The Magazine

For Richer, For Poorer

The best part of the Bush tax plan you've never heard about.

Feb 3, 2003, Vol. 8, No. 20 • By DAVID BLANKENHORN
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EDMUND L. ANDREWS, the "Economic View" columnist for the New York Times, is annoyed. It seems that President Bush won't stick with the plan favored by Andrews and most experts for reducing the marriage penalty in the federal tax code. "The big winners," he complains, "are the Ozzie and Harriets." Andrews is bothered for bad reasons, but it's true that President Bush has changed his proposal, and therein hangs a small but revealing tale.

There are two basic approaches to reducing the marriage penalty. Call them Plan A and Plan B. Plan A, by far the more widely credentialed, was brought to prominence in 1994 by Newt Gingrich and the House Republicans in their Contract With America, and is now viewed as conventional wisdom by the New York Times, supply-side Republicans, feminists, European-influenced social democrats, most economists, and the nonpartisan Congressional Budget Office.

Here's their argument. About half of U.S. couples, including most one-earner couples, receive a marriage "bonus," paying less in taxes as a married couple than they would have paid as two unrelated individuals. But about 40 percent of couples incur a marriage penalty, paying an average of about $1,400 per year more in taxes than they would have paid if they had been taxed as separate individuals. This is unfair. Two-earner couples are particularly likely to incur this penalty, since their joint income-tax returns typically push them into a higher tax bracket.

If this is the problem, there are several ways to fix it, or at least reduce it. One way is to permit the married couple to claim a tax credit equal to the amount of the marriage penalty incurred. Another way is to permit married couples to file their returns singly, as if they were unrelated individuals, or jointly, whichever would result in the lower tax burden. This solution was proposed by Congressional Republicans throughout the 1990s and came very close to becoming law. It was endorsed by supply-side economists, who recognized that moving toward individual taxation would encourage more mothers to enter the paid labor force and thereby boost economic growth, and by feminists, who recognized the same thing. Yet another version of Plan A is to give a special tax credit to two-earner married couples. This solution was proposed by candidate George W. Bush when he ran for president in 2000, and just about everyone thought it was a good idea.

Except for a few malcontents insisting on Plan B. This approach has been favored by a small number of marriage buffs (including your author) whose big idea is to support marriage, and several grass-roots organizations, most notably the Family Research Council, one of whose big ideas is to support at-home mothers.

Here's our argument. All the talk about bonuses and penalties is largely misguided, a sign of having asked the wrong question. Plan A assumes that the underlying standard for tax fairness is individual filing, and that the basic question is whether a married couple pays less (gets a "bonus") or more (pays a "penalty") than they would have paid if they had remained single and filed separately. But for married couples, the real question is whether the tax code recognizes what marriage is.

When two people marry, they cease to be simply two separate individuals. In so many areas of life, including the economic, the two become one. From a policy perspective, the objective is not to treat them as if they were single, but to treat them as married! In particular, which spouse has earned which sum in the paid labor force is not the main issue. Every day, spouses cooperate, trade off, give freely to each other, and specialize according to talent and inclination. For this reason, the tax code should treat the married couple as a true partnership, in which the two spouses share equally and to which they are viewed as making equal contributions. If this is the goal, one (but not the only) way to get there is to permit income-splitting for married couples. At tax time, the couple would add up their income and divide by two, so that effectively each spouse would be taxed on half.

Whereas Plan A would reward individual financial autonomy and greater participation in the paid labor force, Plan B would recognize the fact of spousal interdependence and offer a measure of protection for non-market work, such as raising children. Both plans would get rid of what Plan A calls the marriage penalty, but only Plan B would do so in a way that corresponds to the reality of the marital bond. Both plans would reduce the tax burden on marriage, but Plan B in principle leads to a broader, across-the-board reduction.