Federal Income Tax Treatment of the Family

Federal Income Tax Treatment of the Family
Updated January 24, 2008
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division

Federal Income Tax Treatment of the Family
Individual income tax provisions have shifted over time, first in increasing the
burden on larger families, and then in decreasing it. These shifts were caused by
changing tax code features: personal exemptions, standard and itemized deductions,
rates, the earned income credit, the child credit, and other standard structural aspects
of the tax. The distribution of tax burden across income classes has, however,
changed relatively little, although burdens at the top and bottom have decreased in
recent years. A recent proposal by Chairman Rangel of the Ways and Means
Committee, H.R. 3780, proposes some important changes in family tax treatment,
including an expansion in the earned income credit for families without children.
While several standards may be considered in determining equitable treatment
of families over family type and size, a standard approach is based on ability to pay,
so that large families with the same income as small ones pay less tax. Based on this
standard, the analysis of equity across families suggests that families with children
are paying lower rates of tax (or receiving larger negative tax rates) than single
individuals and married couples at lower and middle incomes. However, families
with children are being taxed more heavily at higher income levels. At the lowest
income levels, the EIC provides the largest tax subsidies to families with two or three
children. The smallest subsidies go to childless couples. At middle income levels,
families with many children will have the most favorable treatment, due to the effect
of the child credit, which has a very large effect relative to tax liability. At higher
income levels, large families are penalized because the adjustments for children such
as personal exemptions and child credits are too small or are phased out, while
graduated rates cause larger families that need more income to maintain a given
living standard to pay higher taxes. Tax rates are more variable at lower income
levels. At all but the lowest and very highest income levels, singles pay higher taxes
than married couples.
The analysis of the marriage penalty indicates that marriage penalties have
largely been eliminated for those without children throughout the middle income
range, but this change has inevitably expanded marriage bonuses. Marriage penalties
remain at the high and low income levels and could also apply to those with children,
where the penalty or bonus is not very well defined. But by and large, the current
system is likely to encourage rather than discourage marriage and favors married
couples over singles.
The analysis of equity across families suggests that increases in earned income
tax credits for those without children would lead to more equal treatment based on
the ability to pay approach, while full refundability of the child credit would
exacerbate inequalities. At the higher end of the scale, eliminating phaseouts of
provisions that differentiate across families would probably lead to more equitable
treatment, and containing the effect of the alternative minimum tax is important to
both reducing the high burden of taxes on families with children at upper middle
income levels as well as preventing an increasing level of marriage penalties.
This report will not be updated.

Development of Current Tax Treatment of the Family.....................1
Personal Exemptions; Child Credits...............................2
Standard Deduction or Flat Exclusion; Itemized Deductions............3
Rate Structure.................................................4
Earned Income Tax Credit (EIC)..................................7
Child or Dependent Care Credit..................................7
Alternative Minimum Tax.......................................8
Other Provisions...............................................8
Equity and Distributional Issues......................................9
Vertical Equity...............................................10
Horizontal Equity.............................................11
Theories of Equitable Taxation..............................11
Family Arrangements as Personal Choices.....................12
Ability to Pay Approaches..................................13
Targeted Family Assistance.................................14
Applying the Ability-to-Pay Horizontal Equity Standard to Current Law......15
Marriage Penalties and Marriage Bonuses..............................19
Conclusion .....................................................25
List of Tables
Table 1. Average Effective Income Tax Rates by Type of Return,
Family Size, and Income: Lower and Middle Incomes................16
Table 2. Average Effective Income Tax Rates by Type of Return,
Family Size, and Income: Higher Incomes.........................17
Table 3. Average Effective Income Tax Rates for Joint Returns
and Unmarried Couples, By Size of Income and Degree of Split:
Lower and Middle Incomes.....................................21
Table 4. Average Effective Income Tax Rates for Joint Returns
and Unmarried Couples, By Size of Income and Degree of Split:
Higher Incomes..............................................22

Federal Income Tax Treatment of the Family
Recent years have been times of significant changes in the income tax treatment
of the family. For lower income families, the most important of these have been the
expansion of the earned income credit (EIC) in 1990 and 1993. For middle income
families, the introduction of the child credit in 1997 and its expansion in 2001-2003,
along with the expansion of rate brackets and standard deductions to address the
marriage penalty have been important features. For higher income families, the
lowering of tax rates in general, and the increasing scope of the alternative minimum
tax (AMT) are important changes. Chairman Rangel of the Ways and Means
Committee has proposed a reform proposal, H.R. 3970, that would make a number
of changes affecting families differently, including repeal of the alternative minimum
tax, a surcharge on high income families, and expansion of the earned income credit
for families without children.1
While an array of issues might be considered in discussing tax rules and their
effects, this paper considers two questions: what is an equitable treatment of families
of different sizes, and what are the effects of marriage penalties and bonuses.
The first section summarizes the major features of the tax law affecting families
and family choices, and how they developed over time, including the relatively recent
introduction of large benefits for children at low and moderate income levels, a
reversal of a trend in the past that tended to reduce these benefits through the erosion
of the real value of the personal exemptions. It also summarizes the origin of the
marriage penalty and marriage bonus.
The following two sections first discuss general equity issues, and then apply
the ability-to-pay standard to examine how tax burdens vary by family size, across
the income spectrum. The final section examines the marriage penalties and bonuses.
Development of Current Tax Treatment
of the Family
Current federal income tax law differentiates among families by type and
structure in several ways. This differentiation has changed considerably over the
years and includes personal exemptions, standard deductions, rate schedules, and
various other features such as child care credits, age exemptions, and earned-income

1 See CRS Report RL34249, The Tax Reduction and Reform Act of 2007: An Overview, by
Jane G. Gravelle, for an overview of the provisions of H.R. 3970.

Personal Exemptions; Child Credits
Personal exemptions allow a certain amount per person to be exempt from tax.
Combined with standard deductions, which vary by family type, they exclude a
minimum level of income from tax. In 1986, these combined amounts were roughly
set at the poverty level. Personal exemptions can also play a part in marriage bonuses
when only one spouse works: a single individual cannot claim an unmarried
companion as a dependent, while a husband can claim a wife (and vice versa).
The tax laws have always allowed some relief for family size through
exemptions, although the original 1913 act allowed deductions only for the individual
taxpayer ($3,000) and spouse ($1,000). These amounts were very large relative to
incomes, but the initial income tax was not intended to reach a broad group of
individuals. Even when dependent exemptions were allowed in 1917, they were only
$200, small relative to the basic exemptions. The practice of allowing an equal
exemption for each family member began in the early 1940s.
Personal exemptions were reduced in the initial years of the tax, then increased,
then reduced again; they were last reduced in the early 1940s. The real value of the
exemptions was also affected by inflation. For example, the personal exemption
remained constant at $600 from 1948 through 1969, while its real value was heavily
eroded through inflation. It was gradually increased over the next ten years to
$1,000, where it again remained constant until 1985. From 1948 through 1984 the
personal exemption lost 63% of its purchasing power. In large part due to diminution
of the real value of personal exemptions, the tax burden had shifted over time to fall
more heavily on larger families.
In 1986 personal exemptions were increased and indexed, so that today the
personal exemption has lost only about 24% of its purchasing power.2 This shift of
burden to families with children was changed dramatically by the adoption of the
$500 child credits in the Taxpayer Relief Act of 1997 and by the increase in that
credit to $1,000 in the Economic Growth and Recovery Act of 2001. In the cases
where these credits apply (for children under 17), they caused the personal exemption
plus the deduction equivalent of the credit to be 55% larger than its 1948 value with
the $500 credit and 133% larger with the $1,000 credit for families in the 15% rate
bracket; they are 23% and 70% larger respectively for families in the 25% bracket.
The credit is not, however, indexed for inflation, and absent indexation its value will
diminish. The $500 increase in the credit is to sunset in 2010 as well, although it
may be extended or made permanent.
Not all taxpayers received the credit. It was phased out for higher incomes. The
credit was not generally refundable and therefore families with no tax liability or
insufficient liability to use the full credit would not receive the full benefit. An
exception was made for families with three or more children where the credit could
offset payroll tax in excess of the earned income tax credit.

2 The ratio of prices in 2005 to those in 1948 using the GDP deflator is 7.03, while personal
exemptions have increased from $600 to $3200, a ratio of 5.33.

When the child credit was doubled under the temporary provisions of the 2001
tax, an additional refundability provision was allowed for all families for income in
excess of $10,000 (beginning at 10% and rising to 15%), indexed for inflation. The
additional child credit was phased in initially, but accelerated in legislation adopted
in 2003 and 2004.
The personal exemption is also phased out for higher incomes, although that
phase-out is scheduled to expire.
Standard Deduction or Flat Exclusion; Itemized Deductions
Standard deductions, which vary across the types of returns (single, joint, and
head of household), also affect tax burdens across families. Prior to the 2001 tax
revision, the standard deductions for singles and heads of household were 60% and
80%, respectively, of the size of the deduction for joint returns. The standard
deduction can contribute to a marriage penalty if it is larger than half the deduction
for married couples: two singles who both work and marry will have a smaller
combined deduction. It can also contribute to a marriage bonus, if there is only one
earner in the couple, since the joint deduction is larger than the single deduction. In
2001, joint standard deductions were increased, so as to eliminate the marriage
penalty relative to singles without children and reduce it relative to heads of
household (where the deduction is 73% as large). These changes increased the
marriage bonus.
Virtually from its inception, the tax law allowed deductions for taxes, interest,
charitable contributions, and certain other personal expenses. In 1944, a standard
deduction of 10% of adjusted gross income with a ceiling of $500 was allowed as a
substitute for these itemized deductions.3 A major reason for this exemption was to
reduce the number of itemizers and make tax filing less complex. In 1964, a
minimum standard deduction of $200 plus $100 for each exemption with a $1,000
ceiling was added. Beginning in 1969, these standard deductions were increased
substantially. The percentage standard deduction was gradually increased to 16%
and the ceiling increased to $2,000. A low-income allowance of $1,100, to be
reduced by $50 in each of the next two years, was substituted for the minimum
standard deduction. (These reductions were included because of the rise in the
personal exemption that was increasing total exempt amounts). The low-income
allowance was increased to $1,300 in 1972.
In 1975, the low-income allowance was once again differentiated, but based on
family type (joint, head of household, single) rather than size. Joint returns received
a $2,100 allowance by 1976. The ceiling on the percentage standard deduction was
also differentiated by family type, and was raised to $2,800 for joint returns by 1976.
In 1977, the low-income allowance and the percentage standard deduction were
consolidated into a single flat allowance called the zero-bracket amount, which was
set at $3,200 in 1977 and at $3,400 in 1978. This zero-bracket amount was indexed
in 1981, so that it would rise with inflation. The Tax Reform Act of 1986 raised the

3 In general, floors and ceilings for standard deductions for joint returns were halved for
married couples filing separate returns.

flat deduction amount, but continued to differentiate it with respect to family status
(but not family size). The 2001 act increased the standard deduction for joint returns
to twice that of single returns.
In comparing the relative benefits over time, it is important to consider the
changes in all flat allowances as well, not just the personal exemption. For example,
while the real value of the personal exemption has declined about 24% since 1948,
the exempt amount for a family of four (joint return) was very close to the exempt
amount had 1948 values been indexed for inflation (using the GDP deflator) prior to
the 2001 tax changes. Current levels are about 21% larger than those which would
have occurred had the exempt level in 1948 been indexed.4 Ignoring the child credit,
smaller families have more generous exempt levels today, while larger ones have less
generous levels. For example (again, ignoring the child credit), exempt allowances
are larger in real terms today for singles (75% larger), for heads of households with
one child or two children (46% and 20% larger respectively) and for joint returns
with one to four children (39%, 31%, 11%, and 4% larger respectively). Real levels
are about the same as 1948 for heads of household with four family members and
smaller for those with more family members (1% for a five-person family, 6% for a
six-person family). They are also smaller for joint-return families with five and six
family members (2% and 5%, respectively).
Heads of household and joint returns with children eligible for the child credit,
however, have greater exempt levels. For joint returns, assuming that additional
members are eligible children, the credit causes all of them to have increased exempt
amount equivalents between 87% and 117% higher than in 1948, with the larger
increases for heads of households and large families with joint returns (whose values
have tended to more than double).
Note, however, that changes in benefits compared to past levels do not
necessarily have implications for the appropriate treatment of different families. If
past family differentiation was not due to a theory about equitable treatment of
differing families, there is no economic reason that current tax treatment should
conform to any past standards.
Most taxpayers take the standard deduction but about a third itemize, largely at
the higher income levels. Itemized deductions tend to keep pace with income levels.
They are technically subject to a phase-out but the effect of the phase-out is to
increase marginal tax rates, since it is triggered by income and not deductions.
Rate Structure
Two important aspects of the rate structure are the unit of taxation and the
progressivity of the rate structure (that is, how tax rates rise as increments of income
increase). Current tax rates are imposed at 10, 15, 25, 28, 33, and 35% under the
provisions of the 2001 tax change; if those provisions expire the 10% rate will return

4 In 2005, the personal exemption was $3,200 and the standard deduction $10,000, for a total
of $22,800. The exempt allowance in 1948 was $2,667 (600 times 4 divided by 0.9). If the

1948 levels had kept pace with the GDP deflator, the total amount would be $20,177.

to 15% and the top four rates will increase to 28, 31, 36, and 39.6%. Taxes are
imposed on family units. Married couples cannot use the single rate schedules
(although they can file separately with a rate structure that offers no advantage over
joint filing). Most taxpayers have income that taxes them at no more than 10% (23%
of returns), no more than 15% (41% of returns), and no more than 25% (15% of
returns). 5
The width of the brackets is greatest for joint returns and smallest for singles,
although all types of returns reach the top 35% rate at the same point. For single
returns the 10% and 15% brackets are half the width of joint returns, the 25% bracket
is 70% as large, and the next two brackets are about 124% as large (longer brackets
at the top being necessary to get to the same income for the top bracket). For heads
of household the 10% and 15% brackets are 72% and 66% as wide, the next two
about the same length and the final bracket 111% as wide.6 There are also phase-outs
of itemized deductions, personal exemptions, and child credits at very high income
levels.7 However, the higher rates and the phase-outs apply to only a small fraction
of taxpayers. Less than 10% of taxpayers had adjusted gross income over $100,000
in 2003 and less than 2% had incomes over $200,000.8
In the original 1913 tax law, a single rate structure was applied to all taxpayers
as individuals. In 1948, joint returns were allowed that effectively permitted income
splitting. This change had little to do with any theory regarding the tax treatment of
the family. Rather, it occurred because married couples in community property states
were successfully claiming the right to divide their income evenly for tax purposes.
Under a graduated rate structure, this income-splitting reduces the total tax burden
by reducing the amount of income subject to higher rates. Income-splitting was
adopted to equalize treatment across the states and to forestall a major tax-induced
disruption in state property laws. This move created the familiar joint and single
returns. Both the community property treatment and the legislated income-splitting
resulted in a tax subsidy for marriage. Individuals who married would experience
lower tax liabilities due to the rate structure as long as their incomes were unequal.
Shortly after, in 1951, a head-of-household schedule for unmarried taxpayers with
dependents was introduced which allowed half the benefits from income splitting
(i.e., wider tax brackets). This treatment could, in theory, create a marriage penalty
for families with children, although this point received virtually no attention.

5 Kyle Mudry and Michael Parisi, Individual Income Tax Rates and Shares, Internal
Revenue Service Statistics of Income Bulletin, 2003, posted at [http://www.irs.ustreas.gov/
taxstats/indtaxstats/article/0,,id=129270,00.html #_article].
6 Details of the tax rates can be found in CRS Report RL30007, Individual Income Tax
Rates: 1989 through 2007, by Gregg A. Esenwein.
7 The itemized deduction phase-out range, which is indexed for inflation, begins at
$145,950 for 2005; the personal exemption phase-out, which is also indexed, varies by type
of return, but begins at about $145,950 for singles. The top rate of 35% begins at $326,450
of taxable income. Child credits begin to phase out at about $75,000 for head of household
returns and $110,000 for joint returns.
8 Internal Revenue Service, Statistics of Income, posted at [http://www.irs.ustreas.gov/
taxstats/indtaxstats/ar ticle/0,,id=96981,00.html #_grp1].

Criticism from singles, arguing that their taxes were too high, led in 1969 to a
singles rate schedule with wider brackets. This difference in rate schedules, however,
also created a marriage penalty for certain types of families, including those without
children. If both spouses worked, tax bills could increase with marriage. Many
people were uncomfortable with a tax provision which encouraged couples to live
together without benefit of matrimony. Coupled with increasing female labor force
participation and a changing social structure, the marriage penalty created
considerable concern. For this reason, a capped deduction for the secondary earner
in a family was adopted in 1981. The provision allowed 10% of income to be
deducted, subject to a cap of $3,000. This deduction was an imperfect device which
partly alleviated the problem of the marriage penalty and, for individuals below the
cap, reduced the marginal tax rate on the secondary worker. It was repealed in 1986,
when the flatter rate structure caused the marriage penalty to be less severe. The
marriage penalty was increased for very high income individuals in 1993 with the
addition of higher tax rates. These changes affected, however, only a very small
fraction of the population.
The degree of progression in the rate structure interacts to affect the tax burden
that applies to taxpayers in different circumstances. The rate structure has varied
significantly over time, but a major revision in the 1986 act reduced the brackets to
two (15 and 28%) as well as lowering the top bracket. Certain benefits were phased
out. In 1990, the “bubble” due to these phase-outs was eliminated in exchange for
adding a new tax rate of 31%. 9 (Capital gains were held to a 28% rate). However,
personal exemptions were still phased out. Itemized deductions were also phased
out, on a temporary basis, reduced by 3% of adjusted gross income (AGI) above a
limit. Since itemized deductions tend to rise with income faster than the reductions
due to the phase-out, this phase-out is the equivalent of increasing taxable income by
3%, and an additional percentage point or so in tax. (Each dollar of adjusted gross
income taxed leads to a reduction in deductions of $0.03, and if the marginal tax rate
is around a third, then the additional tax per dollar of income is around $0.01). In

1993, two marginal tax rates were added at the upper income levels, 36% and 39.6%;

this legislation made the itemized deduction and personal exemption phase-outs
The 2001 tax cut, in addition to lowering the top tax rates and introducing a new
10% rate, eliminated the marriage penalty for most taxpayers by increasing the
standard deduction, new 10% rate bracket, and the 15% rate bracket to make these
values twice as large as for singles, returning to the pre-1969 treatment for most
taxpayers. That tax cut also prospectively eliminated the personal exemption phase
out (to begin in 2006 and be complete in 2010) and the itemized deduction phase-out
(in 2010).

9 Although there were two statutory rate brackets after 1986, 15% and 28%, there was also
a surcharge that was designed to phase out the benefits of the 15% rate and the personal
exemptions for high income taxpayers. This surcharge effectively increased the tax rate by

5 percentage points, to 33%, and created a bubble: rates were 15%, then 28%, then 33%,

and then fell back to 28%.

Earned Income Tax Credit (EIC)
The earned income tax credit (EIC) is a refundable credit (or negative tax) that
provides a wage subsidy for low-income working individuals. The credit is a
percentage of earned income which reaches a maximum fixed amount and then is
eventually phased out. The credit rates are currently 7.65% for families without
children, 34% for families with one child, and 40% for families with two children.
The phase-out levels are higher for families with children than for those without
children. In 2005, the credit reached its maximum value of $399 for families with
no children at an income of $5,220; the credit is phased out at incomes between
$6,530 and $11,750 for singles and between $8,530 and $13,750 for joint returns.
For families with one child, the maximum credit of $2,662 is reached at $7,830; the
credit is phased out between $14,370 and $31,030 for single heads and between
$16,370 and $33,030 for married couples. For families with two or more children,
the maximum credit of $4,400 is reached at $11,000 and is phased out between
$14,370 and $35,363 for single heads and between $16,3790 and $37,263 for married
couples. These values are indexed for inflation.
Unlike some other provisions, there is no differentiation by family type; rather,
the differences depend on the presence of one, two or no children. The EIC plays a
role in creating a marriage penalty for lower income families. If individuals with low
earnings marry, the couple’s higher combined income may phase out more of the
earned income tax credit. At the same time, marriage can reduce taxes if a single
individual marries someone with children but with little or no income, because he or
she becomes eligible for the larger credit for families with children.
The earned income tax credit (EIC) was first enacted in 1975. This provision
provided a refundable tax credit for 10% of earned income, phased out at a rate of
10% of income over $4,000. Because the credit was refundable, individuals who
paid no income tax were nevertheless eligible for a benefit. There were a variety of
rationales for the EIC: to provide a work incentive, to offset the social security tax
burden, and to provide relief for recent price increases in food and fuel. The credit
was, however, only allowed to individuals who maintained a household for
dependent children; thus, like the major welfare program of the time, AFDC (Aid
to Families with Dependent Children), the EIC as originally enacted was not
extended to singles and childless couples.
The EIC has been revised in various ways, and in 1990 was differentiated with
respect to number of children. In 1993, the credits were increased substantially and
a small credit was added for families without children. The 2001 tax cut expanded
the phase-out range for married couples which slightly reduced the marriage penalty
in the EIC.
Child or Dependent Care Credit
Another provision allows for credits for paid child care expenses for children
under 13 and disabled dependents. A deduction for these costs was first allowed in
1954 and converted to a credit in 1976. The credit is 30% of eligible expenses but
is phased down to 20% as income rises from $15,000 to $43,000. Eligible expenses

are limited to $3,000 for one child, and $6,000 for two or more children. The credit
is available only to single parents or married couples where both parents work and
is limited to the smaller earned income. It is not indexed.
Alternative Minimum Tax
The alternative minimum tax calculates a tax on a broader income base with a
large flat exemption (in 2005, $58,000 for married couples and $40,250 for singles)
and at rates of 26% and 28%. If this tax is higher than the regular tax, the difference
in tax is added to the taxpayer’s liability.
Currently the AMT does not affect very many taxpayers, but its effects will
grow over time unless legislative changes are made, including an increase in the
exemption and indexing of the exemptions. Thus far, temporary revisions to limit
the scope of the AMT have been enacted.
The alternative minimum tax originated in 1969 as an add-on tax on tax
preferences and the most important preference was capital gains. At that time, there
was an exclusion for a share of capital gains and the excluded share was taxed under
the add-on tax. The add-on tax was eventually paired with and then displaced by the
alternative minimum tax. In 1986 the capital gains preference was ended and the
number of individuals affected by the tax, already small, fell further. Over time,
however, the coverage of the AMT began to grow as rates increased and because the
exemption was not indexed, while exemptions in the regular tax were. The potential
coverage was also increased with the 2001 tax cut which cut regular rates but not
AMT rates. The focus of preferences has also changed. The preference for capital
gains enacted in 1997 and extended in 2003, and for dividends enacted in 2003 was
not included in the AMT. Increasingly the major preference items are personal
exemptions and certain itemized deductions. (The child credit was allowed against
the AMT after it became clear that failure to do so would push many families onto
the tax.) In the middle income classes, large families will increasingly be affected
by the AMT, absent change.10
Other Provisions
In addition to these basic provisions — rate structures, personal exemptions,
standard allowances, and credits — several other provisions related to family
structure are summarized here. First, there are specific provisions that relate to
family structure or characteristics. There are additional standard deductions for
elderly and blind taxpayers (provisions that give little benefit to high income
individuals who tend to itemize deductions). In addition, there is a 15% tax credit
for the elderly and disabled that is phased out; since the base for the credit is offset
by social security, it tends to benefit elderly and disabled individuals who do not
receive social security. Another explicit family tax provision, adopted in 1986, is the
“kiddie tax” which taxes unearned income of children under 14 (now 19) at the
parents’ tax rate.

10 For a more detailed discussion and history, see CRS Report RL30149, The Alternative
Minimum Tax for Individuals, by Gregg A. Esenwein.

One might add a variety of exclusions (some social security benefits, welfare
payments, in-kind benefits, employer provided child care) and deductions or credits
(medical expenses, educational expenses) which benefit families of certain income
levels and characteristics. Moreover, since the tax law does not apply to certain
imputed income, families who prefer owner-occupied homes or in-home provision
of goods and services, or the consumption of leisure over other goods, have greater
tax benefits. These benefits are, in some cases, associated with family characteristics.
For example, families with higher incomes and at certain ages are more likely to live
in owner-occupied homes. One-earner married couples benefit from the services
provided in the home by the non-working spouse which are not subject to tax.11
Finally, the payroll tax can alter the relative net tax burden between different
types of families with consequences that could matter for concerns of equity and
efficiency (such as work choice). The social security system may confer a marriage
bonus, that can increase the implicit tax on work effort for second earners. Spouses
receive a benefit, without necessarily paying any payroll taxes of their own; a second-
earner spouse pays additional social security taxes but his or her benefit is only the
net of a benefit based on the individual earnings record and the benefit for spouses
— and this amount may not be positive. That is, the spouse’s benefit based on the
partner’s earning record may be better than the benefit a spouse receives on his or her
own earnings record, and there is, therefore, no return to payroll taxes paid. Thus,
the net tax on a second earner spouse is effectively larger than it would be in the
absence of a benefit for spouses, since little or no additional benefits occur as a result
of those payments. There are also implicit taxes that affect behavior in the transfer
system, where increases in income through work or marriage may cause a reduction
in benefits, thereby discouraging these behaviors.
Equity and Distributional Issues
Tax proposals can be evaluated on many grounds, but one issue is that of
fairness. This issue of fairness can involve two elements: vertical equity, or the
equity of changes in tax burdens as income rises for an otherwise identical family,
and horizontal equity, or how taxes should be fairly differentiated between families
of different sizes and structures. This analysis focuses primarily on the issue of
horizontal equity, since this is an issue which can be addressed in a more analytical
framework. We first, however, briefly discuss the issue of vertical equity.

11 This concept be may unfamiliar, particularly to readers who think of spouses working at
home as making a monetary sacrifice, perhaps to stay with their children. While their
income is smaller, they save the taxes that would have been paid on outside earnings.
However, these spouses do not give up all of their income, since there are cost savings, as
in lower child care payments or not having to pay for other services (e.g., dry cleaning,
household help). It is this value that provides a benefit to one-earner families and is the
imputed income not subject to tax.

Vertical Equity
The individual income tax is progressive in rate structure and in actual
outcomes: higher income taxpayers pay larger shares of their income than do lower
income taxpayers, and at the lowest income levels taxpayers received overall
subsidies through the EIC. Because the desired degree of redistribution cannot be
easily established, issues of vertical equity involve value judgments to a considerable
degree.12 By and large, the overall distribution of the tax system has not changed a
great deal in the last twenty-three years; all tax rates have fallen and the largest
reduction is for the very highest 1% of taxpayers, followed by the middle quintile.
At the lower end, the earned income tax credits have more than offset growth in
payroll taxes.13
How different tax revisions affect the progressivity of the income tax depends
on several factors.
First, a significant fraction of taxpayers do not have income tax liability.
Positive income taxes do not apply in most cases until individuals are above the
poverty line. In the Tax Reform Act of 1986, the combination of standard deductions
and personal exemptions were set to roughly approximate the poverty line — the
income levels above which families of different sizes are not considered poor. The
allowances for single individuals are below the poverty line and cause some poor
single individuals to be taxed. The addition of the child credit means that taxpayers
with qualifying children well above the poverty line would not be subject to tax.
These taxpayers would not be affected by a tax cut.
An exception is when tax cuts are refundable. An expansion of the EIC, which
is a refundable credit (or negative tax), would affect low-income individuals. The
child credit is also refundable in some circumstances.
Certain types of revisions tend to benefit higher income individuals, while
others tend to provide little benefit to that group. For example, while lowering the
top rates clearly benefitted higher income individuals in 2001, it is also clear that
widening the 15% rate bracket for joint returns also benefitted higher income
individuals. In 2000, prior to the tax cut, according to the Internal Revenue
Service’s statistical data, of 129 million returns, approximately 69 million returns
paid tax at the 15% rate and another 25 million had no tax liability. Thus the
widening of the 15% bracket, which helped only those paying tax above that rate,
benefitted approximately the top 25% of taxpayers. Higher income individuals are
also more likely to itemize deductions, and changes which increase the standard

12 Progressivity in the tax system is typically based on an equal sacrifice notion and the
notion that a dollar to a poor person is much more valuable than a dollar to the wealthy
person. These theories do not easily pin down the desired degree of progressivity, however.
For a more extensive discussion of distributional issues and of the distribution of the income
tax see CRS Report RL32693, Distribution of the Tax Burden Across Individuals: An
Overview, by Jane G. Gravelle and Maxim Shvedov.
13 See Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2003,
December 2005: [http://www.cbo.gov/ftpdoc.cfm?index=7000&type=1].

deduction will tend to focus more benefits to moderate income taxpayers than high
income ones. Similarly, expansions of benefits that are phased out, such as the child
credits, would not benefit high income individuals. The 10% bracket also favored
lower income families.
Horizontal Equity
Horizontal equity has to do with equal treatment of equals and is an important
focus of this analysis. For the income tax, this standard might mean that families of
the same size with the same income should pay the same tax. But, it could also be
taken to mean that two individuals with the same income should pay the same tax.
In a progressive tax system, these two standards can be incompatible, and, indeed this
incompatibility causes marriage penalties and bonuses in a system where the family
is the tax unit. Thus, the basic challenge of assessing standards of horizontal equity
is to determine how to treat different taxpayers equitably. First, we review the
economic principles which could be used in that assessment. Second, we consider
in further detail the ability-to-pay concept, which seems most consistent with the
equal-sacrifice principles of horizontal equity.
As the recent history of the tax law suggests and the following discussion
reveals, tax policy has not generally been guided by a consistent theory of fairness or
equity across different types of families. Indeed, it is clear that many of the structural
changes in the treatment of the family were haphazard. Income splitting, perhaps one
of the most important aspects of family tax differentials, was adopted in reaction to
a legal situation. Other changes were contemporary reactions to a set of complaints
or concerns about behavioral response (such as the singles rate schedule or attempts
to fix the marriage penalty).
Theories of Equitable Taxation. For taxation purposes, there are two
fundamental attributes of families: the type of head (a married couple, or a single
individual) and the size. Families can be composed of single persons, single parents
with children, childless couples, and married couples with children. And, in turn,
there are two important features of the tax system that relate to these differences.
First, should the unit of taxation be the individual, or the family? The U.S. tax
system imposes taxes on families and differentiates in its rate structure between
singles, head of households (single parents with children), and married couples.
However, an alternative would be to apply a single rate schedule to each individual
on his or her own earnings. While some preference for this view of individual
taxation may have to do with philosophical matters, one argument for treating the
individual rather than the family as a taxpaying unit has to do with marriage
neutrality and efficiency, discussed subsequently. That is, if individuals could be
taxed solely on their own earnings, there would be no tax consequences of being
married, and the married state would not affect incentives to work via tax
The second issue is how one should adjust for family size, or, in the case of
individual taxation, for the number of dependents. Despite the thrust of recent
legislation that added substantial tax credits for children, some of the debate over
differentiating by taxpayer characteristics has been over whether personal exemptions
for dependents should be allowed at all. Under some theories of how the family

should be taxed, no differentiation should be allowed for dependents; indeed,
arguments are made that individuals should be taxed on their income without regard
to their family arrangements. For that matter, individual taxation does not preclude
allowances for number of dependents; rather, its focus is on treating working adults,
even though married, as separate entities.14 (In practice, such a tax system must
always deal with the possibility of income splitting of capital income by transfers of
assets within the family, as well as the allocation of deductions.)
Clearly the family involves a social and economic unit which differs from
unrelated groupings. Although taxation of the family has received limited attention
in the economics literature, various principles have been advanced about how to treat
family characteristics. Three such approaches are outlined here: treating living
arrangements and children as personal choices that should not be addressed by the
tax law, equating post-tax standards of living for families with the same pretax
standard of living, and family assistance.
This analysis does not consider another alternative principle of taxation, the
benefit principle, which would set taxes to reflect the amount of government services
received. One could argue that large families, particularly families with children, are
greater beneficiaries of public spending, such as education. While some taxes are
explicitly formulated as benefit taxes (e.g., the gasoline tax which is used to build
roads), the individual income tax has generally been based on other principles, such
as the ones described here.
Family Arrangements as Personal Choices. People are relatively free
to choose whether to marry and have children, and an argument can be made that
such choices should not lead to tax relief. From this perspective, if they choose to
have children, they are not worse off, since the enjoyment they receive from their
children outweighs any cost. Thus, one could think of children as part of the
consumption of the parents.15 At a minimum, this approach suggests that no
allowance be made for the additional cost of supporting children, treating the choice
to have children as a consumption item, no different from the decision to consume
food or clothing. Similarly, the choice of a spouse could be seen as a consumption
or investment choice, which should not alter the tax paid by the individual, or the
combined tax of the two spouses. In this case, the individual should be the tax unit.
While the argument that children constitute consumption to their parents may
be a defensible one, using this view as a guide to making tax policy is problematic.
Even if the adults have made a choice, a troublesome aspect of this treatment of
children as consumption is that it considers only the well-being of the parent or

14 See Harvey E. Brazer, “Income Tax Treatment of the Family,” and Alicia Munnell, “The
Couple vs. The Individual under the Federal Personal Income Tax,” both in The Economics
of Taxation, ed. Henry J. Aaron and Michael J. Boskin, Washington, DC, Brookings
Institution, 1980.
15 The notion of children as consumption can be traced to Henry Simons, Personal Income
Taxation, Chicago: University of Chicago Press, 1938.

parents. Parents’ tastes for children aside, the material level of consumption for
children as well as for adults is affected by the number of others in the family.
Some theories have suggested that children could be seen as an investment,
perhaps for support in old age. There is some justification for this theory of parental
motivation, although it must surely be less than universal since many parents leave
bequests to their children, rather than being supported by them in old age. If
investment were the objective of having children, then there would be some
justification for tax relief, since the cost of such an investment should, in theory, be
recovered; at the same time, returns (such as help in old age) should be taxed to the
parents. Our tax system is not designed along these lines, and, in any case, the
children-as-investment theory also suffers from a lack of focus on the well-being of
the children.
Ability to Pay Approaches. Another approach is simply that of ability to
pay, which is the cornerstone of progressive taxation. Applying this ability-to-pay
standard of taxation is straightforward in theory if one begins with the proposition
that families with equal standards of living before tax should have equal standards
of living after tax. If all family members were more or less identical in their needs
and if all goods consumed were purely private in nature, this standard would suggest
full income splitting of total family income among all members of the family. One
could merely divide all family income evenly and then subject each share to an
identical rate structure. In a progressive tax system, larger families would pay
smaller taxes than smaller families with the same total income.
One difficulty with this straightforward prescription is the existence of “club”
goods within the family. Some goods are more or less purely private goods, such as
food. If one person consumes food, it is not available to anyone else. Other goods
have elements of a club nature (one person can consume the good without interfering
with another’s consumption). Such club goods include housing and some
furnishings, reading materials, and the family car. None of these goods are pure
shared goods since tastes may not be identical and congestion may occur, but they do
provide scale advantages in consumption within a family. These scale advantages
in family consumption are recognized in construction of the poverty line, which
varies with family size, yet does not increase in full proportion to it.
Another problem is that adults and children may differ in the amount of private
goods they need or desire.
If we knew how to scale ability to pay by family size and characteristics, design
of the income tax would be theoretically straightforward. The method would be as
follows. Choose a representative family (e.g., a family of two). Devise the tax rate
schedule to achieve the desired degree of progression, setting the exempt level at the
poverty level or whatever other level is desired. The solution to horizontal equity is
then, simply, an averaging approach. For example, consider a larger family which
needs 50% more income than the basic reference family. This means that a larger
family that has $75,000 of income should have the same average tax rate as a smaller
(reference) family with $50,000 of income. We simply apply the basic tax rate
schedule to two thirds of the larger family’s income, and multiply the resulting tax
liability by 1.5. This approach will produce the same effective tax rate for the larger

family as for the reference family. (The larger family, which has more income, will
still pay more taxes, but the fraction paid will be the same as the smaller family.)
The two families will have the same (although smaller) standard of living after tax
just as they had the same standard of living before tax.
When exempt levels of tax are set roughly at the poverty rate, as was the intent
of the 1986 Tax Reform Act, families whose income falls within the first rate bracket
(the 15% tax bracket at that point) tend to have equal effective tax rates, if the
relative poverty measures across families are correct (ignoring the earned income tax
credit). These effects will not hold, however, when higher income families are
considered or when other provisions, such as the child credit and the earned income
credit, are considered, or with a new small bracket such as the 10% bracket
introduced in 2001. Moreover, families with one earner are better off than families
with two earners at the same income because of the expenses of working, including
child care, and the benefits of home production of the non-working spouse. Thus,
credits for child care expenses or allowances for working spouses can move the
system towards more equitable treatment, at least vis-a-vis one-earner couples.
Targeted Family Assistance. At the opposite end of the spectrum is the
notion of targeted family assistance, especially for lower income families, and often
targeted towards children. To accomplish this targeting, allowances for family size
differentials (e.g., personal allowances) are often made refundable, they take the form
of a credit rather than an exemption, and benefits are often phased out as incomes
rise. Several of these features, including the EIC and the child credit, have made
their way into current law.
This view of family allowances differs from the philosophy that personal
exemptions, along with other exclusions, should be used to exempt a minimum
subsistence amount from the income base, the philosophy underlying the 1986
revisions, and one which is more in line with the ability to pay standard. Similarly,
a benefit for child care would be more appropriately made through a deduction, if
child care was viewed as one of the costs of working under an ability-to-pay
Proposals that are driven by this philosophy are often simultaneously addressing
differentiation across family types and a vertical distribution objective. This
objective is not necessarily inconsistent with the ability-to-pay objective addressed
previously, even though it often appears to be because of the mechanisms chosen,
such as credits that are phased out. For a given family size, any degree of vertical
equity can be obtained through either exemptions or credits or by arranging the tax
rate schedule appropriately. But, the differentiation across families at the same
income level (or ability-to-pay) can be achieved only by selecting the sizes of
personal exemptions for different family members. An ability-to-pay approach
would include differentiation of families of different sizes at either high or low
income levels. When a vanishing exemption or credit is chosen in the interest of

vertical equity, the actual result is to allow no differentiation for family size at higher
income levels.16
Finally, it is important to recognize that the income tax system exists side by
side with a welfare system and many conclude that targeted family assistance might
better be addressed through the welfare system.
Applying the Ability-to-Pay Horizontal Equity
Standard to Current Law
The ability to pay approach seems the most consistent and, to many, appealing
of the three approaches to dealing with tax differentiation based on family size. This
method considers the welfare of all in society rather than focusing exclusively on
adults or children. A recent study used this approach to estimate effective tax rates
in 2005, and how various provisions of the tax law affected these rates, using an
equivalency scale similar to the variations in poverty lines across family types.17
Because the tax system has been indexed, the findings of this study remain applicable
in 2008 although income levels refer to 2005 values.
The remainder of this section reports the results of that study. In defining
families that have the same ability to pay, an adjustment based on a research study
similar to that adjusting for official poverty levels for different family sizes was used
which has a smaller adjustment for children than for adults. Under this standard, a
single person requires about 62% of the income of a married couple; a couple with
four kids requires about three times the income. Thus, for a married couple with no
children with $20,000 of income, an equivalent single person would need slightly
over $12,000 and a married couple with four children would need $60,000.
Table 1 reports the 2005 effective tax rates for low- and middle-income
taxpayers at different levels of income, for family sizes of up to seven individuals,
and for the three basic types of returns — single, joint, and head of household,
without considering the child credit. Table 2 reports the tax rates for higher income

16 One argument along these lines is that progressive taxation could be justified by the need
to maintain human resources at the bottom of the scale (which justifies some minimum
exclusion) and curb the accumulation of power at the top. Since the accumulation of power
is undiminished by family size, there should be little differentiation at the top of the scale.
See Harold M. Groves, Federal Tax Treatment of the Family, Washington, DC, The
Brookings Institution, 1963.
17 Jane Gravelle and Jennifer Gravelle, “Horizontal Equity and Family Tax Treatment: The
Orphan Child of Tax Policy,” National Tax Journal, vol 59, September 2006, pp. 631-649.
This study calculated stylized effective tax rates reflecting personal exemptions, itemized
or standard deductions, the child credit, and the earned income credit The equivalency0.7
formula used was (A+0.7K) based on Constance F. Citro and Robert T. Michael,
Measuring Poverty: A New Approach, Washington, DC, National Academy Press, 1995.
Using this formula, a single person would need 62% of the income of a married couple
without children to achieve the same standard of income. A married couple with one child
would need 23% more and a married couple with two children would need 45% more.

families. the heading of the column indicates the income level for married couples.
Families in each column have the same estimated ability to pay, so that larger
families have more income and singles and a head of household with one child have
less. The rates across families should be compared by looking down the columns.
For example, in Table 1, a married couple with $25,000 in income pays 3.4% of
income in taxes, but a married couple with one child with the same ability to pay
receives a subsidy of 0.7%, while a single with an equivalent before tax standard of
living pays 4.7%.
These numbers assume that dependents are children eligible for the child credit
and that the families are eligible for the earned income tax credit (a provision not
allowed for those over 65 or for those without children under 25). These are
illustrative calculations that do not account for any other tax preferences and are
designed to show how the basic structural, family-related features of the tax law
affect burdens. Tax rates for returns paying the AMT are bolded.
Table 1. Average Effective Income Tax Rates by Type of Return,
Family Size, and Income: Lower and Middle Incomes
(2005 tax law and income levels)
Income Level for Married Couple
Type-Size $10,000 $15,000 $25,000 $50,000
Single - 1-6.5%-1.0%4.7%9.0%
Joint - 2-2.9 0.0 3.4 8.3
Joint - 3-23.2 -17.9 -0.7 6.6
Joint - 4-34.0 -22.4 -2.4 5.3
Joint - 5-31.4 -18.9-3.5 4.3
Joint - 6-27.5 -16.3 -4.8 3.5
Joint - 7-24.5 -14.3 -6.2 3.0
H/H - 2-29.8 -22.6 -6.8 6.4
H/H - 3-39.2 -27.6 -7.9 4.7
H/H - 4-35.2 -22..7-5.2 3.7
H/H - 5-30.8 -18.5 -6.0 4.9
H/H - 6-26.7 -15.8 -7.4 6.3
H/H - 7-23.5 -13.7 -8.6 7.4
Source: Gravelle and Gravelle. The dollar amounts refer to the income for a married couple with no
children; larger families in each column would have more income and singles and heads of household
with 2 family members (one child) would have less income.

These tables suggest that the pattern of tax burden by family size varies across
the income scale, as it reflects the complications of the earned income tax credit, the
child credit, and graduated rates, including phase-out effects. Moreover, the variation
across families which have the same ability to pay is substantial. At low incomes,
families with children, whether headed by a married couple or a single parent, are
favored because of the earned income tax credit. The largest negative tax rates tend
to accrue to returns with two children, since the largest EIC credits are available for
these returns.
Table 2. Average Effective Income Tax Rates by Type of Return,
Family Size, and Income: Higher Incomes
(2005 tax law and income levels)
Income Level for a Married Couple of Two
Type-Size $75,000 $100,000 $250,000 $500,000
Single - 110.5%12.8%17.8%24.2%
Joint - 29.5 11.2 19.424.8
Joint - 38.6 11.9 21.824.9
Joint - 48.6 12.5 23.425.0
Joint - 59.0 14.024.425.1
Joint - 610.315.5 24.725.4
Joint - 711.4 16.7 24.825.6
H/H - 28.9 12.4 21.324.6
H/H - 39.7 13.623.624.9
H/H - 411.2 15.724.325.0
H/H - 512.6 17.6 24.525.3
H/H - 613.8 18.924.6 25.6
H/H - 715.119.924.725.9
Source: Gravelle and Gravelle. The dollar amounts refer to the income for a married couple with no
children; larger families in each column would have more income and singles and heads of household
with 2 family members (one child) would have less income.
As incomes rise, families with children are still favored, but it is the largest
families that have the largest subsidies or the smallest tax rates, because of the
combination of the personal exemptions and the child credit lower taxes so much for
these families. Eventually large families began to be penalized because the value of
the child credit and personal exemptions relative to income declines and larger
families that require more income are pushed up through the rate brackets. That
effect is increased because more families with children are subjected to the AMT.
At higher income levels, credits and exemptions begin to be phased out. As incomes
reach very high levels, however, the rates converge as the tax becomes large a flat

tax. (Note that itemized deductions assumed to be a constant fraction of income, and
so is a proportional exclusion).
Overall, these calculations suggest (1) that singles are taxed more heavily than
childless couples in the middle income ranges but less heavily at very high and very
low income levels; (2) when the child credit and EIC are available, families with
children tend to be favored over families without children at low and moderate
income levels; (3) the number of children in a family sometimes causes more
beneficial treatment and sometimes less depending on how the EIC and child credit
are being phased out; and (4) the graduated rate structure causes large families at
higher income levels to be taxed significantly more, an effect exacerbated by the
These results can be characterized as resulting from the fundamental structural
flaws of phase-out provisions and rate brackets. Phase-out points and rate brackets
should be based on family size if the ability to pay criterion is being used to
determine the tax structure. The flat amount of the child credit and personal
exemption also causes them to have little effect on relative tax liabilities at high
income levels; phasing them out increases the over-taxation of large families relative
to small ones at higher income levels
At low income levels, however, the family comparisons are affected by the
earned-income tax credit, and differences in tax burdens by family size can be
striking. If there were no earned-income tax credit, effective tax rates would be
relatively uniform at the lower income levels, at zero or a small positive percentage
amount. The EIC introduces disparities. First, the EIC rate is much lower for single
taxpayers or two-member joint returns where there are no qualifying children than
it is for families with children. Second, if one accepts the ability-to-pay standard, the
EIC has an inappropriate adjustment for family size. There is no reason to vary the
rate of the EIC by family size; but the base (or maximum creditable wage) and the
phase-out levels should be varied according to the ability-to-pay standard. That is,
both dollar amounts — the amount on which the EIC applies and the income at
which the phase-out begins — should be tied to family size according to the ability
to pay standard, while the EIC rate should be the same for all families.
To make the EIC neutral across families, using the ability-to-pay standard,
would require, in addition to allowing it at a common rate for all families, changing
the base levels and the phase-out levels for family size. Changing the rate, as was
done in 1990 and retained when the EIC was expanded in 1993, does not accomplish
equal treatment across families of different sizes, providing too much adjustment for
some families and not enough for others.
The analysis also considered the effects of other aspects of the tax system. One
is the availability of the child care credit. The analysis in that paper indicated that
including the child credit (at the maximum) does not have very important effects.
The dependent care credit is not effectively available to low income families who do
not have sufficient tax liability to use the credit, and is capped and unimportant in a
relative sense for high income taxpayers. In the middle income levels, it lowers the
tax rate for families with children.

Another issue has to do with the treatment of married couples where only one
individual works outside the home. These families are better off because the spouse
not employed outside the home can perform services at home which result in cost
savings, perform household tasks which increase leisure time for the rest of the
family, or enjoy leisure. The value of this time, which is not counted in the measured
transactions of the economy, is referred to as “imputed income.” This imputed
income is not taxed, and it would probably be impractical to tax it. Nevertheless, the
tax burden as a percent of cash plus imputed income is lower for such a family.
Imputed income is not easily valued and this issue is explored in the study by
limiting the imputed income to the value of child care using the cap for the expenses
eligible for a child care credit and excluding this amount from income. For low
income families, this change actually increased taxes by reducing earned income
credits. At moderate and middle incomes, it benefitted married couples with
children, who already tend to be favored.
The authors also considered some of the potential changes and whether those
would increase horizontal equity or exacerbate it. In the interest of increased
horizontal equity, the analysis would support an increase in the earned income credit
for those without children; a reduction (or containment) of the AMT which will grow
in importance absent change; and elimination of phase-outs for child credits, personal
exemptions, and itemized deductions. (2001 tax law changes proposed to eliminate
the phase-out of the latter two beginning in 2007.) Making the child credit fully
refundable would increase disparities in tax rates at the lower income levels.
These calculations should be considered with caution, as they depend on the
precision of the family equivalency scales, which do not take into account the
heterogeneity of the cost of rearing children, and are aimed at measuring cash needs
to attain a given standard of living. Lower income families with younger children
who need child care may find their standard of living in material matters lower than
other types of families, because of the higher cost of that care relative to their
income. In that case, the lower rates due to child care credits or exclusion of imputed
income may be appropriate. At higher income levels, child care costs are probably
much smaller relative to income, even if more is spent on care. The child care credit,
however, has little effect on effective tax rates at these income levels.
Marriage Penalties and Marriage Bonuses
Concerns about the marriage penalty reflect a reluctance to penalize marriage
in a society that upholds such traditions. As the tax law shifts to reduce the marriage
penalty, as it did in 2001, it also expands marriage bonuses. These choices have
consequences not only for incentives but for equitable treatment of singles and
married couples. As shown above in Tables 1 and 2, in the middle income brackets,
where the marriage penalty was largely eliminated, singles with the same ability to
pay are subject to higher taxes than married couples. Singles benefit at lower income
levels because their lower required incomes do not phase them out of the earned
income credit. And at very high incomes married couples may pay a larger share of

their income because of marriage penalties that remain in the AMT and the upper
brackets of the rate structure.
This section explores the treatment of married couples and singles in an
additional dimension by assuming that singles live together and share the same
economies of scale that married couples do. These individuals could be room mates,
but they could also be partners who differ from married couples only in that they are
not legally married.18 Single individuals who live together in the same fashion as
married couples have the same ability to pay with the same income. However,
remaining single can alter their tax liability. Remaining single can cause tax liability
either to rise or fall, depending on the split of income between the two spouses. If
one individual earns most of the income, tax burdens will be higher for two
individuals who are not married than for a married couple with the same total
income, because the standard deductions are smaller and the rate brackets narrower.
If income is evenly split between the two individuals, there can be a benefit from
remaining single. Married individuals have to combine their income, and the rate
brackets for joint returns at the higher income brackets, while wider than those for
single individuals, are not twice as wide. At all levels they are not wider than those
for heads of household.
The marriage penalty or bonus might, in the context of the measures of
household ability-to-pay, also be described as a singles bonus or penalty. In any case,
in considering both the incentive and equity dimension to this issue, the tax rates of
these families should be compared to the tax rates of other households.
Tables 3 and 4 show the effective tax rates for married couples and for
unmarried couples with the same combined income, both where income is evenly
split and where all income is received by one person. In one case there is no child
and in the other a single child. These income splits represent the extremes of the
marriage penalty and the marriage bonus. The same reference income classes and
equivalency scales in Tables 1 and 2 are used.
Note that uneven income splits in the case of a family with a child can yield
different results depending on whether the individual with the income can claim the
child and therefore receive the benefits of the head of household rate structure, the
higher earned income credit, the dependency exemption, and the child credit. If not,
that individual files as a single.
The tables indicate that both marriage penalties and bonuses persist. In the case
of families without children, however, penalties do not exist in the middle income

18 For other discussions of this issue, see Daniel Feenberg, “The Tax Treatment of Married
Couples and the 1981 Tax Law,” In Taxing the Family, Ed. Rudolph G. Penner,
Washington: American Enterprise Institute for Public Policy Research, 1983; Harvey Rosen,
“The Marriage Tax is Down But Not Out,” National Tax Journal, Vol. 40, December, 1987,
pp 567-576; Daniel R. Feenberg and Harvey S. Rosen.” Recent Developments in the
Marriage Tax.” National Tax Journal, Vol. 48, March 1995, pp. 91-101. Rosen, Harvey,
“Is It Time to Abandon Joint Filing?” National Tax Journal, Vol. 30 (December 1977):
423-428. U.S. Congressional Budget Office. For Better or for Worse: Marriage and the
Federal Income Tax. Washington, DC, June 1997.

ranges, only bonuses. In this case, singles who live together and who have uneven
incomes would see their tax rates fall if they got married. Both bonuses and penalties
exist at the lower income levels because of the earned income tax credit. If income
is evenly split, the phase out ranges are not reached as quickly for singles because
each of the partners has only half the income. If all of the income is earned by one
of the singles in the single partnership, phase out of the credit still occurs and the
individual also has a smaller standard deduction, and thus pays a higher tax. The
smaller deductions and narrower rate brackets also cause the higher tax rates through
the middle income brackets. At very high income levels, marriage penalties can also
occur. Some of the penalty is due to not doubling the rate brackets after the 15%
bracket, but more of it is due to the marriage penalties in the AMT. If there were no
AMT, tax rates for joint returns would be 17.1% and 22.8% for the $250,000 and
$500,000 incomes. The regular tax is still responsible for most of the penalty for
singles with one partner earning income: the regular rates are 20.9% and 24.1% for
the $250,000 and $500,000 incomes.
Table 3. Average Effective Income Tax Rates for Joint Returns
and Unmarried Couples, By Size of Income and Degree of Split:
Lower and Middle Incomes
(2005 Levels of Income)
Income Level for Married Couple
Type-Size $10,000 $15,000 $25,000 $50,000
No Child
Joint-2.9 0.0 3.4 8.3
Single 50/50 Split- 7.7 - 4.3 3.4 6.6
Single 100/0 Split 0.54.5 8.311.2
One Child
Joint-23.2 -17.9 -0.7 6.6
50/50 Split (One-19.9 -15.0-7.96.1
Single, One Head of
100/0 Split, Single 3.56.4 9.0 12.8
100/0 Split, Head of-23.2-
Household Return
Source: Congressional Research Service. Note that effective tax rate does not always rise across
incomes due to rounding.
Matters are more complex for families with one child. At low income levels,
and a 50/50 split, one of the singles files a single return with a very limited negative
rate because of the small earned income credit for those without children, while the
other claims a child and has a much higher negative tax rate than a married couple
because there is no phase out of benefits. The result is that there is a marriage bonus.

This eventually becomes a marriage penalty because of the favorable head of
household standard deduction and rate structure. The penalty continues through all
the incomes shown, although it eventually becomes very small at the top. A small
part of this penalty is due to the AMT at the $250,000 equivalent incomes: the rates
without the AMT for a joint return is 19.7% and the rate for the combined singles
16.8%. Eliminating the AMT would, however, widen the discrepancy between the
two at the $500,000 equivalent level: without the AMT the rates would be 23.9% for
a joint return and 21.6% for the combined singles.
Table 4. Average Effective Income Tax Rates for Joint Returns
and Unmarried Couples, By Size of Income and Degree of Split:
Higher Incomes
(2005 Levels of Income)
Income Level for Married Couple
Type $75,000 $100,000 $250,000 $500,000
No Child
Joint9.5 %11.2 %19.4 %24.8 %
Single 50/50 Split 9.5 11.2 16.7 22.4
Single 100/0 Split 14.015.5 22.4 24.8
One Child
Joint8.6 11.921.8 24.9
50/50 Split (One 8.510.4 17.6 24.2
Single, One Head of
100/0 Split, Single15.016.624.225.0
100/0 Split, Head of12.1 14.6 24.2 25.0
Household Return
Source: Congressional Research Service. Note that effective tax rate does not always rise across
incomes due to rounding.
With one of the pair earning all of the income, the results depend on whether the
partner with the income can claim the child. If that person cannot, the tax burden is
higher throughout the scale (although it reaches roughly the same level at the highest
level in part because of the AMT). The discrepancy at the $250,000 level is
increased slightly by the AMT (the regular rates are 19.7% for the joint return and
22.1% for the single). If the person with the income can claim the child, joint returns
are still favored, but not by nearly as much.
Which of these last two assumptions seems more likely depends on the
circumstances. When couples divorce, they typically move to different residences
and the most usual outcome is that the mother who typically has lower earnings
would have the child. According to the Census Bureau, 83% of children who live

with one parent live with their mother.19 In that case, the comparisons in Tables 1
and 2 would be appropriate. If the couple divorce but live together, presumably the
higher income spouse would claim the child. However, if a couple never married and
the child is only related to one parent, that person, more likely the mother and more
likely to have low income, would claim the child. If such a couple married and had
low incomes, they could obtain the earned income credit and a study of low income
families indicates that this latter effect, the bonus, is the most common effect of the
Which circumstances are more characteristic of the economy? Note first that,
although people refer to the marriage penalty for a particular family situation or the
aggregate size of the marriage penalty, it is really not possible, in many cases, to
determine the size of the penalty or bonus. The effect of assignment of a child is
demonstrated in Tables 3 and 4, but other features matter. Only when a married
couple has only earned income, no dependent children, and no itemized deductions
or other special characteristics, and only if it is assumed that their behavior would
not have been different if their marital status had been different, can one actually
measure the size of the marriage penalty or bonus. There is no way to know who
would have custody of the children and therefore which of the partners might be
eligible for head of household status and for the accompanying personal exemptions
and child credits.
There is reason to expect that unmarried individuals are penalized in the
aggregate. Prior to the 2001 tax cut, which increased bonuses and reduced penalties,
using an allocation that reflects typical behavior of married couples with respect to
child custody, the Congressional Budget Office (CBO) estimated that 37% of married
couples had penalties ($24 billion), 3% were unaffected, and 60% had bonuses ($73
billion). (Itemized deductions and earned income were assigned in proportion to
earnings). The net bonus was $49 billion.21 However, in most of its analysis, the
CBO study relied on a measure of marriage penalties and bonuses that assumed child
custody would be based on a tax-minimizing strategy. For example, if parents of two
children had similar individual earnings, each would be assumed to have custody of
one of the children so that both would be eligible for head-of-household status. Even
using that standard, net bonuses occurred: 43% of married couples had penalties
amounting to $32 billion, and 52% had bonuses of $43 billion, for a net bonuses of
$11 billion. Nevertheless, a significant proportion of married taxpayers — between

37% and 43% — paid marriage penalties.

19 U.S. Census Bureau, Table C2: Household Relationships and Living Arrangements of
Children Under 18 [http://www.census.gov/population/www/socdemo/hh-fam/cps2005.
20 See Stacy Dickert-Conlin and Scott Houser. “Taxes and Transfers: A New Look at the
Marriage Penalty.” National Tax Journal 51, June 1998, pp. 175-217.
21 These and other numbers discussed in this paragraph are from an update of a study by the
U.S. Congressional Budget Office, For Better or for Worse: Marriage and the Federal
Income Tax. Washington, DC, June 1997. These numbers were updated for 1999 in a
memorandum from Bob Williams and David Weiner of CBO dated September 18, 1998.

A study using Treasury data and other assumptions produced different measures
of the marriage bonus or penalty.22 Using an assumption that divorced parents
occupied the same residence, and thus only one could qualify for head of household
status, the authors found that 48% had a penalty ($28.3 billion) and 41% had a bonus
($26.7 billion), for a net penalty of $1.6 billion. This study also provided several
other ways of measuring penalties and bonuses, including estimating $30.2 billion
in singles penalties because these individuals could not use joint return rate
schedules. Some of the penalty applied to families with children because of the
benefits of head of household status. Without head-of-household status, the Treasury
found that 46% of couples have bonuses ($36.6 billion), 43% had penalties ($20.8
billion) and the net effect was a bonus of $15.8 billion.
Treasury researchers did a subsequent study using the standard assumption for
the effects of the 2001 tax cut and for 2004 income levels.23 As before, they
essentially found a penalty (of $3.7 billion) without the 2001 tax cut, but found a $30
billion bonus with 2004 tax law (which included explicit marriage relief provisions
and other provisions such as rate reductions). About 60% of couples have bonuses,
and 23% have penalties (while some have no effect). The study also warns that
penalties will grow substantially if the AMT continues to grow as projected.
Given the shift away from penalties and towards bonuses in 2001, it seems clear
that the current situation is characterized by bonuses rather than penalties. However,
if the AMT is allowed to grow and begins to cover many taxpayers, more significant
penalties will return.
An alternative measurement is the bonuses and penalties of single individuals
who are cohabitating, a much smaller group of people. In 2005, according to the
Census Bureau, there were 58 million married households, but only 5 million
unmarried couple households (with partners of the opposite sex).24 (There were 77
million households altogether). Thus, assuming that these households were similar
to married households, the “single penalties and bonuses” measured by looking at
unmarried cohabitating households would be about 9% of the size of “marriage
bonuses and penalties” measured by looking at married households.
A study has been made of penalties and bonuses for existing co-habiting couples
with children, which assign the children to the biological parent, or, if both partners

22 Nicholas Bull, Janet Holtzblatt, James R. Nunns, and Robert Rebelein. Assessing
Marriage Penalties and Bonuses. Proceedings of the 91st Annual Conference of the National
Tax Association, 1998, pp. 327-340. An updated version of this paper is published as Office
of Tax Analysis Paper 82, Defining and Measuring Marriage Penalties and Bonuses,
November 1999 [http://www.ustreas.gov/ota/ota82_revised.pdf].
23 Robert Gillette, Janet Holtzblatt, and Emily Y. Yin, Marriage Penalties and Bonuses: A
Longer Term, Proceeding of the National Tax Association, 2004, Washington, DC, National
Tax Association, pp. 468-478.
24 [http://www.census.gov/population/www/socdemo/hh-fam/cps2005.html]

are biological parents to the higher earner.25 This study found that under 2003 law,

42% of these couples would experience a bonus averaging $1,893 while 50.7%

would experience a penalty of $1,497. Under 2003 law, 48.5% receive an average
bonus of $2,236 and 44.1% receive a penalty of $1,513. Bonuses are actually more
prevalent in low income households because marriage often increases the earned
income credit.
In general, therefore, the rules tend to indicate that singles who are living
together are, on average, being penalized relative to married couples, but this pattern
does not hold for all circumstances.
The marriage penalty cannot be easily addressed because we cannot
simultaneously achieve three apparently desired income tax objectives: a progressive
tax, a marriage neutral tax, and equal treatment of couples with the same total
incomes, but with different income shares. Moreover, even if one were to chose
horizontal equity, the achievement of that system would require information on living
arrangements of unmarried individuals that is not available to the tax authorities.
The current system, however, appears to lean towards benefitting marriage, as long
as the AMT is contained.
The analysis of equity across families suggests that, based on an ability to pay
standard, families with children are paying lower rates of tax (or receiving larger
negative tax rates) than single individuals and married couples at lower and middle
incomes, while families with children are being taxed more heavily at higher income
levels. At the lowest income levels, the EIC provides the largest tax subsidies to
single parents with two children, followed by single parents with three children and
married couples with two children. The smallest subsidies go to childless couples,
but all families with children have much larger subsidies than either childless couples
or single individuals. At middle income levels, families with many children will
have the most favorable treatment, due to the effect of the child credit which has a
very large effect relative to tax liability. At higher income levels, large families are
penalized because the adjustments for children such as personal exemptions and child
credits are too small or are phased out, while graduated rates cause larger families
that need more income to maintain a given living standard to pay higher taxes. Tax
rates are more variable at lower income levels. At all but the lowest and very highest
income levels, singles pay higher taxes than married couples.
After the 2001 tax cut, the vast majority of taxpayers without children receive
a marriage bonus rather than a penalty, with penalties occurring only at the bottom
and at the top — the latter due largely to the AMT. The comparison of families with
children is less easily defined. Overall, marriage appears to be rewarded, but if the
AMT continues to increase its scope (as it will absent legislation) penalties will
begin to reach back in the middle income classes.

25 Elaine Maag, “Taxes and Marriage for Cohabiting Parents,” Tax Notes, May 23, 2005, p.


H.R. 3970, introduced by Chairman Rangel of the Ways and Means Committee,
includes a number of changes that would have effects on relative tax treatment of
family types. It would double the size of the earned income tax credit for single
individuals without children, which would narrow the differences between family
types at the lower income levels. It would also increase the refundability of the child
credit, benefitting lower income families with children, although the cost of that
change is smaller. It would also slightly increase the standard deduction, with
relative increases designed not to increase the marriage penalty, but which would,
based on ability to pay, favor married couples. At the higher end of the scale it
would restore phase-outs of itemized deductions, which would maintain some
uneveness across family types but also would repeal the AMT, which penalizes
families with children at higher income levels.