Higher marginal tax rates discourage married women from working. When single women work and are considering marriage, higher rates discourage marriage. Sometimes high tax rates result in women quitting the workforce altogether.
Working women are disproportionately represented in the top fifth of the income distribution, where federal and state income tax rates can reach over 50 percent. Frequently it is their work that pushes the family into the top brackets. After adding up costs of transportation, child care, and professional clothing, there is not much left.
Taxes discourage married women not just from working, but also from striving for promotions, from pursuing upwardly-mobile careers.
Mothers are more affected by the marriage penalty than other women because they are more likely to move out of the labor force to look after newborn children and toddlers, and then to return to work when their children are in school.
On average, households in the top fifth of the income distribution have two earners. In the middle fifth, it is 1.3 earners. In the bottom fifth, it is half an earner. That second earner pushes families into the top brackets.
Census data show that men and women living alone are most likely to be poor. Over 70 percent of women and 60 percent of men living alone are in the bottom two fifths of the income distribution.
Lowering the top individual income tax rate to 33 percent, as both House Speaker Ryan and President Trump have proposed, can reduce the marriage penalty.
Many economists have shown that lowering individual and corporate income taxes is the key to increasing incentives for Americans to work and for businesses to invest.
Nobel Prize winning economist Edward Prescott found that in the 1970s the labor supply of France, Germany, and the United Kingdom exceeded that of the United States. In the 1990s, Americans worked much more than Europeans. Controlling for other factors, he concluded that when tax rates of European countries and the United States were comparable, their labor supplies were comparable as well. Prescott concluded that the difference in the marginal tax rate accounts for the predominance of the differences at points in time and the large change in relative labor supply over time.
Similarly, Professors William Gentry of Williams College and Glenn Hubbard of Columbia University found that higher marginal tax rates discourage entrepreneurship. Entrepreneurship involves risk-taking, and people are less willing to take risks when the rewards will be taxed away. A five-percentage-point reduction in tax progressivity would increase the entry rate by 25 percent.
The increase in taxes in America in 1993, they found, lowered the probability of people becoming self-employed by 20 percent. The ensuing period of high growth and low unemployment could have been even better.
Professors Christina and David Romer, in a 2010 article in the American Economic Review, concluded that “a tax increase of 1 percent of GDP reduces output over the next three years by nearly three percent.” Romer and Romer say the effect is highly statistically significant. Furthermore, the effect is larger and more significant than if they had examined all legislated tax changes rather than just the ones they determined to be legitimate. The effect on output was smaller after 1980 than prior. The maximum output decline from 1950-1980 was 4.3 percent after seven quarters, compared to a 3.1 percent decline after eight quarters in 1980-2007.
The majority of Americans are women. The majority of voters are women. Yet despite their political power, the federal government all too often ignores, or even worse, militates against the interests of women. This is particularly true of the economic interests of women. Especially in the details of tax codes, the economic interests of women are neglected.
With high marginal tax rates, American women are shunted into higher tax brackets, discouraged from working, and given every incentive not to pursue advancement. Let’s hope that things will be different in 2018 after President Trump and Congress modernize the tax code.