SMay 25, 2003
The Real Tax Burden of Two Earner Couples
A new study shows that two earner couples--- the horses that pull our economic plow--- pay for the second job with taxes that are far beyond the well known "marriage penalty."
The study shows that the second worker in a working couple faces a gigantic lifetime tax rate. That lifetime tax rate is higher than the highest federal income tax rate, 38.6 percent. This happens because the second earner basically pays twice for lifetime benefits. The study is another indication that conventional approaches to tax policy are often misleading. Until legislators of both parties take a systemic view of taxation and benefits, the usual claims of wounds and gains will remain largely meaningless.
Here are three findings from the study:
• A spouse whose husband (or wife) earns $60,000 a year faces lifetime marginal net tax rates over 50 percent for earnings that range from $10,000 to $40,000.
• A two-earner couple where each earns $30,000 faces a lifetime loss of Social Security benefits. The loss has a current value of $56,829.
• A woman with a husband who earns only $20,000 a year faces an extraordinary lifetime tax burden if she opts to work. She loses Social Security benefits, Medicaid, and other programs by working. If she earns $10,000 a year her lifetime marginal tax rate is 121.6 percent. The rate declines to 80.6 percent if she earns $20,000 and 66.4 percent if she earns $30,000.
Economists Jagadeesh Gokhale and Laurence J. Kotlikoff did the study for the National Center for Policy Analysis in Dallas. Dr. Gokhale is currently at the American Enterprise Institute, on leave from his position as senior economic advisor to the Federal Reserve Bank of Cleveland. Professor Kotlikoff is Chairman of the Boston University Economics department.
The study is based on the discipline of generational accounting. This is the only tool I've seen in 25 years of reporting that promises to make sense of government tax and benefit programs. Think of it as the Unified Field Theory for government taxing and spending.
Generational accounting works by taking the income a household will earn over its lifetime, adding the benefits it will receive, and subtracting the taxes it will pay. All of this is done in dollars of current value. The net difference is calculated as the lifetime tax rate. In this study, as in an earlier study ("Does It Pay To Work?"), every major social welfare and benefit program has been included. As a result, calculations can truly show the impact of both the decision to work and of different income levels on lifetime tax rates.
While many, including this writer, have observed that the rise of two earner households was an enormous revenue boon to Social Security, this study actually quantifies it. Basically, the two-earner household increases government tax revenues with virtually no increase in future benefits.
More than 25 years ago social commentator Irving Kristol showed that the tax rate faced by mothers trying to get off welfare was punitively high. This study goes further. It exposes the burden all women have shouldered as they left the home and joined the workforce.
"…a woman can earn Social Security benefits in her own right." the study notes, "But she cannot claim benefits in her own right in addition to spousal benefits on her husband's contributions. It must be one or the other. Many women who have paid into Social Security over their work lives find that when they reach retirement their best option is to claim benefits on their husband's contributions. As a result, they get nothing in return for all the payroll taxes they paid." (Italics added)
Basically, the Social Security benefit rules work to impose a large tax increase on all second earners. The study calculates, for instance, that a woman who adds $20,000 to the $30,000 her husband earns will have 12.6 percent added to her lifetime marginal net tax rate--- simply because she must choose between the earnings of her account or her husbands. (Needless to say, this applies to any second earner, regardless of gender.)
Interested readers can obtain the full study--- and the earlier study, "Does It Pay To Work?"--- by visiting the publications section of the NCPA website and downloading publications 260 and 258, respectively.
Read the original studies:
Read earlier columns on generational accounting:
980419SU: Lawrence J. Kotlikoff and Generational Accounting
Subject: Lawrence J. Kotlikoff and Generational Accounting Sunday, April 19, 1998
Politics, Footnotes, and Your Children ... He calls it generational accounting. ...
001008SU: Facts, Not Projections on Private Social Security
... For an introduction to Lawrence J. Kotlikoff and the idea of Generational Accounting,
visit my earlier column on the subject
www.dallasnews.com/business/scottburns/ columns/archives/2000/001008SU.htm - 14k - Cached - Similar pages
DallasNews.com | Dallas-Fort Worth | Scott Burns: Q&A
... Boston University economics professor Laurence Kotlikoff, who created generational
accounting, recently published a paper on the lifetime taxation of 401(k ...
2002/stories/082902dnbusburns.146c7.html - 62k
DallasNews.com | Dallas-Fort Worth | Scott Burns: Columns 2002
... school. It can go well beyond the ordinary extra mile. Earlier columns on
generational accounting. ... created. It's called generational accounting. ...
Filed Under: Government, Taxes & Other Disasters
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