Jane G. Gravelle
Senior Specialist in Economic Policy
Individual income tax provisions have shifted over time, first in increasing the burden on larger families, and then in decreasing it. These shifts were caused by changing tax code features: personal exemptions, standard and itemized deductions, rates, the earned income credit, the child credit, and other standard structural aspects of the tax. Some of these features reflect changes made by the 2001 Bush tax cuts, which were extended for an additional two years by P.L. 111- 312 and largely made permanent by the American Taxpayer Relief Act, P.L. 112-240. The distribution of tax burden across income classes has, however, changed relatively little, although burdens at the top and bottom have decreased in recent years.
While several standards may be considered in determining equitable treatment of families over family type and size, a standard approach is based on ability to pay, so that large families with the same income as small ones pay less tax. Based on this standard, the analysis of equity across families suggests that families with children are paying lower rates of tax (or receiving larger negative tax rates) than single individuals and married couples at lower and middle incomes. However, families with children are being taxed more heavily at higher-income levels. At the lowest income levels, the EIC provides the largest tax subsidies to families with two or three children. The smallest subsidies go to childless couples. At middle-income levels, families with many children will have the most favorable treatment, due to the effect of the child credit, which has a very large effect relative to tax liability. At higher-income levels, large families are penalized because the adjustments for children such as personal exemptions and child credits are too small or are phased out, while graduated rates cause larger families that need more income to maintain a given living standard to pay higher taxes. Tax rates are more variable at lower-income levels. At all but the lowest and very highest income levels, singles pay higher taxes than married couples.
The analysis of the marriage penalty indicates that marriage penalties have largely been eliminated for those without children throughout the middle-income range, but this change has inevitably expanded marriage bonuses. Marriage penalties remain at the high and low income levels and could also apply to those with children, where the penalty or bonus is not very well defined. But by and large, the current system is likely to encourage rather than discourage marriage and favors married couples over singles.
The analysis of equity across families suggests that increases in earned income tax credits for those without children would lead to more equal treatment based on the ability to pay approach, while full refundability of the child credit would exacerbate inequalities. At the higher end of the scale, eliminating phase outs of provisions that differentiate across families would probably lead to more equitable treatment, and containing the effect of the alternative minimum tax is important to both reducing the high burden of taxes on families with children at upper middle-income levels as well as preventing an increasing level of marriage penalties.
This report does not include the temporary provisions enacted in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), although a brief summary is provided in the introduction. Some of the more minor provisions have been extended through 2017 by the American Taxpayer Relief Act (P.L. 112-240). .
Date of Report: January 17, 2013
Number of Pages: 28
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