Taxation, Marriage, and Children

I realize that it has been a week or so since I have posted.  I have been semi-busy with classes, but now it is Spring Break and I have a little more time.  Also, I started out looking for a certain relationship between variables, but what I was looking for wasn’t there so I had to redo the whole thing.  Anyways…

The Marriage Penalty

The conventional wisdom is that the tax code is designed to encourage marriage and children.  The term ‘marriage penalty’ refers to the fact that married couples pay a higher amount in taxes than unmarried couples, even if  the spouses are making approximately the same taxable income.  That is, being ‘married filing jointly’ may result in a higher tax bill than if the same two people filed separate tax returns as if they were unmarried (i.e., filing as “single”, not “married filing separately”).  If this is true, then the tax code penalizes married couples.

But what effect does having children affect a couple’s tax bill?

Children are inferior (goods, that is)

In economics, a good is classified as an ‘inferior good’ if demand for that good goes down when an individual’s income increases.  If this relationship holds, then we would expect individuals with higher incomes to have fewer children, ceteris paribus.

This is what the research shows.  As incomes rise, people have fewer children; that is, poor people have more children than rich people.  Reasons for this may include individuals putting off marriage and childbearing until they complete their educations; the availability of contraception and abortion; the decrease in infant mortality in developed countries; a shift from a more rural population to a more urban population; and other institutional changes that have reduced the incentives for individuals to form families and keep them intact.  All of these changes have led to a decline in the number of children that couples are having in more developed countries.

This post was inspired by my discovery of the Marriage Bonus and Penalty calculator on the Tax Policy Center website.  At first glance, it seemed that the tax code penalizes married couples for having children.  If true, this would provide another incentive for married couples to avoid having children.

Taxing the production of children?

Using the Marriage Bonus and Penalty calculator, I estimated the tax impact of having children on a married couple.  I used the following scenarios:

No children

  1. A couple with $50,000 in income (both spouses work, $25,000 in income each).  The result: no marriage penalty or bonus.
  2. A couple with $50,000 in income (one working spouse).  The result: a marriage bonus of $2,321.
  3. A couple with $75,000 in income (both spouses work, $50,000 in income for one $25,000 in income for the other).  The result: a marriage bonus of $375.
  4. A couple with $75,000 in income (one working spouse).  The result: a marriage bonus of $4,821.
  5. A couple with $250,000 in income (both spouses work, one with $200,000 and one with $50,000 in income).  The result: a marriage bonus of $547.
  6. A couple with $250,000 in income (one spouse works).  The result: a marriage bonus of $11,118.

Based on these results, I can conclude that the tax code encourages marriage, at least marriages in which there is one breadwinner and one stay-at-home spouse.  But these results do not include having children, so my guess is that the stay-at-home spouse will be pretty bored.  What happens when we add children to the mix?  Each simulation assumes that all children are under 13 years of age.

One child

  1. A couple with $50,000 in income (both spouses work, $25,000 in income each).  The result: a marriage penalty of $2,450.
  2. A couple with $50,000 in income (one working spouse).  The result: a marriage bonus of $1,328.  The bonus is $3,906 if the couple are not married and the child is claimed as a dependent by the person with no income.
  3. A couple with $75,000 in income (both spouses work, $50,000 in income for one $25,000 in income for the other).  The result: a marriage penalty of $619.  The marriage penalty is $2,075 if the couple is not married and the child is claimed as a dependent by the person with the lower income.
  4. A couple with $75,000 in income (one working spouse).  The result: a marriage bonus of $2,293.  The marriage bonus is $6,406 if the couple is not married and the child is claimed as a dependent by the person with no income.
  5. A couple with $250,000 in income (both spouses work, one with $200,000 and one with $50,000 in income),one child.  The result: a marriage penalty of $784.  The marriage penalty is $1,332 if the child is claimed as a dependent by the person with the lower income.
  6. A couple with $250,000 in income (one spouse works).  The result: a marriage bonus of $10,374.

It appears that the tax code encourages marriage, especially if the non-working spouse is the one with a child.  Additionally, having one child increases the penalty if both individuals work, and reduces the marriage bonus if you are married and have a child.

Two children

  1. A couple with $50,000 in income (both spouses work, $25,000 in income each).  The result: a marriage penalty of $4,901.
  2. A couple with $50,000 in income (one working spouse).  The result: a marriage bonus of $2,913.
  3. A couple with $75,000 in income (both spouses work, $50,000 in income for one $25,000 in income for the other).  The result: a marriage penalty of $3,069.
  4. A couple with $75,000 in income (one working spouse).  The result: a marriage bonus of $3,878.
  5. A couple with $250,000 in income (both spouses work, one with $200,000 and one with $50,000 in income).  The result: a marriage penalty of $3,158.
  6. A couple with $250,000 in income (one spouse works).  The result: a marriage bonus of $10,787.

Having a second child increases the marriage penalty for couples who both work, and increases the marriage bonus if only one spouse works.

Three children

  1. A couple with $50,000 in income (both spouses work, $25,000 in income each).  The result: a marriage penalty of $6,118.
  2. A couple with $50,000 in income (one working spouse).  The result: a marriage bonus of $1,687.
  3. A couple with $75,000 in income (both spouses work, $50,000 in income for one $25,000 in income for the other).  The result: a marriage penalty of $619.
  4. A couple with $75,000 in income (one working spouse).  The result: a marriage bonus of $1,513.
  5. A couple with $250,000 in income (both spouses work, one with $200,000 and one with $50,000 in income).  The result: a marriage penalty of $519.
  6. A couple with $250,000 in income (one spouse works).  The result: a marriage bonus of $10,787.

Things change once a couple has a third child.  The marriage penalty increases for couples at the $50,000 income level, even if only one spouse works; at the same time, the marriage bonus is reduced.  At an income level of $75,000, the marriage penalty and the marriage bonus are both reduced.  For a couple with $250,000 in income, the marriage penalty is reduced while the marriage bonus is the same as when a couple has only two children.

Four children

  1. A couple with $50,000 in income (both spouses work, $25,000 in income each).  The result: a marriage penalty of $7,838.
  2. A couple with $50,000 in income (one working spouse).  The result: a marriage bonus of $4,655.
  3. A couple with $75,000 in income (both spouses work, $50,000 in income for one $25,000 in income for the other).  The result: a marriage penalty of $4,616.
  4. A couple with $75,000 in income (one working spouse).  The result: a marriage bonus of $5,073.
  5. A couple with $250,000 in income (both spouses work, one with $200,000 and one with $50,000 in income).  The result: a marriage penalty of $4,743.
  6. A couple with $250,000 in income (one spouse works).  The result: a marriage bonus of $10,787.

The results here are kind of weird.  Having a fourth child increases the marriage penalty and the marriage bonus at all income levels simulated.  If only one spouse works and earns an income of $250,000, the marriage bonus is the same as it was for the third child.  It appears that couples are penalized if they have a third child, and rewarded if they have a fourth.

Conclusions

This was not a scientific study, and I did not consult with tax attorneys or CPAs.  I also did not add in the effects of deductions for mortgage interest, student loan interest, childcare expenses, or state income taxes, all of which would change the amount of the marriage penalty or bonus.  It is possible that the tax code encourages both marriage and the production of children.

From my results, it appears that the tax code does encourage couples to marry.  If a couple has no children, then there is a marriage bonus at the levels of income that I entered into the calculator.  If a couple does have children, then the tax code appears to provide an incentive to have one parent stay in the home while the other works.

The production of a second child results in a higher marriage penalty, as well as higher marriage bonuses.  The penalty is larger for those with a lower level of income, and the bonuses are relatively larger at lower levels of income as well.

Having a third child increases the penalty at lower levels of income, and reduces the marriage bonus in the bottom two income categories; at the $250,000 income level the bonus is unchanged.

The fourth child increases both the marriage penalty and the marriage bonus, with the exception once again at the $250,000 income level where the bonus is unchanged.

These were not the results I expected when I first stumbled upon the Marriage Bonus and Penalty calculator.  I expected the tax code to punish couples for having more children, and it appears that it does (but only for the third child).

There is one more thing to consider.  The median household income in the U.S. is less than $50,000. This means that half of the income earners in the U.S. earn $50,000 or less, which happens to be the income level where there is a marriage penalty.  This is why I used examples with $50,000 as the income.  Some politicians have stated that if you make $75,000 a year you are ‘rich’ (which means that they want to tax you even more).  And, in the latest debates over raising taxes, politicians in the federal government have used $250,000 as the benchmark to determine who is ‘rich’.

So that’s where I got the income levels from, and those are the results.

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Categories: Government Shenanigans

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