Is institutional sexism disadvantaging women in the workplace? New research suggests that something else could be to blame. The tax code’s design drives many married women to work fewer hours than they want to. Some women choose not to work at all, and bad policy is at least partly to blame.
The tax code and Social Security are littered with tax penalties for married couples. In many cases, a married couple’s secondary income earner pays more in taxes or receives fewer government transfers than if he or she was not married and filed taxes individually. And his or her marginal tax rate is at least as high as, and often greater than, his or her spouse’s.
Historically, women account for most secondary income earners. Our tax and benefit programs exacerbate this by telling many women not to work, or to work fewer hours in less well-paid professions.
For example, lower-income women are hit particularly hard by the marriage penalty in the Earned Income Tax Credit. Because EITC benefits decrease past an income threshold, lower-income women are often left choosing between marriage, their benefits, or working less. An unmarried woman with a child can lose up to $1,000 in EITC benefits if she marries a man with a similar income. Note that $1,000 is a lot of money for low-income families. It could be used for childcare or other expenses, so the family could be better off if one spouse works fewer hours.
Similarly, women with high-income spouses face total federal tax rates of 53% on their first dollar earned, all because the income tax thresholds are the same for married and single high-income taxpayers.
Current tax policy incentivizes married women at virtually every income level to work fewer hours than they would have otherwise. This changes workplace dynamics and helps perpetuate the myth that women are paid significantly less than men for the same work.
Social Security also disincentivizes female work. If a woman has relatively low earnings compared to her spouse or takes a significant amount of time out of the labor force, she may receive a spousal benefit that has nothing to do with her own contributions. This leaves women paying the full 12.4% Social Security tax without necessarily getting anything in return.
The 2017 tax cuts eliminated most of the marriage penalties in the individual income tax brackets, but the top bracket still has a substantial marriage penalty. The state and local tax deduction, alternative minimum tax, and Medicare surtax each carry their own distinct marriage penalty.
While most research shows that marriage penalties don’t have a large effect on the decision to marry, they do have large effects on how much second earners choose to work. The higher tax rate means that many women make the very rational tradeoff to forego working. That’s a fine decision for women to make on their own, but the government should neither encourage nor discourage this choice.
The lower number of hours worked explains at least half of the traditionally cited 20 cent wage gap, according to a National Bureau of Economic Research working paper. As Heritage Foundation research fellow Rachel Greszler explains, “All but about 5 to 7 cents of the so-called gender pay gap can be explained by differences such as education, choice of occupation, and hours spent at work.”
The tax code penalizes married women for working more hours and taking better-paying jobs. Fewer hours worked is the primary driver of the wage gap.
A recent study by Margherita Borella, Mariacristina De Nardi, and Fang Young found that the elimination of tax and Social Security marriage penalties would have significantly raised female wages and labor force participation.
If politicians want to raise the wages of women and encourage work, they can start by treating marriage neutrally in the tax code and modernize the Social Security spousal benefit.
Elimination of the joint filing system would align the U.S. tax code with the rest of the world. Currently, the United States is only one of seven Organization for Economic Cooperation and Development countries that still uses the outdated joint filing system.
European nations have been particularly successful in boosting female employment and wages by eliminating joint filing. When Sweden eliminated its marriage penalties in 1971, female labor force participation increased 17%. Thus, by eliminating the joint filer system, we could expect to see an increase in the supply of female labor. This would translate to higher family incomes, and women would realize a majority of the income gains.
Eliminating the joint filer system in the U.S. would allow women to make decisions that are best for them and their families, not what the tax code is telling them to do.
Bigger paychecks for women and families would undermine arguments for a federally subsidized family leave program. Not only would families have more money to fund their own time off, but more women in the workforce, working longer hours in better jobs, would push employers to accelerate the already impressive increase in private paid leave programs.
Boosting women’s pay, opportunities, and freedom to make the choices that best meet their own needs are bipartisan goals that the free market is equipped to handle. Instead of trying to intervene in the labor market on women’s behalves, policymakers could do more by removing the tax penalties and disincentives that currently hold women back.
Travis Nix is a former tax policy intern at the Heritage Foundation and Clara Hathorne is a former economic policy intern at the Heritage Foundation.
