>>Economic Scene: Tax System Discourages Married Women From Working<<
By VIRGINIA POSTREL
The single women of "Sex and
the City" read the New York
Times wedding announcements
and mock a bride who was "until
recently" employed as an account
executive. Now that she's found an
investment banker to marry, they
scoff, she doesn't have to pretend
to be interested in her career.
These independent women are
contemptuous of such behavior.
They're looking for love, not a
meal ticket.
But maybe the new Mrs.
Investment Banker doesn't
deserve their scorn. Maybe she's
just a rational "economic woman,"
responding to incentives.
Marriage has kicked her into the
highest bracket. With federal, state
and Social Security taxes, she's
now losing about half of every
dollar she earns — starting with
the very first one. You've got to
really love your work to do it for
half price.
The Census Bureau recently said
that both spouses now work in 51
percent of married couples with
wives of childbearing age — the
first time that number has
surpassed 50 percent since the
bureau started tracking it. More
wives would work if our
progressive income tax structure
didn't sock second earners with
high marginal rates.
"There is a relationship between taxes and labor-force participation," said
Nada Eissa, an economist at the University of California at Berkeley and
the National Bureau for Economic Research. "We think it's fairly strong.
In fact, we think it's strongest for married women," who are usually the
family's secondary earners and are more likely to consider not working
outside the home.
Far more than men or single women, married women act like supply
siders. Cut their marginal tax rates, and they get jobs. Raise their taxes,
and they stay home.
By disproportionately punishing married women's work, the tax system
distorts women's personal choices. And by discouraging valuable work,
it lowers our overall standard of living.
This is a tax story you won't hear from politicians. The "marriage penalty"
debate tends to frame the issue as one of family formation: how does the
tax code affect a couple's decision to marry? But marriage isn't primarily
an economic decision.
The more pertinent question is how does the tax code affect a married
woman's decision to work? There are obvious political reasons not to
ask that. Democrats don't want to admit that soak-the-rich taxation
wallops working wives, lest they split feminists and redistributionists. And
Republicans don't want to admit that cutting taxes will lead more married
women to get jobs, lest they split economic libertarians and social
conservatives. So everyone stays mum.
But the empirical evidence is pretty clear. Tax rates are a feminist issue.
Professor Eissa has studied how the tax bite affects behavior at both
ends of the income distribution. In a 1995 paper for the National Bureau
of Economic Research, she looked at how married women responded to
the Tax Reform Act of 1986. That law created a natural experiment. It
chopped the top marginal tax rate to 28 percent, from 50 percent, but
had only a minor impact on middle-income taxpayers. That gave her an
opportunity to compare the responses of different groups of wives before
and after the change.
Before it, the women in the 99th percentile of family income (the top 1
percent) on average paid about 52 cents in taxes on the first dollar they
earned. In some states, a wife who earned less than $30,000 a year
could have paid in taxes as much as 70 cents of the first dollar she
earned.
The 1986 law flattened federal rates and, as a result, slashed the average
marginal rate faced by such wives to 38 percent. The percentage of these
married women who worked jumped from 46 percent to 55 percent —
a 19 percent increase — and those who had jobs increased their hours
13 percent.
To make sure this increase was caused by the tax change rather than
other trends, Professor Eissa compared it with the behavior of women in
the 75th percentile, who got a much smaller tax cut. Their labor force
participation and hours worked also rose, but by significantly less — a 7
percent jump in those working and a 9 percent increase in hours worked.
Since 1986, rates have become steeper, as Washington pursued
increased revenue and lost interest in supply-side incentives. "There's
been less discussion of the behavioral effects of taxation," Professor Eissa
said.
Policy makers have, however, tried to reform the incentives faced by
poor women. And here, too, Professor Eissa finds they've managed to
prejudice married women against work. The 1993 tax bill expanded the
Earned-Income Tax Credit, a subsidy that goes to the working poor and
is administered through the tax-filing system. The credit is intended partly
to counteract the discouraging effects of Social Security payroll taxes,
which hit wage earners at their first dollar.
Like the rest of the tax system, the credit's sliding scale applies to
households rather than individuals. One spouse's income is enough to
qualify for the subsidy, and the credit is phased out as total family income
increases. So if a husband earned $11,650 in 1997, his family of four got
$3,656 from the earned-income credit, assuming his wife did not work.
For every dollar she earned, the credit was reduced 21 cents — in
effect, a marginal tax rate of 21 percent on top of Social Security and
state taxes.
In a 1998 paper, Professor Eissa and her colleague Hillary Williamson
Hoynes found that the expanded tax credit did increase married men's
labor force participation. But married women were 5 percent less likely
to work if their family incomes were high enough that anything they
earned would cancel out some of the credit. And if they did work, the tax
credit led them to reduce their hours 20 percent.
By paying one spouse to work and reducing the payments as household
income rises, Professors Eissa and Hoynes wrote, the tax credit "is
effectively subsidizing married mothers to stay at home." It's possible
that's what policy makers intended. But it's more likely that they didn't
fully consider how married women would react to what amounted to high
marginal tax rates.
That's a pervasive problem throughout the tax system. Once a woman is
married, it seems, the tax laws don't really want her to work.<<
nytimes.com |
