When the new tax bill is signed by President Obama, Americans at both ends of the income scale will find it more advantageous to stay single than to marry.
And women will face greater incentives to leave the workforce.
For low- and middle-income women, the culprit is the renewed extension of unemployment insurance, as well as the Affordable Care Act subsidies for health insurance that will phase out at 400% of the poverty line in 2014. These subsidies will be initially based on tax returns filed in April 2013.
For some married upper-income professional women, its the new tax law, with its top tax rate of 39.6% that begins at $400,000 for singles and $450,000 for couples.
With the new Affordable Care Act tax of 0.9% on earned income (3.8% on income from capital), and the phaseout of personal exemptions and itemized deductions, this brings the top individual federal tax rate to around 42%. Add 5% to 10% in state taxes, and the rate is over 50%.
The penalty is greatest for women in urban high-cost areas such as New York and Los Angeles who have invested the most in their education, hoping to shatter the glass ceiling and compete with men. The tax discourages married women not just from working, but also from seeking the next promotion and from pursuing upwardly-mobile careers.
Far more people will be affected by the marriage penalty at the bottom of the income scale, caused by the phaseout of benefits such as unemployment insurance, food stamps, the earned income tax credit, and the child credit. This is vital because over 70% of poor families with children are headed by single parents.
Urban Institute fellow Eugene Steuerle has shown that disincentives to marriage among the poor and middle classes are linked to phaseouts of multiple benefits, including Medicaid benefits for the disabled. Read the testimony of Eugene Steuerle.
University of Chicago economics professor Casey B. Mulligan, in "The Redistribution Recession: How Labor Market Distortions Contracted the Economy," shows how increases in benefits since 2007, such as unemployment insurance and the Supplemental Nutritional Assistance Program (formerly food stamps), have discouraged people from working by imposing high tax rates when the benefits phase out.
Mulligan suggests that federal benefits have contributed to a decline in the labor force participation rate. The ratio of people with jobs or looking for them to the population of working age (now 63.6%) peaked in 2000 and then gradually declined about one percentage point until 2007. Since 2007, when benefits were increased, the ratio declined by almost three percentage points. New data will be published on Friday by the Department of Labor.
What is troubling is that as the economy gradually improves, the labor force as a percentage of the population is shrinking. With the population aging and a smaller share of younger workers, this trend will lead to steadily higher federal and state tax burdens on the young, even if Congress reduces taxes and modifies Social Security and Medicare benefits for future retirees.
In addition, come Jan. 1, 2014, lower-income individuals will be affected by the interaction between government-provided health insurance credits and the poverty line.
Health insurance premium credits in the new law are linked not directly to income, but to the poverty line, resulting in a particularly steep marriage penalty for low-income Americans. With $11,170 as the poverty line for one person and an additional $3,960 for a spouse, marriage means less government help with health insurance. Since the new qualified benefit health plans offered in the health exchanges wont come cheap — no limits on lifetime maximum payouts and no copayments for preventive services will drive up prices — getting government help with the premiums will become vital.
The Affordable Care Act will offer refundable, advance premium credits to singles and families with incomes between 133% and 400% of the federal poverty line. These credits can only be used to buy health insurance through the new health exchanges. The credits are structured so that health insurance premium contributions are limited to the following percentages of income for specified income levels, as is shown in the table.
In addition to the premium credits, under the new law the government also gives cost-sharing subsidies to singles and to families. These subsidies reduce amounts that people pay for health insurance.
Since premium credits and cost subsidies are calculated with reference to the federal poverty line, there exists every incentive not necessarily to have as low income as possible, but to be on the lowest possible poverty line. In that way, the government pays a higher share of health insurance.
Department of Health and Human Services poverty guidelines for 2012 (see table) show that one person earning $11,170, or two married people earning $15,130, are at 100% of the poverty line. Moving up the income scale, a single earning $44,680 and a married couple earning $60,520 would be at 400% of the poverty line.
Two singles would each be able to earn $44,000 and still receive help to purchase health insurance, but if they got married and combined their earnings to $88,000, they would be far above the limit. As a married couple, the most they could earn and still get government help with health insurance premiums is $60,000, a difference of $28,000, or 32%. This is a substantial disincentive to getting married, or to working while married.
Such marriage penalties exist even for those couples who earn below 400% of the poverty line when married. Lets look at the example of Jack and Jill.
Living alone, each earns $22,340, putting them at 200% of the federal poverty guideline. Unmarried, their premium would be about 6.3% of their income, or $1,407 each, $2,814 in total. If they were to marry, their combined income would be $44,680 — approximately 300% of the poverty line for a family of two.
This would push their premium close to the 9.5% bracket, or $4,244 of their combined income. The temptation would be either not to marry, or, if married, to work fewer hours.
The penalty extends also to single mothers. Say Sally is a single mother earning $45,390, putting her and her baby at 300% of the poverty line. They would be eligible for the health insurance premium assistance credit.
But what if she wants to marry Sam, the father of her child, who earns $44,680, and is at 400% of the federal poverty line? Their total earnings, at $90,070, would exceed the 400% poverty line for a family of three ($76,360).
Married, the parents would no longer receive help with health insurance premiums, despite both earning the credit when unmarried. In order to keep her government health insurance benefit, Sally could only marry someone earning less than $30,000.
Women are more affected by the marriage penalty than men because they have a greater tendency to move in and out of the labor force, depending on the ages of their children. The majority of American women, married and single, have children, and many take time out of the workforce at some point to look after them.
Reasonable people might expect the tax code to encourage marriage. Yet the tax code is going in the opposite direction.
Original Source: http://www.marketwatch.com/story/higher-taxes-penalize-working-wives-2013-01-04