A recent examination of the marriage penalty by Atlanta Fed researchers found the average marriage penalty imposed on people with low incomes is roughly twice that incurred by the rich.
The Atlanta Fed's recent examination of the marriage penalty uses a novel method to expand the scope of past studies and establishes that, over a lifetime, those with higher incomes face negligible effects of the penalty while low-income women with children fare better financially when single rather than married.
This fresh perspective on the effect of taxes and benefit reductions that make up the marriage penalty is based on a model that breaks from prior research. Rather than focusing on the financial costs of marriage for a one-year period, Atlanta Fed researchers devised a model to determine the expected reduction in lifetime spending for a young person who gets married. The paper raises issues that go to the heart of marriage-related policy discussions including parenthood and child-rearing, factors central to the nation's economy.
Their results are compelling. In the paper, the authors—Elias Ilin and Melinda Pitts of the Atlanta Fed and Laurence Kotlikoff of Boston University—observe that nationwide, "the average marriage penalty imposed on people with low incomes is roughly twice that incurred by the rich. Low-income females with children face particularly stiff marrying penalties, primarily in the form of lost benefits, both in-cash or in-kind. The variation in marriage taxation is particularly striking and ranges, across our sample, from negative 74.4 percent to positive 45.8 percent."
The loss of healthcare-related benefits is the primary driver of the marriage penalty for those in the bottom three of five income brackets, defined as up to $58,500 in earned and unearned annual income. The amount of this financial loss varies by state according to income-eligibility guidelines for subsidies under the Affordable Care Act, plus Medicaid and the Children's Health Insurance Program, the two joint federal and state programs that help pay medical costs of low-income adults and children.
The working paper asks a question in its title—"Is Our Fiscal System Discouraging Marriage? A New Look at the Marriage Tax"—and it answers it with the concluding observation that "researching ways to make the fiscal system marriage-neutral seems highly worthwhile."
Nationwide, the average marriage penalty imposed on people with low incomes is roughly twice that incurred by the rich. Low-income females with children face particularly stiff marrying penalties, primarily in the form of lost benefits, both in-cash or in-kind.
— Elias Ilin, Laurence Kotlikoff, and M. Melinda Pitts
The researchers' methodology establishes the lifetime marriage penalty by pulling together all the major and most of the minor US tax benefit and social insurance programs, nine in all–child care and housing subsidies, SNAP (food stamps), Medicaid, Medicare, Affordable Care Act subsidy, Social Security, Supplemental Security Income, and Temporary Assistance for Needy Families.
The paper's authors calculate the cumulative effects of these programs on lifetime spending. To eliminate the effect of spousal choice on living standards, the model estimates an individual's potential marriage tax by examining changes in lifetime spending if they married their childless clone. The model then applies the results to a variety of scenarios to calculate the effects of taxes and benefits on marrying rates as opposed to dissolution rates, which appear in prior studies.
The research determined that the nation's tax and benefit programs penalize marriage among lower-income individuals and have a more benign effect on those who are more prosperous. From a financial perspective, lower-income single parents are better served by remaining single because marriage, on average, worsens their tax and benefit status, according to the paper. The research also observes that:
- The marriage penalty reduces the chances that 25-year-old women with children will be married by age 35 by 7.52 percentage points
- The average lifetime net marriage tax is 2.69 percent. The rate rises to 3.71 percent on the lowest income bracket (up to $26,000 a year) and falls to 1.49 percent for the highest bracket (more than $103,100 a year)
- Absent marriage taxation, marrying rates for individuals with children in the lowest income quintile would be 13.68 percentage points higher for women and 1.46 percentage points higher for men
- Absent marriage taxation, the marrying rate for those without children in the lowest income quintile would be 4.70 percentage points higher for women and 5.10 percent higher for men
- Individuals with incomes above $103,100 have a marriage rate of 76.94 percent, which is more than double the 36.01 rate among those with incomes below $26,000
These results can inform policy discussions in as the nation's society evolves into one where "Marriage as a social institution appeared to be endangered," as described in one of the paper's references, The Evolving Role of Marriage: 1950 –2010, by Shelly Lundberg and Robert Pollak. Children are born during this era, though a growing proportion, now 40 percent, are born to unmarried parents. This share increases to over 50 percent for women under age 30, according to another of the paper's references, Marriage and Child Wellbeing Revisited: Introducing the Issue, by Sara McLanahan and Isabell Sawhill.
The effect on children is that a shrinking proportion grow up with two continuously married parents. Such parental relationships provide a home where youngsters "are less likely to experience a wide range of cognitive, emotional, and social problems, not only during childhood but also in adulthood," according to Paul Amato, writing in another reference document, "The impact of family formation change on the cognitive, social, and emotional well-being of the next generation."
Several states have tax codes that are "marriage friendly," according to the paper. Medicaid eligibility is a notable factor that contributes to the rate of the marriage penalty. Eligibility is determined by each state's implementation of Medicaid expansion, as enabled by the Affordable Care Act. In addition, the marriage penalty differs by state on the basis of various tax provisions established in each state. This includes provisions in nine states that do not collect income taxes, 15 states with tax brackets that reduce or eliminate the marriage penalty, and six states that have a flat tax rate and, therefore, no marriage penalty.
The paper concludes with a call to action that puts the health and wellness of children at the center of potential discussion: "the US tax and transfer system discourages getting married especially for low-income females with children. Given the importance to children of living with both parents and the economic benefits to both children and adults of forming and maintaining a nuclear family, researching ways to make the fiscal system marriage-neutral seems highly worthwhile."
David Pendered
Staff writer for Economy Matters