Marriage Penalty Tax
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RAY SUAREZ: Joining me now to talk more about the marriage penalty and other tax cuts on the agenda in this political year are Diana Furchtgott-Roth, resident fellow at the American Enterprise Institute, and Max Sawicky, an economist at the Economic policy Institute. Well, Diana Furchtgott-Roth…
DIANA FURCHTGOTT-ROTH, American Enterprise Institute: Yes.
RAY SUAREZ: When you go in to fix something like the marriage penalty, which by all accounts is an unintended quirk of the way the brackets were structured, can you go in there and perform that kind of delicate surgery in just fix that, or do you end up having almost inevitably other unintended consequences?
DIANA FURCHTGOTT-ROTH: Well, you can actually go in and fix the problem, which is that when two single people who earn money get married, they end up paying more after they get married than they did before, and that’s a serious moral and social problem today. And in the proposed Republican bill, the one that just passed, yes, that fixes that problem, indeed. And what they’ve done is they’ve doubled the exemptions. They’ve increased the 15 percent bracket so it’s twice the amount for married couples as for singles. They have done the same with the 28 percent bracket. And that’s going to fix that particular problem.
What it does, an unintended consequence of that, is that it gives a bigger tax cut to married couples where there’s just one earner. It gives an added marriage bonus to stay-at-home moms, but give that we see so many problems with children today that a lot of parents would really like to spend more time at home, I think there’s nothing really wrong socially with doing that, and it’s better to err on the side in these days of surpluses of too much tax relief than too little tax relief for couples.
RAY SUAREZ: Well, the fastest growing component of American households are households that consistent of one person. Is there a possibility that they’re going to say, hey, wait a minute, where’s mine?
DIANA FURCHTGOTT-ROTH: Sure, sure, they are, but one of the reasons is that here we have a big marriage penalty, and a lot of these single people just don’t find it advantageous to get married. And if they were to — because they see if they were to get married, their tax bill is going to go up. And so this marriage penalty tax relief, this bill that was just passed, is going to encouraging them — it’s going to take away the disincentive for getting married. And so that’s going to help with that.
RAY SUAREZ: Max Sawicky, is this a bill that looks like good policy to you?
MAX SAWICKY, Economic Policy Institute: No, I think it’s bad policy on a number of counts. It spends money, much of the resources in the bill go to families who face no marriage penalty presently. In fact, almost half of married couples in the tax code have something analogous to a marriage bonus. Their taxes are lower by virtue of having married. So we have a lot of money going for people that had no marriage penalty to begin with. Secondly, the way they fix this, there are many ways to fix the marriage penalty if that’s what you set out to do. The way they fix this confers benefits on low-income families in the neighborhood of $100 or $200 or $300. And as you go up the income scale, the benefits increase a great deal.
DIANA FURCHTGOTT-ROTH: But that’s because they pay more taxes. These people pay more taxes.
MAX SAWICKY: Well, they pay more income tax, but of course, low-income families pay payroll taxes as well, and it would be eminently feasible in the income tax to provide relief, recognizing the fact that families pay payroll tax. Most, many families pay more payroll tax than income tax. By expanding the earned income tax credit and, as I’ve proposed in a paper with Robert Cherry of Brooklyn College, merging that with the child credit and the dependent exception, it would be possible to provide relief to low-income families who work with children and also reduce marriage penalties for those income level families where in fact marriage penalties are greatest in the tax load. They’re much higher in percentage terms for people in the earned income tax credit program who pay taxes, whether it’s payroll taxes or income taxes, than marriage penalties are in percentage terms for high-income or even middle-income people.
DIANA FURCHTGOTT-ROTH: But the Senate bill does just that. It increases the earned income credit by two and a half thousand dollars on the top and two and a half thousand dollars on the bottom.
MAX SAWICKY: No. But, it doesn’t eliminate marriage penalties for earned income tax credit people.
DIANA FURCHTGOTT-ROTH: As long as -
MAX SAWICKY: It’s a very minor change.
DIANA FURCHTGOTT-ROTH: As long as we have any kind of welfare programs, as long as we have any programs for people at the bottom, we’re going to have some kind of penalty as these people grow out of them and become better off.
MAX SAWICKY: The question is how much resources they put to fixing that problem, and the answer is very little, and how much resources in the tax bill go to high-income, relatively speaking, couples. And the answer is the vast bulk of resources in this tax bill go to high-income couples, whether they had a marriage penalty or not. So this really isn’t about marriage, it’s about an early Christmas present to the Republican electorate.
RAY SUAREZ: Well, as we saw in the -
DIANA FURCHTGOTT-ROTH: They pay most of the taxes. I mean, the top 50 percent of tax filers pay about 90 percent of the taxes. So any tax cut we’re going to get gives most of the tax benefit to the upper income.
MAX SAWICKY: It doesn’t have to be that way because they pay payroll taxes too, and the base for the earned income tax credit, namely earnings, is exactly the base for the payroll tax. So by expanding the earned income tax credit in a nontrivial way, it’s possible to defray more of payroll taxes, which is what low-income people pay to a much greater extent than the personal income tax.
DIANA FURCHTGOTT-ROTH: Excuse me, Max, but expanding it by two and a half thousand dollars on the top and on the bottom is nontrivial.
MAX SAWICKY: Not to me. No. I think it’s very minor.
RAY SUAREZ: Let’s turn to the estate tax, which is another thing that’s been on the Congress’ plate in recent weeks. The way that they are proposing to change the tax strikes a lot of people who are watching the political goings on as sort of fair and also very simple to understand. Max Sawicky, you a problem with that?
MAX SAWICKY: Yeah, there’s all kinds of reasons to retain some kind of estate and gift tax. The one we have now could be repaired in a variety of ways, but basically we have a situation now in the income tax where it’s possible for much income in the form of capital gains to not be taxed under the income tax. Now, in the bill that was passed, there is some provision to capture that income after a person dies but as some economists wrote in a paper out of the Brookings Institution, Joel Slimrod and William Gail, it’s very likely that that provision is a bait-and-switch procedure because it will be so hard to implement. Basically it requires an heir to have records of assets purchased by the person that bequeathed them to that heir, and that could have been a long time ago. It could be very complicated and cumbersome and difficult to administer. So arguably this feature of the bill that was passed will fall out of the law when it becomes impossible to implement and will end up with no estate and gift tax — and no tax on the basic source of income that helps people get really rich in the U.S.: capital gains.
RAY SUAREZ: Diana Furchtgott-Roth.
DIANA FURCHTGOTT-ROTH: Well, I think estate tax is grave robbery. It’s grave robbery. These people have paid taxes on the money. This is a wealth tax. It’s money that’s already been taxed. It’s been taxed once.
MAX SAWICKY: What about capital gains that haven’t been taxed during a person’s lifetime?
DIANA FURCHTGOTT-ROTH: These capital gains, if the person were to sell it, they would pay capital gains.
MAX SAWICKY: But if they don’t sell, there’s a step up, namely, the cost is adjusted, so there’s no tax.
RAY SUAREZ: If you do have a portfolio of investments and you die before you sell them realizing the profits, does somebody pay a tax on it if you reduce or eliminate the estate tax?
DIANA FURCHTGOTT-ROTH: No, no, no. The situation would be that if people have stocks that they leave to their heirs, there is, as Max pointed out, the provision in the bill that would have the step up in basis. Now, Max is saying, “Well, in practice this wouldn’t be workable because they wouldn’t put it in,” but the estate tax repeal bill has made a provision for that.
RAY SUAREZ: Help me understand this.
DIANA FURCHTGOTT-ROTH: — what Max is saying – or as you might right now -
RAY SUAREZ: If you held this portfolio, various things, houses, land, stock, and it’s appreciated a great deal during your life, but you die before realizing this appreciation, will somebody pay a tax on it?
DIANA FURCHTGOTT-ROTH: Right now?
RAY SUAREZ: Given the versions of the plan the Republicans have put forward.
DIANA FURCHTGOTT-ROTH: Under current law, it can be passed on tax free. Under the versions passed by Congress, yes, the heirs would pay the part of the capital gains that capital gains owed on the basis of that stock. Max is just saying…
MAX SAWICKY: When they eventually sell.
DIANA FURCHTGOTT-ROTH: When they sell it.
MAX SAWICKY: If they sell.
RAY SUAREZ: But they can continue to hold it and continue to enjoy the appreciation.
MAX SAWICKY: There’s a tax advantage for capital gains.
DIANA FURCHTGOTT-ROTH: But that’s the case with everything. For example, if you’re give an house and you don’t sell it and you pass it on to your son who passes it on to his son, you wouldn’t pay capital gains on it just because you don’t sell. You don’t derive the benefit of the money either.
MAX SAWICKY: By contrast, if you have a certificate of deposit and you have a cash interest, that’s classified as what’s called ordinary income, the kind of income that ordinary folks get, and the rates for that kind of income are higher than the rates for capital gains income, which itself enjoys other types of advantage. So there’s a gross unfairness presently in the income tax in terms of the way different types of income are taxed. Repealing the estate and gift tax arguably makes that quite a bit worse. The tax system becomes less progressive, rather than staying the same at minimum or becoming more progressive.
RAY SUAREZ: Diana Furchtgott-Roth, respond to that point, that by eliminating the estate tax you favor income earned from investments over income that’s earned by just going out and working.
DIANA FURCHTGOTT-ROTH: Well, I think that income should be taxed once, but I think it’s a myth that it’s the very wealthy that pay the estate tax. If you look at the data, you can see that people who pay estate tax at the highest rate, 55 percent, are father fewer than people who pay tax at the lower rates, 39 percent, 38 percent — about 70 percent of them. Most people pay tax at the lower rates. You’re not getting the very wealthy with the estate tax — in many cases because they have lawyers and they can put their money in trusts. They can put their money in estates. It’s retired teachers, say a couple retired professors who have a house that’s worth, I don’t know, grown to $400,000 and a few retirement accounts. They’re the ones that are paying the estate tax because right now the estate tax limit is only $675,000 for everything.
RAY SUAREZ: But it’s going up to $1 million?
DIANA FURCHTGOTT-ROTH: In 2006, which is six years, yes, yes, that’s true.
MAX SAWICKY: Only $675,000. Somebody that receives that amount of money just once is by virtue of that immediately very much better off than the vast majority of people. In fact, two out of 100 estates only — only two out of 100 are taxable in the first place. Again, that study by Slimrod and Gail found that the average rate of tax, in other words, the average share of an estate one pays in tax for what they call large estates, which means estates larger than $2.5 million is actually about 19 percent. For the other estates that are taxable, it’s around 13 percent. So, in fact, the magnitude of the tax and the coverage have been grossly overstated in the public debate.
RAY SUAREZ: Max Sawicky, Diana Furchtgott-Roth, thank you both very, very much.
MAX SAWICKY: Thank you.
DIANA FURCHTGOTT-ROTH: Thank you.