The Marriage Penalty and Head of Household Filing under the Senate Tax Bill [Updated]

Victor Thuronyi

One of the issues that has received little attention is the repeal of the marriage penalty in the Senate bill. There were no hearings on this, and nothing in the Joint Committee explanation of the Senate bill to indicate why the change is being made.

The tax bill as passed by the Senate would make a significant change to the taxation of married persons vs. single persons.  In headline terms, single people will pay more than married people as a group. This issue involves several policy goals, not all of which can be fully accommodated (the goals include neutrality on getting married, and all married couples with the same combined income pay the same tax). Under current law, these have been accommodated by a compromise. When individuals get married, there might be a marriage penalty or a marriage bonus, but the rate schedules have been adjusted to make these relatively small. Nevertheless, they are there.

The Senate bill would change this by removing the marriage penalty completely. When a couple is married, the tax consequences might be neutral (where the members of the couple have equal incomes), but there would be a marriage bonus in all other cases. The largest bonus occurs in the “traditional” marriage where there is a stay-at-home parent.

If the marriage penalty is eliminated, one implication is that the share of the overall tax burden borne by married persons as opposed to single persons will decline. In other words, singe persons will pay more tax. This is relative. Many single persons will experience a tax decrease, which will occur primarily for those who do not itemize deductions, since their standard deduction will increase. The point is that the decrease would be even greater if the marriage penalty were not being eliminated, because in effect the elimination of the marriage bonus has to be made up for by single people. As an example, two single nonitemizers with gross income of $75,000 would pay $11,889 in tax currently, or $23,778 for both, if unmarried, but 24,790 if married, so there is a marriage penalty of $1,012, or in percentage terms the unmarried individuals pay 96% of what the married couple with identical incomes pays. Under the Senate bill, this ratio is 100% for this couple.

In addition to there not being any marriage penalty, the tax disincentives for labor force participation of the second-earner spouse would not be improved by the Senate bill. In other words, there is a high marginal tax rate on the second earner.This policy change, which affects work incentives for many married women, merits an extensive discussion, at least a day of hearings.

Another change made to the Senate bill – without justification or discussion – is to reduce the advantage to head of household filing. This is for a working parent who is single. Under current law, the differential is $1,486 at a taxable income level of $70,000 and is $2,666 at a taxable income of $131,200 (i.e. the difference in tax between a single person and a head of household with the same taxable income). The differential increases at higher income levels. By contrast, the Senate bill extends the differential only up to a taxable income of $70,000 and limits the differential to $1,392. Why?

One thing that this does is to increase the relative bonus for a working single parent to be married. Under current law, a head of household incurs a larger marriage penalty (or receives a smaller bonus) relative to a single person with the same taxable income getting married. Under the Senate bill, the maximum amount of advantage that a head of household gives up in getting married is $1,392.

Instead of this deliberative process, the policy change was snuck into the bill via modification of the chairman’s mark, and to my knowledge there has been no public discussion of the change, certainly not in committee or the Senate floor so far. This lack of “regular order” is just one example of the poor process that the tax bill has undergone, the lack of public hearings where experts could weigh in on the technical issues and economic consequences.

UPDATE FOR FINAL BILL

The conference agreement follows the Senate bill in providing a lower tax for heads of household up to $1,391, reached at a taxable income of $51,800.  Unlike current law, for higher income levels, there is no additional benefit for heads of household.

The story with the marriage penalty is a bit less coherent than under the Senate bill.  There is no marriage penalty up to two people with $300,000 of taxable income each getting married.  Beyond this, two single persons each earning $300,000 in taxable income face a marginal rate of 35%, while if they married the marginal rate would be 37%.  This is a fairly small difference and applies only to a pretty small population.  So for the vast majority of taxpayers, there is no marriage penalty.

One thought on “The Marriage Penalty and Head of Household Filing under the Senate Tax Bill [Updated]

  1. Add to this that the Conference compromise agreement bill allows the SALT and property tax itemized deduction for $10,000 per individual (so arguably $20,000 for married filing jointly), but only $5,000 for married filing separately.

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