The U.S. Tax Penalty For Married Women Hurts Two-Career Couples

The coronavirus seems to have overtaken every aspect of our lives, from the mundane task of buying toilet paper to the very pressing question of when your spin class will resume. Now it’s even delaying your tax deadline.

That bill from Uncle Sam will come eventually, though, which means over the next few weeks — or months — Americans and their accountants will be busy trying to squeeze every last dime out of their refunds and taking stock of household expenses.

For many two-career couples, this annual budgeting exercise can become pretty dispiriting. Once you tally up the costs of nannies, daycare, commuting, dry cleaning, housekeeping, meals out and other work-related expenses, the marginal benefit of an additional salary can shrink close to zero. If one partner decides to quit, it’s the one with less potential earning power: often a wife.

It may be tempting to use this grim calculus to renew calls for subsidized childcare and more generous parental leave. But a recent staff discussion note from the International Monetary Fund found that there’s a bigger swing factor: the way we file our taxes.

Switching to a system where everyone files separately, whether or not you’re married, would lead to a 15.5 percentage point jump in women’s labor-force participation, the IMF found, compared with a 1.6 percentage point rise for instituting 18 weeks of paid maternity leave and 4.8 percentage points for halving the cost of childcare. That would amount to adding more than 20 million women to the U.S. workforce, based on back-of-the-envelope calculations.

To understand why, take a look at this striking example from Edward McCaffery, a professor at the University of Southern California Gould School of Law and author of “Taxing Women.” He’s outlined a hypothetical scenario of a family where the husband (let’s call him Joe) makes $60,000 a year and the wife (let’s call her Mary) stays home with their two kids. Mary has been offered a job for $30,000 a year. However, once you factor in federal income taxes, social security, state and local taxes, not to mention the related expenses of going back to work, Joe and Mary would end up with just a net $1,000 increase in their joint income.

This comes down to what’s called the secondary-earner bias. Mary’s first dollar doesn’t start getting taxed at $0, as Joe’s would, but rather at $60,001, because joint filers are recognized as one unit of income. Thanks to the U.S.’s progressive marginal rates, successive portions of income get taxed at higher levels — the first bracket starts at 10%, the next at 12%, the following at 22%, and so on. The system is problematic for spouses who are “on the margin” about working, as McCaffery puts it. Seen this way, it’s easy to understand why Mary would get discouraged.