President

Box 5-1: Marriage Penalty BasicsIt is widely acknowledged that a tax system cannot simultaneouslyaccomplish the following three goals:1. Progressivity: average income tax rates rise with family income2. Family neutrality: families with equal incomes pay equal taxes3. Marriage neutrality: taxes paid by a family do not depend onmarriageThe inherent conflicts in these three goals can be illustrated by consideringa few examples. Consider a couple without children with onespouse who earns $60,000 and another who does not work. Under 2007tax law, that couple pays $5,592 in Federal income taxes, but would paya total of $9,236 if they were not married and both were filing individually.The resulting marriage bonus of $3,644 is generated because thenonworking spouse serves as a tax deduction for the higher earningspouse. The current tax system is not marriage-neutral.Alternatively, suppose that each spouse earns $30,000, resulting inthe same family income of $60,000. Current tax law is family-neutral, sothis couple pays the same $5,592 as above. If the tax system is changedso that all individuals file separately, each spouse pays $2,796 for a totalof $5,592. That is the same as they would pay on a family income of$60,000 but is $3,644 less than the combined tax liability of the familyabove. A progressive tax system that has all taxpayers file individuallycannot be family-neutral.Finally, if the tax system is changed so that all taxpayers pay 10 percenton all of their income, taxes are $6,000 for each family regardless ofwhether the couple is married or how the earnings are split betweenthe two spouses. The tax system is marriage- and family-neutral, but itwould no longer be progressive, because the average tax rate would be10 percent for all taxpayers.performance. Making them permanent can substantially improve economicefficiency. The Treasury Department estimates that if the tax cuts of 2001 and2003 were made permanent and paid for by reductions in future governmentspending, economic output would increase by 0.7 percent in the long run.However, the benefits to the economy might be offset if the extension of thetax cuts results in additional government borrowing or future tax increases,rather than spending cuts. The Treasury Department also estimates that ifthe tax cuts were made permanent but offset by other revenue raising taxmeasures in the future, then economic output would decline by 0.9 percentChapter 5 | 129