December 4 2013
by Reihan Salam
Peter Orszag has a new Bloomberg View column on secondary earners:
Conservatives who worry about the ill effects of marginal tax rates on high earners rarely discuss the even higher marginal tax rates that some low- and moderate-income families face. A low-income single parent can experience a marginal rate as high as 95 percent — for each dollar earned, the person takes home only 5 cents. And for married parents, the marginal rate for the family’s secondary earner can be almost as high.
This happens mostly because various means-tested benefit programs are phased out as income increases. A secondary earner who raises the family’s income to $30,000 from $15,000, for example, will trigger a decline of about $1,500 in the family’s Earned Income Tax Credit and a drop in food stamp benefits of almost $3,000. Factor in the child-care costs necessary for the second parent to work, and the family will take home less than 40 cents of each additional dollar earned.
In fairness, many right-of-center thinkers have addressed the problem of implicit marginal tax rates, including Harvard economist Edward Glaeser, who wrote acolumn for Bloomberg View on the subject a short while ago. National Review has covered the subject on several occasions, e.g., in Oren Cass’s “The Height of the Net.” Michael Tanner and Charles Hughes of the libertarian Cato Institute take a different approach in a recently released report on the welfare-vs.-work tradeoff. They suggest that the implicit marginal tax rates created by means-tested benefits are a good reason to eliminate or sharply reduce means-tested benefits, an argument that has been embraced by many on the right. My sympathies are with Glaeser and Cass (and Eugene Steuerle) rather than with Tanner and Hughes, but there definitely has been a conversation on the right about the implicit marginal tax rates some low- and moderate-income families face. It is certainly true that “conservatives who worry about the ill effects of marginal tax rates on high earners rarely discuss the even higher marginal tax rates that some low- and moderate-income families face,” just as labor activists who worry about the ill effects of excessively low minimum wages rarely discuss other public policy issues that are far more complex and thus less easy for the general public to digest. But I’m not sure this tells us very much.
Orszag’s column introduces a new proposal from Melissa S. Kearney and Lesley J. Turner of the Hamilton Project which aims to reduce the tax burden on secondary earners. It turns out that the plight of secondary earners is a perennial theme on the right — it is frequently invoked by the conservative Independent Women’s Forum, and Kim Strassel of the Wall Street Journal called on Mitt Romney to emphasize how his tax cuts would benefit married working women. Jillian Kay Melchior of NRO has also addressed this issue earlier this year.Income-splitting, a favorite policy of social conservatives, is also motivated by the ways in which the tax code punishes joint filers. The problem with the conservative approach for advocates of high levels of public spending is that it is expensive. Moreover, while income-splitting proposals would benefit single-earner households as well as two-earner households, people on the left might be less inclined to advance the interests of full-time parents who aren’t engaged in market work. And so Kearney and Turner envision a narrowly-targeted tax credit:
We propose a secondary-earner tax deduction that would allow low- and middle-income couples to take home a greater portion of a secondary earner’s earnings. This policy would increase working low- and middle-income families’ economic security and mitigate what we label the secondary-earner penalty, which arises from the family-based nature of the progressive U.S. federal income tax system. Our baseline proposal is to allow a secondary earner within a married couple to deduct 20 percent of earnings up to $60,000; eligibility for this deduction would phase out beginning at $110,000 of family income. In addition, to keep revenue costs down and to target the proposal to families most in need of additional disposable income, our baseline proposal limits eligibility to married couples with children. Under our baseline proposal, the hypothetical family introduced above—the one headed by a primary earner making $25,000 a year with a spouse who enters the workforce also at an annual salary of $25,000 a year—would see a 4 percent increase in its disposable income.
The secondary-earner deduction can be easily implemented within the existing tax code. The changes are transparent and do not substantially add to the complexity of the system; they do impact federal government tax revenues, however. We simulate that the implementation of the secondary-earner deduction, according to our baseline stipulations, would lead to an estimated annual $8.2 billion reduction in federal tax revenue. The benefit side includes an increase in resources of $13.4 billion to families with combined income of $130,000 or less. This has a benefit-to-cost ratio of 1.6. We also provide a (nearly) revenue-neutral policy option that proposes to offset the cost of the secondary-earner deduction by scaling back the allowance of the spousal exemption—equal to about $4,000— for all married-couple families.
We justify the secondary-earner deduction on both fairness and economic grounds. First, a married couple that brings in a certain income with two full-time earners has fewer resources available than does a married couple that brings in the same income with only one earning spouse. This discrepancy is heightened if there are children in the home because the nonearning spouse has more time to devote to household chores and child care. The current federal income tax system does not acknowledge this discrepancy in resources between households with one earning spouse and those with two earning spouses. 2 Our proposal would move the federal income tax system toward a more equitable treatment of two-earner married couples relative to single-earner married couples.
Kearney and Turner’s proposal addresses an important issue. But because it is focused on married couples with children, one wonders if an expanded child credit might be a more straightforward solution. Robert Stein’s family-friendly tax reform proposal also creates a two-bracket system:
The rates should be set at 15% and 35%, and the width of the 15% bracket should be twice the size for married couples as for singles.
Setting the 15 percent bracket at twice the size for married couples as for singles would tend to limit the secondary earner penalty, though it would also benefit single-earner households, which is something at least some policymakers are determined not to do.
In their conclusion, Kearney and Turner observe that “few tax-related benefits target two-earner low-income families.” It is worth noting that there are relatively few two-earner low-income families. According to 2011 Census data, the median household income for households with no earners was $20,000 in 2010 as opposed to $40,000 for households with one earner, $80,000 for households with two earners, and $100,000 for households with three or more earners. This isn’t to suggest that we shouldn’t do more to help these households, but it is worthy of note. One wonders if two-earner low-income households tend to be relatively young.
P.S. I should stress that one reason for aiding low- to moderate-income two-earner households and not single-earner households is that single-earner households are able to specialize in ways that generate cost savings, e.g., when one spouse specializes in child-rearing and the other specializes in market work, there is less of a need to finance child care. It’s not clear to me that we shouldn’t be neutral across different divisions of labor, particularly since the same family might choose different divisions of labor over time.