Better Life Lab

The Hidden Ways the Tax Code Hurts Women

Photo illustration by Lisa Larson-Walker

For months, Americans not-so-patiently waited for the grand unveiling of the Republican solution to our tax woes. The GOP’s not-so-modestly titled “Unified Framework for Fixing Our Broken Tax Code”  promises to cut corporate taxes and charge low-income and working-class families even more. We’ll learn more of the details on exactly how later this week. No one, however, expects the proposal to address the marriage penalty, an effect of joint filing, and a looming and long-standing problem with our current income tax code that particularly disadvantages working women.

Our tax system is a relic of 1948, when the system of joint filing for married couples began. It benefits an ideal of the family that was rarer than we think even back then: the (straight) breadwinner-homemaker nuclear married family. A 1947 study on the congressional record predicted that “only about one in ten families would benefit from joint filing.” Researchers suggest Congress agreed to joint filing less out of a desire to save couples money and more because, “After World War II, Congress wanted women to relinquish their jobs so those jobs could be filled by soldiers returning home.” Unlike in 1948 when this system was created, there is now nearly double the number of dual-income to single-earner marriages.

For most economists, the marriage penalty describes the effect of joint filing on low-income couples who get bumped into a higher tax bracket and lose important low-income benefits (this is also true but less devastating for high-income and equal-earning couples). But married women up and down the income ladder are unknowingly dealing with yet another tax specter when they get married: secondary earner bias.

Since the U.S. taxes families as a unit (rather than taxing individuals), the tax rate for the second earner, typically (due to the gender wage gap) a woman, is set at her partner’s top marginal tax rate, much higher than it would be if she were a single filer (calculate your rate here). In other words, if a woman has a partner earning $50,000 a year, the very first dollar she earns is taxed as though it were her 50,001st dollar. As in all things tax code, how the penalty works for various kinds of couples is complicated, and what you see after you figure in deductions can sometimes mask the effects of the secondary earner bias, but the penalty is particularly hard on households where partners earn roughly the same amount of money.

“How do people respond to those incentives? Poor people don’t marry, rich people have a stay at home spouse, and people in the middle swim upstream,” says University of Southern California professor of law, economics, and political science Edward McCaffery, author of Taxing Women.

Any tax policy faces a conundrum between two kinds of equity: neutral, which says all people should be taxed the same, regardless of whether they are married or single, or whether they should be taxed differently based on their “ability to pay.” The tax code currently assumes that if someone has a partner earning a greater income than themselves, they are better able to pay a higher rate of taxes. But this doesn’t account for the cost of child and elder care that many dual-earner couples are paying so they can both work.

Women and men earn roughly the same until they have children. At that point, growth in the pay gap is attributed to women entering more flexible and lower paid (or part-time) work environments so they can take on more caregiving. The marriage penalty for the second earner may be just one more reason for women to stop working or reduce their hours. Additionally, according to Harvard economist Claudia Goldin, “Getting rid of the marriage penalty could serve to increase participation rates for women at the top and decrease the wage gap.” This marriage penalty tends to hurt you worse if you work in high-paying jobs, since your top marginal tax rate is higher, as is the likelihood you’re married to another high earner. People don’t know this is happening, but it’s one of a series of issues faced when people get married, have kids, and realize it’s not worth it to work. The secondary earner penalty compounds with other issues to drive women from the workforce or at least into lower paying, more flexible jobs, even if they don’t know it’s there or understand how it’s hurting them.

One simple solution to tackling this problem could be having the U.S. revert back to taxing labor individually (simplifying the current six statuses), as it did at the beginning of the 20th century, so that the second earner isn’t penalized for working. This is, in fact, how most advanced economies tax workers.

In 1971, Sweden moved from joint to individual labor taxation. In studying the implications of this tax reform over time, Hakan Selin, associate professor at the Institute for Evaluation of Labour Market and Education Policy, found that women’s labor force participation grew significantly after the 1971 reforms, especially among women with high-earning husbands. “If you want to increase female labor force participation, individual taxation is a good thing,” says Selin. There’s more good news about this: By increasing the labor participation of women, tax revenue is also likely to increase, even though the tax contributions of a number of U.S. workers currently being penalized would drop. Individual taxation would not only be fair but fiscally responsible.

Politically, however, this may not be feasible. Individual taxation is “the most pro-woman thing to do, but a nonstarter, because it would hurt the one-earner family,” says McCaffrey. Since it seems unlikely we will find the political will to end incentives for more traditional families in U.S. financial policy (especially under the current Republican majority), there are other approaches that could help at the margins. Other groups have proposed tax deductions for low-income families who are worst affected by the penalty, and universal secondary-earner deductions would both help make the code fairer and allow couples to keep more of the secondary earner’s income.

The biggest roadblock to fixing the system is that most people don’t even know it’s broken—or at least in which particular ways it’s broken. Kimberly Palmer, a personal finance writer at NerdWallet and author of Smart Mom, Rich Mom, admits: “When we got married, it was around the time of a lot of other things impacting our taxes: buying a house and having kids. It was hard to isolate those changes. Taxes are so confusing that not even we had a clear understanding of what was going on.”

Unlike most Americans, Verenda Smith understands the tax code. That’s because she analyzes tax policies for a living as the deputy director of Federation of Tax Administrators. So when she and her husband considered divorce 20 years ago, the tax code was something that factored in. “I’d been married 14 or 15 years. Because we earned roughly the same income, and faced a marriage penalty, one of my first thoughts was that we have to get this [divorce] done by the end of the year.”

Smith’s divorce was finalized Nov. 30, 1998, and she calculates it saved her $1,500 in income taxes the next year. “It gave me something positive to work toward,” Smith said.

Introducing secondary-earner deductions or abolishing joint filing altogether would go a long way to fixing a system that, whether they realize it or not, makes no sense for the majority of American families today and adds one more obstacle to women gaining economic equality.