Earlier this week, the Obama administration released its final budget, for the 2017 fiscal year. Many of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. proposals in the budget will undoubtedly be “dead on arrival” in Congress, including the President’s proposed minimum tax on foreign earnings. However, at least one portion of the White House’s budget may present an opportunity for bipartisan compromise: its proposal to lower the tax burden on secondary earners within a married couple.
In many married couples, one spouse earns more income than the other. If the two individuals file their taxes jointly, the spouse that earns less income (the secondary earner) can face a significant work disincentive. The recent White House budget explains why:
“About 60 percent of married-couple families between the ages of 25 and 64 will include two earners in 2017. By taxing the second (lower) earner’s income based on the couple’s joint income, the second earner can face higher marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s under the progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. system based on family income and can be discouraged from working.”
Reading this quote from the Obama administration, it’s striking how similar it sounds to another recent policy document: Governor Jeb Bush’s tax plan. In the document released by the Bush campaign, we find the following passage:
“By discouraging spouses from filing separately, secondary earners face high marginal tax rates as their income is added to the primary earners’ income. This discourages secondary earners from entering the work force.”
To illustrate what the Obama administration and the Bush campaign are talking about, imagine a married couple with no children, where one spouse (the primary earner) earns $200,000 and the other spouse (the secondary earner) earns $25,000. Based on the 2016 tax brackets,
- If the couple chooses to file separately, the primary earner would likely fall into the 33 percent bracket and the secondary earner would likely fall into the 15 percent bracket.
- If the couple chooses to file jointly, both the primary earner and the secondary earner would likely fall into the 28 percent bracket.
The couple in question would likely choose to file jointly, because of the extensive tax benefits of filing jointly for two individuals with disparate incomes. However, this means that the marginal tax rate on the secondary earner would rise significantly, from 15 percent to 28 percent. Put another way: by filing jointly, the couple lowers its overall tax burden but raises the marginal tax burden on the secondary earner. Because higher marginal tax rates discourage work, the U.S. tax code tends to discourage additional work among secondary earners.
Both the Obama administration and the Bush presidential campaign have issued policy proposals to mitigate the extent to which the U.S. tax code discourages secondary earners from working.
In its most recent two budgets, the Obama administration has proposed a modest tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. for secondary earners that work, with a maximum value of $500. The value of the tax credit would increase by five cents for each additional dollar that the secondary earner makes. This means that the proposed credit would reduce marginal tax rates on secondary earners by 5 percentage points, which would lessen the work disincentives in the current tax code.
The Bush campaign has issued a much more ambitious policy proposal regarding second earners: it would allow a secondary earner to file a separate tax return, while continuing to provide the primary earner with all of the tax benefits of filing jointly. In the example above, the primary earner making $200,000 would still fall into the 28 percent bracket, and the secondary earner making $25,000 would now fall into the 15 percent bracket. In other words, the Bush proposal would completely eliminate the higher marginal tax rates on secondary earners that arise from filing jointly.
These two policy proposals are designed quite differently, but both share the ultimate aim of lowering barriers for secondary earners to work. The broad agreement between the Obama administration and the Bush campaign on this policy goal is an indication that it may be possible to garner bipartisan support for tax policy changes that lower marginal tax rates on secondary earners.Share