My real anniversary, that is, not a blog anniversary. I’ve been married for six years. And the notion of my anniversary got me to thinking. You know, about marriage and what drives people to marry and to divorce. It should come as no surprise to anyone in the modern world that finances are often cited as a reason to do both. Pretty un-romantic, I know. But it happens.
But what does any of this have to do with tax? A lot. The marriage “penalty” in the Tax Code has been called one of the most family un-friendly phases of our entire legislative history – and that’s saying a lot. Many couples in the 1990s claimed that the “marriage penalty” was so significant that it was a reason not to get married at all. Is the tax tail wagging the dog? Perhaps. Tax policy, however, has always been a driving force behind the Tax Code. And our changing demographics influence how the Code has been changed over the years (and arguably, vice versa).
In the pre-World War II United States, the vision of the perfect family was a married couple with 2.5 children, a station wagon, and a dog. Generally, these families were single-income families in which the head of household, usually the father, worked and supported the family. With the advent of World War II and “Rosie the Riveter,” that began to change. More and more women started going off to work and earning a second income while their husbands were at war. This posed problems for the Internal Revenue Service. Since 1913, one income had usually equaled one tax return. There were rarely other considerations.
However, with the advent of an increasing number of two-income families, a better approach was needed. So, in 1948, Congress adopted the joint tax return. The idea was that tax for a married couple would be paid equal to twice the income of a single filer. Income and deductions would be filed in the aggregate.
In the 1960s, the United States was changing again. More single women were earning college degrees and going to work. Married women still largely stayed at home. As more and more single women entered the workplace, single filers began objecting to what was ironically referred to as the “singles penalty.” The singles penalty was based on the notion that a married couple received the equivalent of two single-person deductions regardless of whether there were two incomes. This was unfair, claimed the singles, because married couples split expenses and thus did not deserve two full deductions and exemptions. The singles contended that the tax system was, in effect, subsidizing marriage.
In 1969, Congress, responding to this charge, enacted an amended tax structure, which provided for a joint return for married persons with a scaled-down deduction equal to less than two single filers. This system, with some minor concessions in 1986 to higher-income joint filers, remained in place for more than thirty years.
In the late 1980s and 1990s, the family structure in the United States changed yet again. More and more couples were choosing to live together rather than get married; like the yuppies of the early 1980s, these couples were given a nickname, “DINKs” (Double Income No Kids). Several reasons were given for this phenomenon. One reason was the so-called “marriage penalty,” which would give single filers who live together tax advantages not available to married filers. This happened because, as individual income levels rose, so did the income tax brackets of single filers.
However, single filers retained the full personal exemption and standard deduction, unlike married filers. Additionally, the impact of the “phase-out,” which limits or eliminates many deductions and credits at certain AGI (adjusted gross income) levels, is more dramatic for high-income married filers than for high-income single filers; married couples lost itemized deductions and personal exemptions more quickly. Capital losses and passive activity loss deductions were less favorable for a married couple than for two single persons – in some instances, a married couple’s total loss deductions were equal to a single person’s loss.
The phenomenon even inspired some niche industries (this is, after all, the United States). Since your federal filing status was dependent on your marital status at the end of the year, some cruise lines partnered with tax gurus to promote an end of the year “divorce special.” The scheme worked like this: at the end of December, a married couple would take a relaxing cruise to somewhere warm and fun. At the end of the year, they would get a divorce and, for federal tax purposes, would be considered divorced. On the return trip, the couple would remarry at sea. Voila. Tax benefits and a vacation to boot! You can imagine that this did not sit well with the IRS, and the practice was subsequently sacked. But the existence of the practice emphasized the ridiculousness of the rule – and why changes needed to be made.
In 2001, perhaps as a result of a politically-charged campaign over what constitutes family values, a bill was signed into office purporting to offer relief for the “marriage penalty.” The tax law gradually increased the standard deduction for married taxpayers who file jointly to an amount equal to twice the standard deduction of persons filing a single return, resembling the 1948 bill that allowed two full deductions for married couples regardless of the level of income. This increase was phased in over five years, beginning in 2005.
The bill was controversial. One reason for opposition is that the bill will prove to be a mere temporary fix and will result in the same debate that led to the 1969 amendments. Another, more qualitative argument is the cost of the bill: in 2006 alone, the bill is estimated to cost the government more than $35 million in lost revenue. The bill has a sunset provision, which means that it is set to expire – several bills have been introduced to make the bill permanent. Most are still pending in Congress.
If you just can’t enough of this stuff, a detailed if somewhat outdated analysis and history of the so-called ‘marriage penalty,” the Congressional Budget Office prepared a report on the subject in 1997.