How to Remove Marriage Penalties

Patrick T. Brown, in the National Review of all places, had a wonderful piece on how to provide tax relief to poor families with children. Brown criticizes Marco Rubio's Child Tax Credit for missing the poor and offers a monthly child benefit as an alternative (sound familiar?):

This approach triples down on the child tax credit, a blunt-instrument approach to helping poor families. Because it is only partially refundable (i.e. if the amount of the credit is greater than the tax you owe, you can collect only part of the excess as a refund), only 13 percent of the credit’s total value went to families in the lowest income quartile in 2013. An even bolder pro-family, pro-growth approach to supporting low-income families would be through a fully refundable child tax benefit.

This new program could be based on the Canadian model, in which families receive a monthly payment per child, via direct deposit, in return for filing a federal tax return. There, the poorest families receive roughly $1,060 USD per child from the federal government over the course of a year, with the benefit slowly phasing out as family income increases. As Josh McCabe of The Freedom Project has pointed out, similar policies assist low-income families in Australia, New Zealand, and the U.K.

To pay for these benefits, Brown suggests reducing other tax benefits for families with children and, presumably, raising revenue elsewhere (though he doesn't specify where).

Brown and I disagree somewhat on the particulars. For instance, I prefer a universal child benefit while he prefers a means-tested child benefit. But, overall, our visions are substantially similar, and it's worth noting when a conservative endorses good family benefit policy.

One of the other interests Brown identifies is removing so-called "marriage penalties" from the tax code. It's questionable how much these "penalties" actually affect marriage behavior, but if you want to remove them, below is one way to do it.

First, use the child benefit to replace every other child-related tax benefit in the tax code. This means getting rid of the dependent exemption, the child tax credit, the child and dependent care tax credit, and, crucially for these purposes, the Head of Household Filing Status. The Head of Household Filing Status provides favorable tax treatment to single adults with children. As a result of this favorable treatment, there are conceivable scenarios where marrying would leave you worse off than cohabitating and filing separate tax returns. If the child benefit is generous enough, getting rid of the Head of Household Filing Status as part of implementing the child benefit would not leave any families with children worse off on net.

Second, change the earned income tax credit so that it pays out the same benefit to all qualifying people regardless of how many kids they have. And, crucially, pay out the earned income tax credit to individuals not families. This way, when two low-earners marry, their combined incomes don't cause them to lose their earned income tax credits. Such a change would also promote other (sometimes bipartisan) policy goals of 1) extending the earned income tax credit to single adults and 2) ensuring that second-earners don't face very high marginal tax rates inherited from their spouse's income. Ideally you would also just eliminate the married filing status and tax all labor income on the individual level, but that may be asking too much.

If you take these two steps as part of the transition away from child tax credits to monthly child benefits, you should remove most of the so-called "marriage penalties" imposed on the poor without creating hardships for any particular type of family.