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Outdated Tax Code Gives Some Working Spouses A Bad Deal

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Women today are nearly half the workforce, and two-income couples are the norm. But the U.S. tax code? It's straight out of Ozzie and Harriet.

When it comes to paying taxes, economists say a lot of secondary wage-earners are getting a raw deal. It's called the marriage penalty.

"The system was never designed to penalize working spouses," says Melissa Kearney, director of the Hamilton Project at The Brookings Institution. "It was just designed in a different era."

That era was 1948, when the U.S. began pooling the income of husbands and wives, Kearney says. It works great if one spouse stays home. A couple can drop to a lower tax bracket for a marriage bonus — or, as one legal analyst calls it, "aid for affluent husband care."

But Kearney says two working spouses pay a steep price. Imagine a well-paid husband in the highest tax bracket.

"As soon as the wife goes to work, her first dollar of earnings is taxed at our highest marginal tax rate," she says. "So some lawyers have referred to this as really a tax on women."

Kearney says the system ignores the extra cost of transportation and childcare when both parents work.

"I think are a lot of higher educated women who are making these calculations and realizing it would actually cost their family money if they went to work," she says. "The problem is, a lot of these women will eventually want to return to the workforce, and they will do so at a lower wage profile."

The impact on low-wage families can be even harsher. Kearney calculates a working spouse could bring in just 30 cents on the dollar.

Pooling spousal income also means another kind of marriage penalty. Take low-wage workers thinking about tying the knot.

"They're hesitant to marry because they realize that they would experience a significant financial hit by doing so," says Brad Wilcox, director of the National Marriage Project at the University of Virginia.

He says a low-wage single mother who marries someone with a job may no longer qualify for food assistance, or the Earned Income Tax Credit. Same with the many pregnant woman who qualify for Medicaid.

"You realize that if you get married and factor in the income of both parties, that might disqualify you for Medicaid coverage," Wilcox says. "If you have a baby — you know how expensive babies are when it comes to a birth."

"Many struggling, two-earner families today end up taking home a smaller percentage of their paycheck than many of the wealthiest households in America do," says Sen. Patty Murray, D-Wash.

Murray introduced legislation last month to ease the marriage penalty by letting low- and middle-wage couples deduct 20 percent from the second earner's income when they file taxes.

"A mom or dad who goes back in the workforce and brings home an extra, say, $25,000, would get a $5,000," she says. "That means $1,250 back in their pocket for groceries, or child care, or transportation, or retirement savings."

Of course, all this would have to be paid for, and Murray's bill is not likely to pass in a divided Congress.

Alternately, the U.S. could fix the marriage penalty by doing what most other developed countries do: tax each spouse individually. Wilcox doesn't like that idea, however.

"We think about marriage as a kind of sharing of life, of love and of money," he says. Pooling income and taxes, he says, shows spouses are in it together, for better or worse. Copyright 2014 NPR. To see more, visit http://www.npr.org/.

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