Use tax credit as an incentive for marriage

0 Comments | Insight on the News, August 28, 1995 | by Jonathan Barry Forman

Congress seems poised to give families a tax cut this year. The most likely vehicle is the $500-per-child tax credit included in the House GOP's "Contract With America." But there is another way for the tax system to help families defray the costs of child-rearing. Why not a tax credit for parents?

That's what Rep. Thomas E. Petri, a Wisconsin Republican, suggested in testimony before a joint hearing of the Ways and Means subcommittees on Oversight and Human Resources in June. Specifically, Petri suggested replacing a portion of the current earned-income tax credit with a $1,000-per-parent tax credit. At the outset, I must say that there is a certain attraction, perhaps even a certain genius, to the Petri tax credit for parents, which would reward the "parenting" of children rather than just the "having" of children. Also, a $1,000-perparent tax credit would provide a meaningful tax cut for families. And unlike the current tax system with its pervasive marriage penalties, a parent-tax credit actually could encourage couples to marry or stay married.

Petri outlined his proposal at a hearing on how to fix the earned-income tax credit, which provides cash refunds to low-income workers, especially those with chilren. For 1995, a low-income worker with two or more children can claim a credit of up to $3,110 and a worker with one child can claim a credit of up to $2,094. There is also a credit of up to $314 for childless workers.

Unfortunately, the current earned-income credit can discourage marriage. For example, if a low-wage woman with two children marries a low-wage man with two children, the marriage penalty can exceed $5,000. Before the marriage each could claim a $3,110 credit, but together they could claim just one, much smaller credit. To reduce such marriage penalties, Petri would replace a portion of the earned-income credit with a refundable credit of $1,000 per parent. The credit would be available to families with earned income who have children under the age of 18. The credit would phase in as the family's earned income rises to $8,000 and would phase out for single parents with incomes between $9,000 and $19,000 and couples with incomes between $16,000 and $36,000. Petri also would replace the current personal exemption for children with a $1,100-per-child tax credit that would be refundable for those with earned income and he would eliminate the current earned-income credit for childless workers.

The Petri tax credit for parents would significantly reduce marriage penalties for most low-income taxpayers. For example, if a parent earning $8,000 married another parent earning $8,000, together they could keep both of their $1,000 tax credits. That's no marriage penalty at all. Compare that with current law -- marriage of the couple mentioned above would result in their losing more than $3,600 worth of earned-income credits.

Unfortunately, because the Petri tax credit for parents would phase out as family income increased, some couples still would face marriage penalties. For example, if a parent with $9,000 of earned income married someone with $27,000 or more of income, the couple would lose the $9,000 earner's $1,000 credit. Still, that's a much smaller marriage penalty than under current law -- wherein marriage would result in the loss of a $3,110 earned-income credit.

But Congress can do even better: Enact a $1,000-per-parent tax credit with no phaseout. Then a married couple could have two $1,000 tax credits, regardless of income. In fact, such an across-the-board tax credit would provide a substantial marriage bonus for many couples. For example, if a single parent married a childless individual, together they could claim two parental-tax credits, while before only the single parent could claim a credit. As marriage is one of the best ways for single parents to escape the welfare trap, it would make sense for the tax system to provide just such a marriage bonus.

Congress also should provide a $1,100-per-child tax credit for all families with children. Like an across-the-board parent-tax credit, a universally available child-tax credit would reduce marriage penalties. As long as the child-tax credit is not phased out, there would be no incentive to divorce or not marry. For example, a low-income parent with two children could claim two child-tax credits; if he or she married another parent with two children, together they could claim four child-tax credits.

In fairness, it should be noted that the combination of parental-tax credits and child-tax credits would provide larger tax benefits to married parents than to single parents with the same number of children. For example, a married couple with two children would get two child-tax credits and two parent-tax credits -- $4,200 in all. On the other hand, a single parent with two children would get just $3,200 -- two child-tax credits but just one parent-tax credit.

Rightly or wrongly, the current earned-income credit does not make such a distinction. Both a married couple with two children and a single parent with two children can claim an earned-income credit of up to $3,110 for 1995. Then again, the married couple has another parent to feed; that alone might justify giving the couple a larger tax benefit.