Cover Story

New Attacks on Taxes

Q: When does it pay to live in sin? A: When Uncle Sam is footing the bill. But now, some Republicans in Congress hope to make this past April 15 one of the last for the infamous "marriage penalty" component of the federal tax structure.

Issue: "New attacks on taxes," April 18, 1998

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.

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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.

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