finance the package, one provision proposes to increase the top income tax rate to 39.6 percent for individuals earning more than $452,700 and married couples earning more than $509,300.
This seemingly innocuous provision is appealing because it does not affect most taxpayers and fulfills the president’s campaign promise that nobody making under $400,000 would pay higher taxes, at a time when perceived income inequality is increasing.
There’s one problem: the provision exacerbates the marriage penalty. All else being equal, dual-income families pay higher taxes when partners marry and jointly file their tax returns than people filing as individuals.
If the plan becomes law, the immediate impact will be felt by women in high-earning jobs.
Before COVID-19, women held about 21 percent of the senior management roles in corporate America. The pandemic has disrupted the entire labor market, but especially for working mothers and women in senior management positions. It has been a perfect storm: Increased responsibilities at home have imposed disproportionate burdens on them. Some have decided to downshift their careers in exchange for flexible schedules; others have chosen to leave the labor market.
One may argue the marriage penalty will only affect a small number of families. After all, IRS data shows that about 3 percent of the joint returns report household income over $500,000. However, how many potential female leaders in the pipeline alter their employment decisions based on subtle discouragements such as the marriage penalty and a lack of child care, making work economically less appealing? We cannot measure what we cannot see. That 3 percent may seem like a small number, but it is critical to remember that underemployment is also costly to society. While the American Families Plan improves child care affordability, the tax system should not contribute to gender inequality in senior leadership positions.
The impact does not stop there. A married couple could be taxed at the proposed 39.6 percent rate even if both earn less than $400,000 — one earning $250,000 and the other earning $260,000 would put them in that bracket. Indeed, spouses with more equal income splits are more likely to pay a marriage penalty, whereas couples with uneven division of income may even receive a marriage bonus. Research shows the marriage penalty does change households’ work patterns, most prominently causing the secondary earner to reduce his or her work hours or not work at all. The reason is simple: Despite earning less, the lower-earning spouse’s marginal tax rate is the same as that of the primary earner.
The last few decades have witnessed an increase of dual-income families among married households. Concurrently, there are more marriages of two partners with similar earnings or educational attainment. Both tend to exacerbate the marriage penalty.
Beyond tax rates and income brackets, the state and local tax deduction limit of $10,000 per return instead of per taxpayer is another example of a marriage penalty on higher-income married couples. The impact is especially prominent for taxpayers in large families and in coastal states with high costs of living. Adding another layer of marriage penalty further burdens these households, contradicting the goal of achieving a comprehensive recovery across geographic regions.
Finally, because the provision targets a specific group of dual-income households, the revenue potential is limited. By my rough calculation, increasing the top tax rate on married families would generate less than 10 percent of the $1.5 trillion the Biden administration estimates would be raised by the plan. In comparison, the administration indicates enhanced tax enforcement on taxpayers who failed to pay taxes owed would raise $700 billion over 10 years, generating nearly half of the revenue. So is it worth raising limited revenue with a provision that has significant side effects and creates a different kind of inequality?
It is fair to say that taxpayers who earn more should pay more taxes, but the burden should not be disproportionately placed on dual-income families through a marriage penalty. One may also wonder whether the overall pledge of not increasing any taxes — beyond income tax — for taxpayers earning less than $400,000 is a sound idea, not only because we are facing a huge deficit at a critical point of debating the Biden administration’s massive infrastructure plan, but also because it essentially carves out the vast majority of the tax base.
Many provisions in the American Families Plan send positive messages about workforce gender equality, child care affordability and family friendly priorities, yet the marriage penalty in the tax code sends an opposite signal. Although the American Families Plan does not create a marriage penalty, its magnitude is within each administration’s control. The current administration has a choice, and the fix is easy: widen the income bracket for married households, which will alleviate the penalty and ensure a more neutral and inclusive recovery across gender, race and place of residence.
Joyce Beebe is an economist and fellow in public finance at Rice University’s Baker Institute for Public Policy.