On Thursday, Utah Senator Mitt Romney sent a letter, signed by him and 34 of his Republican colleagues, to Senate Majority Leader Chuck Schumer and Finance Committee Chair Ron Wyden. In the letter, he objects to marriage penalties built into the House’s reconciliation bill, marriage penalties, he claims, that are exacerbated by the changes made to the earned income tax credit (the “EITC”). He concludes his letter saying, “We believe that marriage is a vital social good. It is misguided and unfair for the government to build bigger barriers for couples to marry.”So is Sen. Romney right? Does the reconciliation bill (available here) increase marriage penalties and disincentivize marriage?
If you’ve followed my writing, or if you’re familiar with attorneys or academics, I’m sure you know my answer: yes. Kind of. Under certain circumstances. But the letter leaves out important context, both within the law and within the political process.
Before we can dig into the claim about marriage penalties and the EITC, though, we should probably figure out what exactly a marriage penalty is and why and how the EITC works. (Feel free to skip these discussions if you are already familiar with marriage penalties and/or the EITC.)
Marriage Penalties
In its simplest construction, a marriage penalty occurs when two people would pay more collectively in taxes married than they collectively pay unmarried. (I’m not going to spend time on it here, but the opposite of a marriage penalty is a marriage bonus, where two people pay less collectively in taxes married than they would unmarried; under current tax law, in most circumstances, marriage bonuses are both more likely and are higher than marriage penalties.)
How does a marriage penalty happen? Leaving aside special cases like the EITC, it happens when the tax bracket for taxpayers filing jointly aren’t at least double the size of tax brackets for unmarried taxpayers. To illustrate, we can look at some older tax brackets from the Internal Revenue Code:
So let’s say we have a couple who each earn $20,000. Under these tax brackets, if they are unmarried, each would owe taxes of $3,000, for a collective tax liability of $6,000. But if they married, they would owe $6,403. Marriage would raise their collective tax bill by $403. In other words, they face a $403 marriage penalty.
It’s worth noting that, as of the 2017 tax changes, two people would have to collectively earn more than $500,000 (adjusted for inflation) to the possibility of this type of marriage penalty to apply. And even still, in many cases, a marriage bonus remains more likely than a penalty. (These particular brackets go away as of 2026, unless Congress makes them permanent.)
EITC
The EITC is, in the words of the Congressional Research Service, “the largest need-tested antipoverty program that provides cash to families.”
The EITC was first signed into law (as a temporary measure) by Pres, Ford. It was later expanded under Pres. Reagan, who considered it “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”
While in practice the EITC is tremendously complicated, its underlying function can be described simply: it is a refundable tax credit that is measured as a percentage of an individual’s income up to a ceiling. It stays at the ceiling amount for a while and then phases out as income rises even more. (Tax credits reduce tax liability by the amount of the liability. A “refundable credit,” means that if you have less tax liability than the value of the credit, the government sends you a check.)
Essentially, the goal of the EITC is to give low-income individuals incentive to work by supplementing the amount they earn up to a maximum amount. And the phaseout is to ensure there’s no cliff effect: if you got, for instance, $1,000 up to $20,000 of income but lost the whole amount when you earned $20,001, you would not only have no incentive to earn more than $20,000, but you’d have a very powerful incentive not to make any more money.
And how much is the supplement? It depends on how many children you have. The more children (up to 3), the higher your ceiling and the higher the phaseout starts. The Congressional Research Service has a chart that illustrates this better than I could hope to:
A couple things to note here: first, the EITC already has a strong potential for a marriage penalty. The phaseout for EITC begins at a higher income level for married taxpayers than unmarried, but it isn’t double.
The second thing is, the EITC functions mostly as a benefit to low-income parents. Low-income taxpayers without children barely rise to the level of afterthought.[fn1] One child provides a maximum EITC of $3,618 and it doesn’t fully phase out until income of more than $40,000 for an unmarried individual.
By contrast, the most a taxpayer without children can receive is less than one-seventh of that amount. And an unmarried individual’s EITC is entirely gone at right around $15,000 of income.
The Reconciliation Bill
Actually, let’s start before the reconciliation bill: as part of the American Rescue Plan Act of 2021, Congress temporarily increased the credit percentage, the ceiling, and the start of the phaseout for taxpayers without children. Under these changes, Congress doubled (from 7.65% to 15.3%) the credit for which a taxpayer without children qualified. It increased the income ceiling from $4,220 to $9,820. And it increase the beginning of the phaseout from $5,280 to $11,610. In chart form, the new EITC looks like this:
The ARPA only increased the unmarried EITC for 2021, though. In the reconciliation bill, the House makes it permanent. (It also makes a couple other changes that are beyond the scope of this blog post.)
About That Marriage Penalty
In his letter, Romney claims that under 2019 law, a dual-income couple with two children in which one spouse earns $12,000 and the other earns $30,000 faced a $1,578 marriage penalty. Under the reconciliation bill, he says, they could increase their marriage penalty to $2,713. Is that true?
Honestly, I don’t know. He doesn’t show his math or his assumptions, so was going to try to recreate it as best I could using 2021 numbers. But after doing a bunch of math, I realized that the interactions between tax rates, increased refundable child tax credits, and changes to the EITC make it stunningly difficult to actually recreate his numbers without seeing his math.
So for purposes of this blog post, let’s assume he’s right and the changes increase the marriage penalty.
At this point, it’s necessary to point out that ARPA and the reconciliation bill only change the EITC as it applies to childless individuals; everything else stays the same. So to the extent it increases the marriage penalty, that’s because it is actually giving more support to individuals who don’t have children.
So What?
So does the expansion of the EITC harm society?
I mean, it’s a question of balancing. To really answer that, we’d need to know how much the marriage penalty reduces marriage rates. I’m not an empiricist or an economist, but I’m good with the Google. The largest estimate I can find is that every $1,000 additional cost may have reduce the probability of a couple marrying by as much as 2.7 percentage points for those at the lowest educational levels. If we go with Romney’s numbers, then, the increase in in the marriage penalty will reduce the probability of a couple marrying by just over 2.7 percentage points.
On the other hand, the change substantially benefits low-income individuals and couples without children. The EITC is our largest cash transfer program and it feels unseemly to largely exclude childless low-income Americans from benefiting from it.
But What If I Think Marriage and Childless People Are Important?
I’m with you! And honestly, this is largely where Romney’s letter starts to feel like political theater to me. He and his cosigners raise an issue, but they don’t offer any solutions to the issue. (Why does that feel like political theater to me? I’ll answer that in just a minute.)
It seems like there are at least two possible solutions here if you consider the marriage penalty a problem. One is to let the expanded childless EITC go away after the end of this year. But that seems like a bad solution—to ensure that people have an incentive to marry, we’re going to refuse to help people without children who need help?
The second is, we could also expand the other parts of the EITC, raising the ceiling and the threshold for the phaseout. By expanding that, we not only reduce or eliminate the marriage penalty (a good thing!), we also provide additional support to parents and children who could use that support and to childless people and families who could use that support!
But here’s the thing: the Democrats realistically couldn’t do that kind of expansion in the reconciliation bill. Why not? It has to do with Senate rules: reconciliation is a way to avoid the filibuster and pass legislation with 51, rather than 60, votes. But the Senate has rules about how much a reconciliation bill can cost. The budgetary cost of the 1-year extension of the childless EITC was pegged at $11.9 billion. Expanding the EITC for childless individuals and families and for individuals and families with children would presumably have a significantly higher price tag, one that may not fit within the reconciliation rules.
And this is why I see Romney’s letter as largely political theater: because he could do something about it. If he and his 34 Republican colleagues were willing, they could offer to pass legislation broadly expanding the EITC along the lines I sketched above. With 35 Republicans, they would only need 25 Democrats to sign on to get the 60 votes to overcome the filibuster. And if it were enacted outside of the reconciliation route, reconciliation’s budgetary considerations would be moot.
Which is to say, if Romney and his colleagues are really serious about not making the marriage penalty worse, the ball is in their court.
Thanks to frequent commenter Bro. B who brought Romney’s letter to my attention. Even though you’d think it would show up in my regular news sources, it didn’t.
Photo by Sandy Millar on Unsplash
[fn1] Actually, “without children” is not entirely true. A taxpayer who does not live with their children, who has custody for less than 6 months of the year, or who lives with certain nonbiological children is treated as childless for EITC purposes.