Forbes magazine's recent cover story "When Work Doesn't Pay For the Middle Class" illustrates many of the issues the middle class faces regarding the unintended interactions between work, marriage and taxes. We'd also like to point out that these unintended interactions pose serious problems for an often overlooked segment of our society--the working poor.
As recently as 10 years ago, the "marriage penalty" was the exclusive province of the middle and upper classes: Two people with approximately the same incomes would pay more taxes if they married (and filed taxes jointly) than if they did not marry and filed as single taxpayers. The Bush tax cuts attempted to make tax rates "marriage-neutral"; for most middle-class taxpayers, there is now, in fact, little if any difference between filing as a married couple or as unmarried singles.
The working poor, by contrast, are in a highly undesirable position when it comes to marital status and taxes. It literally doesn't pay for working poor parents to marry. Instead, it costs them precious money in the form of lost tax credits. We researched the tax consequences in 2008 for two working poor individuals and their dependents and made some significant (some would say startling) discoveries.
A single parent earning $21,000 with two children would receive an earned income credit and child tax credit of $5,460. Say that same parent is living with, but not married to, another single parent with two children who earns the same amount. Their combined income is $42,000. Unmarried and filing their taxes separately, they would receive a total of $10,920 in earned income credits and child tax credits. If they were to marry and file jointly (listing four dependent children), they would receive only $3,400 in earned income credits and child credits. So it would cost them $7,520 to be married. To make the situation worse, this "penalty" will occur every year, adding up over time to a huge amount.
We applaud the recent efforts of Congress to eradicate or reduce the marriage penalty for those with higher levels of income, but these efforts have overlooked the most at-risk sector of our society: families headed by the working poor. Our current income tax laws create a hurdle to getting married or cause a devastating surprise when the newly married couple files their first tax return as husband and wife. In our opinion, this is unfair to the people involved and unhealthy for a society that already has many people cohabitating rather than living as husband and wife. Studies continue to indicate that one of the contributing causes of poverty, illegitimacy, crime, inadequate education and other socioeconomic problems is the absence of married, committed parents in a family.
We encourage Republican and Democratic leaders to revisit the issue, though we recognize it is a political hot potato. If you "remove" the marriage penalty by lowering the credits for single taxpayers, you invoke the wrath of those who would say you're "raising" taxes (by reducing their credits) on people who can least afford it. On the other hand, if you raise the credits for married taxpayers to the point where getting married offers the same tax result as being single, you've got a budgetary issue--where is the money to compensate for these additional credits going to come from?
Claude Renshaw is an emeritus professor of accounting at Saint Mary's College in Notre Dame, Ind. Ken Milani is a professor of accountancy at the University of Notre Dame and the director of the Vivian Harrington Gray Notre Dame-Saint Mary's College Tax Assistance Program for the South Bend, Ind., community. They co-author a tax column in the South Bend Tribune called "Tax Talk."