In Washington - Guy and Querube Hood were married December 18. On April 15 they received a wedding present from Uncle Sam. But like most "gifts" from the government, this one came with strings attached.
Tax day came just four months after the Hoods' nuptials. The couple's tax situation mirrors that of millions of Americans. Querube, a Panamanian national, is a full-time homemaker for now. When her American citizenship is finalized later this year, she plans to work in childcare, which should bring in about $30,000 a year in the Washington, D.C., market. In the meantime, Guy is able to support her nicely on the $73,000 he earns as a computer systems analyst. Last year, after taking $20,000 in personal exemptions and itemized deductions-mostly for church-related giving-Guy faced a federal tax liability of $9,491. It helped that Querube wasn't working. Without her personal exemption, Guy's tax bite would have been $12,371.
That $2,000 tax savings was Uncle Sam's wedding gift. Now for the strings: The Hoods only save money on their taxes as long as Querube stays at home. Once they become a two-earner household-like 72 percent of American families-not only will they forfeit their gift, but they'll begin paying a penalty. It's called the marriage penalty, and the Congressional Budget Office estimates that it affects approximately 21 million married couples, costing them, on average, an extra $1,400 each in federal taxes.
The source of the penalty is the progressive tax code. Two singles who simply shack up and file their taxes separately determine their tax brackets based on their individual income levels. But when a couple marries, their earnings are combined, which often pushes them into a higher bracket. Moreover, married couples find themselves in a higher tax bracket sooner than co-habiting couples do. A husband and wife pay 15 percent on the first $41,200 of their income; any additional income is taxed at 28 percent. But for two singles who live together, the 28 percent tax rate doesn't kick in until their combined income reaches $49,300. That difference alone costs the married couple more than $1,000 a year in additional taxes.
As if that weren't enough, the tax code also penalizes married couples through phase-outs. For instance, a single mother can claim the child-care tax credit as long as she makes less than $75,000. If two single parents moved in together, they could make up to $150,000 and still claim that benefit. But for married couples, the child-care tax credit phases out at just $110,000. According to a study by the American Institute of Certified Public Accountants, the present tax code penalizes married couples 66 different ways. No wonder a recent issue of the men's magazine P.O.V. counseled its readers that "When you're trying to beat the IRS, it pays to live in sin."
For the Hoods, living in sin was never an option. According to Shawn Sumrall, a CPA in Warrenton, Va., their morals will cost them. Holding their deductions constant, but adding Querube's $30,000 paycheck, the couple will pay $17,891 under the current tax code. If they were simply living together, the first $24,650 of Querube's taxable income would be taxed at just 15 percent, while the remaining $5,350 is subject to 28 percent taxation. Her net tax bill: $4,461. As a single man, Guy would pay $12,371. Thus, their combined tax bill as singles would be $16,832, compared to the $17,891 they pay as man and wife. The bottom line: Their Christian convictions cost them $1,059 a year.
Almost everyone admits that the marriage penalty defies logic. President Clinton declared last year, "I don't like the marriage penalty, on principle. I don't think any American could." Conservatives have gone much further, blasting the tax code as not only illogical, but immoral. Sen. John Ashcroft (R-Mo.) said last month that "The current tax code is a standing threat to our most cherished values: marriage, family, work. We can no longer tolerate a system that retards the values our culture should reward."
But it turns out that fixing the marriage penalty is much harder than making a speech. The problems are both fiscal and philosophical. On the fiscal front, the marriage penalty brings about $29 billion a year into the federal coffers. With both Republicans and Democrats bragging about this year's projected $8 billion budget surplus, it will be tough to pass a law that would put the Treasury back in the hole with a single penstroke.
The philosophical debate may be even more divisive, and it illustrates perfectly the problem of using the tax code to promote the goals of social engineering. The government has long understood that it can manipulate public actions by levying higher taxes on undesirable behaviors while encouraging other behaviors through tax breaks. Thus, for instance, "sin taxes" on cigarettes discourage smoking, while mortgage interest is made tax deductible to encourage the American dream of home ownership.
Looked at in this way, the marriage penalty is particularly objectionable. Conservatives argue, rightly, that it is in effect a sin tax on the institution of marriage. Regardless of the cost to the Treasury, they insist it must go because of the message that it sends about the desirability of marriage. Accordingly, Rep. Jerry Weller (R-Ill.) and Rep. David McIntosh (R-Ind.) have introduced a bill that would eliminate the marriage penalty by letting dual-income couples claim their income separately, as if they were two singles. Married couples would then be treated exactly the same as unmarried couples, and the incentive for living together outside of wedlock would be erased.
Who could argue with such a strategy? Surprisingly enough, the loudest objections have come from the pro-family lobby. The problem, as they see it, is that the Weller-McIntosh bill wipes out the incentive for living in sin at the same time that it wipes out a much more desirable incentive: tax benefits for moms who stay at home with their children. Remember Guy Hood? He actually paid less tax as a married man than he did as a single because Querube didn't work outside the home. It's only when she goes to work that the marriage penalty kicks in. Critics charge that the Weller-McIntosh "fix" for the marriage penalty would actually make it harder for women like Querube to make the decision to stay home when they start their families.
Responding to such criticism, Sen. Lauch Faircloth (R-N.C.) has introduced a rival bill that would attempt to correct the marriage penalty by allowing married couples to split their total income down the middle, apportioning 50 percent to each spouse, regardless of whether the wife worked outside the home. Based on Guy's current salary and deductions, each of the Hoods could claim $26,500 of income even if Querube chose not to work at all. That would lower their taxes from $9,491 to as little as $8,446, because the vast majority of their income would be taxed at 15 percent rather than 28 percent.
Because the Faircloth bill would benefit all married couples (rather than just those with two incomes), it would cost billions of dollars more than the Weller-McIntosh solution, and critics charge that it would, in effect, subsidize marriage whether or not the couple has any children. In numerical terms, under the Faircloth bill a single person with $50,000 in taxable income would pay 30 percent more in taxes than a couple with similar earnings. That was precisely the situation in the late 1960s, when singles complained loudly that they were paying more than their fair share of taxes. When Congress tried to correct the inequity in 1969, it unwittingly created the marriage penalty-and unleashed the debate that rages today.
Conservatives appear sharply divided over the best way to fix a problem that they universally acknowledge. In the House of Representatives, the Weller-McIntosh bill has attracted more than 230 co-sponsors, while 75 co-sponsors have signed onto the more recent Salmon-Riley bill-the House equivalent of Sen. Faircloth's proposal.
With billions of dollars of tax money at stake, the rhetoric is getting predictably heated. Though each side is being careful not to criticize the other too sharply, the strategy debate among conservatives has allowed more liberal members to advance their own proposals. Two Wisconsin representatives in late March offered a bill to correct the marriage penalty by raising the standard deduction for joint filers-a plan specifically designed to provide no benefit to couples like the Hoods earning more than $50,000 a year. Meanwhile, House Minority Leader Dick Gephardt, trying to position himself as a populist for a future presidential run, has also introduced a tax reform bill that would eliminate the marriage penalty and tax incomes up to $46,000 at a flat rate of 10 percent.
The flap over the marriage penalty shows the pitfalls of a tax code designed to promote social values rather than simply to raise revenue. After a generation of Congresses controlled by Democrats, Republicans knew they would encounter stiff resistance to undoing liberal social experiments. But now, rather than the usual liberal-conservative split, they face a debate over which conservative value to promote-marriage in general, or only those marriages in which one spouse stays home with the children.
In the heat of battle, few have stopped to assess the philosophy of this particular war. The entire debate seems to concede the legitimacy of big government that attempts to coerce its citizens into making choices that it considers socially desirable. The present system-5.5 million words, 5,000 pages of tax law, 17,000 pages of additional rules and regulations, 569 different forms to be filled out-is custom-made for creating loopholes that tempt taxpayers into behaving the way that government thinks they ought to.
How to get the government out of the business of social engineering? The solution, according to many experts, is either a flat tax or a national sales tax. Both proposals have the advantage of treating almost all choices equally in terms of tax consequence. Because income or spending would be taxed at a constant rate, the government would be unable to encourage some choices by artificially manipulating economic outcomes.
That's hardly the case under the present system. Take education, for instance. Congress and the president decided last year that everyone should be encouraged to attend college, so the 1997 tax bill included loopholes offering tax credits for the first two years of college tuition and tax deductions for subsequent years. So a decision that was once based on a student's grades and career aspirations now has the added dimension of a financial incentive granted by Uncle Sam. That means marginal students, who might ordinarily have entered the trades, will be encouraged to go to college for financial, rather than academic, reasons. An influx of less qualified students seeking a tax break will likely mean two things for the colleges: a further dumbing-down of the curriculum and further ratcheting up of prices as additional personnel are hired to serve the new students.
As Congress debates doing away with the marriage penalty, hundreds of other behavioral rewards and penalties remain embedded in the tax code. From day care to college education, from marriage to working women, Uncle Sam carries a very big financial stick-and many taxpayers don't even realize it. When Guy Hood learned that he would be penalized for having a working wife, he was stunned. "They encourage you to live in sin? That's crazy."
The same might be said for the tax code as a whole.