Marriage Tax Penalty Relief Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001

Marriage Tax Penalty Relief Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001

Order Code RS21000
Updated January 30, 2003
CRS Report for Congress
Received through the CRS Web
Marriage Tax Penalty Relief Provisions of the
Economic Growth and Tax Relief
Reconciliation Act of 2001
Gregg A. Esenwein
Specialist in Public Finance
Government and Finance Division
Summary
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
contains three marriage tax penalty relief provisions. It increases the standard deduction
for joint returns to twice the size of the standard deduction for single returns. This
change is phased in over a 5-year period starting in calendar year 2005. The 2001 Act
also increases the width of the 15% marginal income tax bracket for joint returns to
twice the width of the 15% tax bracket for single returns. This change is phased in over
a 4-year period starting in calendar year 2005. Finally, the 2001 Act increases the
earned income tax credit phaseout start and end points for joint returns by $3,000 with
the increase phased in over a 7-year period starting in calendar year 2002. The Joint
Committee on Taxation estimates that the combined cost of all of the marriage penalty
relief provisions will be $63 billion over the fiscal year period 2002 through 2011.
All of the EGTRRA tax cuts, including the marriage tax relief provisions, are
scheduled to expire at the end of calendar year 2010. In the 107th Congress, the House
passed several bills that would have extended the EGTRRA tax cuts beyond 2010. The
Senate, however, did not adopt these bills. It is likely that the 108th Congress will revisit
the issue of making the EGTRRA tax cuts permanent.
Additionally, in response to continued sluggish economic performance, President
Bush unveiled a new tax stimulus plan in early January 2003. As part of his stimulus
plan, President Bush has proposed accelerating the phase-in of some of the EGTRRA
tax cut provisions. The President’s proposal includes accelerating the increase in the
standard deduction for joint returns and the increase in the width of the 15% tax bracket
for joint returns. The Treasury Department estimates that the 10-year revenue cost of
these two changes would be $58 billion.
This report will be updated as legislation action warrants.
Background
Congressional Research Service ˜ The Library of Congress

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Defining the married couple as a single tax unit under the federal individual income
tax tends to violate the goal of marriage neutrality. Marriage neutrality means that the tax
system should not influence the choice of individuals with regard to their marital status.
However, under the current federal income tax system, some married couples pay more
income tax than they would as two unmarried singles (a marriage tax penalty) while other
married couples pay less income tax than they would as two unmarried singles (a marriage
tax bonus).
The three most important structural features affecting the marriage neutrality of the
income tax are the earned income tax credit (EIC), the standard deduction, and the tax rate
schedules. Under the current income tax system, single individuals, heads of households,
and married couples are subject to different standard deductions and tax rate schedules.
The EIC amounts and phaseout ranges also vary according to filing status. These
differences give rise to structural marriage tax penalties and bonuses.
Because of these asymmetries, when the income of one spouse is added to the
income of the other spouse, a married couple might find themselves paying either more
federal income tax (a marriage penalty) or less tax (a marriage bonus) than they would by
filing as two singles. Two singles (or some combination of singles and heads of
households) contemplating marriage might find that their federal income tax liability
increases (a marriage tax penalty) or decreases (a marriage tax bonus) by filing a joint
return.
In general, the division of income, or income split, of the two individuals determines
whether they will have a marriage tax bonus or penalty. The largest marriage tax bonuses
occur when one spouse earns 100% of the income. The more evenly divided the income,
the more likely a married couple will experience a marriage tax penalty. The largest tax
penalties occur where the income is evenly divided between the two spouses, a 50/50
income split.
For example, consider the case of two married couples where each couple has
$60,000 of income. One couple is a one-earner household where one spouse earns all the
income while the other couple is a two-earner household where each spouse earns
$30,000. Under the federal income tax rate structure in effect in 2001, the one-earner
couple has a marriage tax bonus of $4,326 (that is, they pay $4,326 less filing a joint
return than they would if they filed as two single individuals) while the two-earner couple
has a marriage tax penalty of $406 (that is, they pay $406 more filing a joint return then
they would if they filed as two single individuals).
Eliminating marriage tax penalties and bonuses and creating a marriage neutral
income tax are elusive equity goals. Marriage neutrality conflicts with two other concepts
of equity: progressivity and equal taxation of couples with equal incomes. Regardless
of how these three concepts of equity are juggled, an income tax can achieve any two of
these goals but cannot, under current definitions, simultaneously achieve all three.

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Over time, Congress has switched emphasis among these three equity goals of
marriage neutrality, progressivity, and equal taxation of couples with equal incomes.1 The
changes in the 2001 Act, which are described below, will provide a tax reduction to all
married couples filing a joint return regardless of whether or not they currently incur a
marriage tax penalty. Married couples who currently experience a marriage tax bonus
(they pay less filing a joint return than they would filing two single returns) will see their
bonus increase. Married couples who currently experience a marriage tax penalty will see
their marriage tax penalty reduced or eliminated.
The 2001 Act
The Economic Growth and Tax Relief Reconciliation Act of 2001 (H.R. 1836) was
approved by both chambers of Congress on May 26, 2001 and signed by President George
W. Bush on June 7, 2001 (P.L. 107-16). The Act contains three provisions designed to
reduce marriage tax penalties.
First, the Act increases the standard deduction for joint returns to twice the amount
of the standard deduction for single returns. (The standard deduction for joint returns is
currently equal to 167% of the standard deduction for single returns.) This change is
phased in over a 5-year period starting in calendar year 2005. The Joint Committee on
Taxation (JCT) estimates that this change will reduce federal income tax revenues by
approximately $15 billion over the fiscal year period 2005 through 2011. Table 1 shows
how the change will be implemented.
Table 1. Phase-In Schedule for Increase in the
Standard Deduction for Joint Returns
Standard Deduction for Joint Returns
Calendar
as a Percentage of the
Year
Standard Deduction for Single
Returns
2005
174%
2006
184%
2007
187%
2008
190%
2009 and later
200%
Second, the 2001 Act increases the width of the 15% marginal income tax bracket
for joint returns to twice the width of the 15% marginal income tax bracket for single
returns. (The 15% tax bracket for joint returns is currently 167% of the width of the 15%
1 For more information on the historical tax treatment of marital status and background on the
extent and magnitude of marriage tax penalties and bonuses see CRS Report RL30800, The
Federal Income Tax and the Treatment of Married Couples: Background and Analysis, by Gregg
Esenwein.

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tax bracket for single returns.) This change is phased in over a 4-year period starting in
calendar year 2005. The JCT estimates that this change will reduce federal income tax
revenue by approximately $33 billion over the fiscal year period 2005 through 2011.
Table 2 shows how this change will be implemented.
Table 2. Phase-In Schedule for Increase in the
Width of the 15% Tax Bracket for Joint Returns
End Point of 15% Tax Bracket for
Calendar
Joint Returns as a % of the End Point
Year
of the 15% Bracket for Single Returns
2005
180%
2006
187%
2007
193%
2008 and later
200%
Third, the 2001 Act increases the earned income tax credit phaseout start and end
points for joint returns by $3,000, with the increase phased in over a 7-year period starting
in calendar year 2002. The $3,000 amount will be adjusted on an annual basis for
inflation beginning after 2008.2 The JCT estimates that this provision will reduce federal
income tax revenues by $15.6 billion over the fiscal year period 2002 through 2011.
Table 3 shows the schedule for the increase in the phaseout start point for the EIC for
taxpayers filing joint returns.
Table 3. Phase-In Schedule for Increase in EIC Phaseout
Start and End Points for Joint Returns

EIC Start and End
Calendar Year
Point Increased By:
2002
$1,000
2003
$1,000
2004
$1,000
2005
$2,000
2006
$2,000
2007
$2,000
2008 and later
$3,000
2 The 2001 Act also simplifies the definition of earned income by excluding nontaxable employee
compensation from the calculation of earned income and repeals the income tax provisions that
reduce a taxpayer’s EIC by the amount of their alternative minimum tax. For more information
on the EIC see CRS Report RL30991, The Earned Income Tax Credit: Current Issues and Benefit
Amounts, by Melinda Gish.

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The JCT estimates that the combined cost of all of the marriage penalty relief
provisions will be $63 billion over the fiscal year period 2002 through 2011.
However, all of the changes in the Economic Growth and Tax Relief Reconciliation
Act of 2001(including the marriage tax relief provisions) will expire (sunset) after 2010.
Congress included the sunset in EGTRRA to avoid a Byrd rule violation in the Senate.
The Byrd rule prohibits “extraneous matter” in reconciliation legislation. Under the rule,
extraneous matter includes, among other things, language that would cause an increase
the budget deficit (or reduce budget surpluses) in a fiscal year beyond those covered by
the reconciliation legislation. As a result of the Byrd rule, EGTRRA contained language
providing for the expiration of all of its provisions at the end of calendar year 2010.