The earned income tax credit and marriage penalties: Does a childless worker expansion make them worse?

Key Points

• The earned income tax credit (EITC) is an effective tool to reduce poverty, but it penalizes marriage. Existing research primarily relies on hypothetical situations to document EITC marriage penalties, with little empirical work exploring penalties based on real-life situations.
• This paper analyzes survey data from low-income parents with young children in urban areas and finds that EITC marriage penalties are more prevalent and larger than marriage bonuses. Expanding the childless worker EITC, as some have proposed, would worsen marriage penalties but by fairly small amounts.
• If enacted, policymakers should at least match the childless worker EITC expansion with a married family expansion and consider additional steps to reduce the overall EITC marriage penalty.

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The earned income tax credit (EITC) is one of the largest government transfers for low-income families in the United States. In tax year 2013, $68.1 billion was distributed to more than 28 million tax filers.[1] As an antipoverty tool, the program has proved quite effective. The EITC lifted more than six million people out of poverty in 2014.[2]

However, a frequently cited concern about the EITC is that it penalizes marriage. Because of its structure, some low-income couples who share a child can receive a much larger benefit if they are unmarried than if they were to marry. As a result, efforts to reduce the EITC marriage penalty have been incorporated into the federal income tax code since 2002, with the most recent expansion in 2009.

Existing research suggests that concerns about marriage penalties in the EITC may be overly cautious, but more empirical work is needed to identify whether penalties exist when actual—rather than hypothetical—situations are considered. In addition, with proposals to expand the childless worker EITC gaining attention, a better understanding of how an expansion might affect marriage penalties is important. This paper analyzes survey data from a cohort of unmarried parents with young children in urban areas to assess the extent to which EITC marriage penalties are real and the implications of increasing the childless worker EITC for potential marriage penalties.

Background on Marriage Penalties in the EITC

The benefits of marriage for children are well documented. Married households tend to have higher incomes than unmarried households, and this income advantage is associated with better outcomes for children.[3] However, even when controlling for income, children in married families do better. A comprehensive review of the literature in the Annual Review of Sociology in 2013 concluded a causal link between children growing up without a father and adult mental health problems, lower high school graduation rates, and more child social adjustment problems.[4]

Yet, according to the Pew Research Center, more than one-third of children lived with a single parent or with unmarried, cohabitating parents in 2013.[5] This is almost two times the rate of children living outside of marriage in 1980 and four times that of 1960.[6] Because the benefits of marriage are clear, reversing these trends should be an important public policy objective. Reducing marriage penalties in social welfare programs may be part of the solution.[7]

It is no secret that the United States federal income tax system treats married couples differently than unmarried couples, even when they share children.[8] In some ways, the income tax system is more favorable to married couples than unmarried couples, but in other ways it penalizes marriage. The EITC is often cited as a tax expenditure that penalizes marriage.[9]

The EITC provides a refundable tax credit based on the earnings of a tax filing unit. The credit phases in and out at different earnings levels and is more generous for families with children. Married families must file a joint tax return to be eligible for the EITC, and combined spousal income is used to calculate the credit, whereas the earnings of unmarried parents are considered separately in calculating the EITC. Recognizing that this penalizes marriage, Congress changed the EITC in 2002 so it phases out more gradually at higher income levels for married couples, which partially offsets but does not eliminate the penalty.

A childless worker EITC is also available to workers who do not have a resident child. It is much smaller than the family EITC and phases out at lower earnings levels. But it means that unmarried parents can receive both the family EITC and the childless worker EITC depending on the earnings of each parent, whereas married parents cannot.

Proposals to expand the childless worker EITC have received attention in recent years as a way to shore up low wages for workers without dependent children. Most recently, versions of an expansion were included in President Barack Obama’s Fiscal Year 2016 Budget and in House Ways and Means Committee Chairman Paul Ryan’s antipoverty blueprint, which roughly doubles the EITC for childless workers and extends it to higher income levels. While certainly not the goal, the implication of the proposed expansion is that it will likely increase the marriage penalty.

Research has shown that the EITC’s structure can both penalize and subsidize marriage. Unmarried couples who earn similar incomes likely face an EITC penalty if they were to marry. But unmarried couples with disparate incomes might get an EITC bonus for marrying because of the more gradual phase out at higher income levels for married families.

In examining hypothetical situations, Kyle Pomerleau of the Tax Foundation found in 2015 that low-income couples with similar incomes who marry can face tax penalties of up to 12 percent of their income, largely driven by EITC penalties.[10] But couples in which only one person works or one person earns much more than the other can face marriage tax bonuses of up to 20 percent of their income.[11] Others have similarly explored hypothetical EITC marriage penalties based on different income scenarios, typically finding that penalties can be quite substantial.[12]

While marriage penalties based on hypothetical scenarios are helpful to know, better estimates of marriage penalties for real low-income families are also important. In 2005 Gregory Acs and Elaine Maag from the Urban Institute used data from the 2002 National Survey of the American Family to examine unmarried, cohabitating couples. They found that more low-income couples (couples who are under 200 percent of the federal poverty level) would receive tax bonuses if they were to marry than would be penalized, because many couples only had one earner.[13] Although their research examined the tax and transfer system as a whole and not just the EITC, it included marriage penalties and bonuses associated with the EITC. The results suggested that concerns about EITC marriage penalties based on hypothetical scenarios may be overly cautious.

Adding to the debate over the importance of EITC marriage penalties is the extent to which couples actually factor tax benefits or penalties into their decisions around marriage. Qualitative research by Laura Tach and Sarah Halpern-Meekin in 2014 suggested that penalties associated with the EITC factor little into decisions around marriage.[14] Of the individuals they interviewed, few identified the EITC as a reason to marry or stay unmarried, with many citing the idea that the EITC might influence marriage decisions as impractical. However, many identified ways that they manipulate their tax filings to maximize their refunds, suggesting that they are aware of how marriage affects their taxes.

Conversely, Hayley Fisher in 2011 examined the impact of the tax system (not just the EITC) on marriage using data from the Current Population Survey and found that marriage penalties decreased the probability of marriage among cohabitating couples and that low-educated workers were most affected.[15] This suggests that decisions around marriage might well be influenced by the tax system.

But the existing research is far from conclusive. The Acs and Maag study did not focus exclusively on the EITC, and it included only cohabitating couples because it argued that cohabitating couples are more likely to marry than unmarried parents not living together. The authors also included couples with children of different ages. But understanding the EITC marriage penalty for noncohabitating parents and understanding the dynamics of the EITC marriage penalty early after the birth of a child may also be important.

For these reasons, this study explores how the EITC marriage penalty may affect the finances of low-income couples based on their actual reported earnings rather than hypothetical situations. Although this exercise remains speculative, it provides a more complete picture of how marriage penalties associated with the EITC might affect actual low-income parents.

In addition, this study makes two additional contributions to the existing literature. First, it factors in changes to the EITC since 2009 that have reduced the marriage penalty, even though these provisions are set to expire in 2017 unless Congress acts.[16] Second, this study explores implications of the proposed EITC expansion for workers without qualifying children (known as childless workers) on the marriage penalty. These expansion efforts might increase marriage penalties at the same time as provisions to reduce marriage penalties are expiring.

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Notes 

1. US Treasury, Internal Revenue Service, “SOI Tax Stats: Individual Statistical Tables by Size of Adjusted Gross Income,” http://ift.tt/1Kam1ns.
2. Kathleen Short, “The Supplemental Poverty Measure: 2014,” US Census Bureau, 2015.
3. Paul Amato, “The Impact of Family Formation Change on the Cognitive, Social, and Emotional Well-Being of the Next Generation,” Future of Children 15, no. 2 (2005).
4. Sara McLanahan, Laura Tach, and Daniel Schneider, “The Causal Effects of Father Absence,” Annual Review of Sociology 38 (2013): 399–427.
5. Gretchen Livingston, “Less Than Half of US Kids Today Live in a ‘Traditional’ Family,” Pew Research Fact Tank, December 22, 2014, http://pewrsr.ch/1zW782T.
6. Ibid.
7. Douglas Besharov and Neil Gilbert, Marriage Penalties in the Modern Social Welfare State, R Street Policy Study no. 40 (2015), http://ift.tt/1OawK3b.
8. Congressional Budget Office, For Better or for Worse: Marriage and the Federal Income Tax, June 1997, http://ift.tt/1QxqUKm.
9. Hayley Fisher, “Marriage Penalties, Marriage, and Cohabitation” (working paper, University of Sydney Economic Policy, 2011–12), http://ift.tt/1O5jYlj.
10. Kyle Pomerleau, “Understanding the Marriage Penalty and Marriage Bonus,” Tax Foundation Fiscal Fact no. 464 (April 2015), http://ift.tt/1QxqUKo.
11. Ibid.
12. See Besharov and Gilbert, Marriage Penalties in the Modern Social Welfare State; and Elaine Maag and Gregory Acs, The Financial Consequences of Marriage for Cohabitating Couples with Children, Urban Institute, September 2015, http://ift.tt/1O5jYll.
13. Gregory Acs and Elaine Maag, “Irreconcilable Differences: The Conflict between Marriage Promotion Initiatives for Cohabiting Couples with Children and Marriage Penalties in Tax and Transfer Programs,” Urban Institute, New Federalism Series B, no. B-66, April 2005.
14. Laura Tach and Sarah Meekin-Halpern, “Tax Code Knowledge and Behavioral Responses among EITC Recipients, Policy Insights from Qualitative Data,” Journal of Policy Analysis and Management 33, no. 2 (2014): 413–39.
15. Fisher, “Marriage Penalties, Marriage, and Cohabitation.”
16. Tax Policy Center, “EITC Historical Parameters,” http://ift.tt/1OBWbIL.

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