Reducing the marriage tax penalty for low-income families

Conservatives have long been interested in policies that support working families while encouraging marriage as a pathway to escape poverty. In a 2015 piece for the Institute for Family Studies, Brooklyn College Professor Robert Cherry proposed reforming the Earned Income Tax Credit (EITC) to reduce marriage penalties in the US tax code and encourage the formation of more two-parent families. Below, we outline how the current EITC works and what a proposal to reduce the marriage penalty would look like today. 

the EITC supplements the wages of low-income families in the form of a
refundable tax credit (families with no tax liabilities still receive a check
in the amount of the tax credit). The size of this tax credit depends on a
household’s earnings and number of children. For the 2020 tax year, families
could receive a maximum tax credit of $3,584 if they had one child, $5,920 if
they had two children, and $6,660 if they had three children or more. This
maximum benefit starts to phase out when income reaches $25,000 for married tax
filers and $19,520 for single, head of household tax filers. It drops at a rate
of 16 percent of additional income for families with one child, and 21 percent
for families with two or more children.

structure often results in substantial tax penalties when lower-income parents marry
because the income from a second parent often pushes a couple above the EITC
threshold for married tax filers. To reduce this “marriage penalty,”
policymakers could increase the income at which the EITC starts to phase out
for married couples and phase it out more slowly. This would extend EITC
benefits to married couples at higher income levels than current law, partially
offsetting the existing marriage tax penalties for low-income families.

Building on
Professor Cherry’s approach, one option to eliminate marriage penalties from
the EITC would be to increase the income at which EITC benefits phase out for
married couples to $40,000 and reduce benefits at a rate of 10 percent of
additional income. Under this approach, the EITC would completely phase out for
married families with two children once their earnings reach $100,000. To
maintain fairness, policymakers could also reduce the phase-out rate for single,
head of household families to 10 percent, meaning single families with earnings
below $85,000 would receive the EITC. The chart below shows how this proposal
would change benefit levels for families across the income spectrum.

When factoring
for the Child Tax Credit (which becomes more generous at higher income levels),
federal tax rates, and the EITC, the tax penalties associated with marriage are
substantial, as much as $3500 for single families with one child and $5000 for
those with two children, depending on earnings (Figure 2A). Because the EITC accounts
for the vast majority of the marriage tax penalty for low-income families,
reforming the EITC would substantially lower it (Figure 2B). In fact, for the
lowest income families with two children, the proposal outlined above would offer
a marriage bonus, meaning low-income families would receive a larger EITC
benefit if they choose to marry.

the income at which the EITC phase out begins and lowering the phase out rate
for married parents would not only provide similar assistance to children in
married and unmarried households, it would also extend financial relief to many
working families, while almost eliminating the tax incentive for low-income parents
to remain unmarried (Figure 3).

Using the AEI Open Source Policy Center’s “Tax Brain” tool, we estimate the proposal outlined above would cost $35 billion per year, on top of the more than $65 billion currently spent on the EITC each year. Targeting these reforms to families with children under age six could reduce costs, as would increasing the phase-out rate to more than 10 percent once families reach higher income levels. Analyses using the “Tax Brain” tool suggest this proposal would overwhelmingly target low- and middle-income households, with more than 85 percent of added benefits going to households that bring in less than $100,000 per year. Policymakers could also increase the phase-out rate above 10 percent to target the benefits even more to lower-income households.

Reducing the marriage penalties in the tax code for low-income households should be a priority for policymakers interested in helping low-income working families. This effort should start with the EITC.

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