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August 22, 2004

50% Marginal Tax Rates on Married Women-- Gokhale and Kotlikoff

Gokhale and Kotlikoff's "The Effect of Social Security on Working Couples" came up at our Law and Econ Lunch last Thursday. The heart of it is Table 1, from which I have adapted the table below. The most dramatic part is that if a husband earns $20,000 per year (in 2002 dollars, Massachusetts state resident), his wife is taxed at a marginal rate of 122% if she earns $10,000. A more typical case is if the husband earns $50,000 and his wife earns $30,000. She then has a 49% tax rate, very high.

Much of this effect comes because the wife is going to get social security benefits even if she doesn't work-- via her husband's benefits-- but she pays the full tax nonetheless.

Lifetime Marginal Net Tax Rates for Spouses (%)
Husband's Earnings Wife's Earnings
$10K $20K $30K $40K $50K
$10K 96
$20K 122 81
$30K 48 44 44
$50K 50 50 49 48
$80K 58 56 55 54 55
$100K 61 60 61 58 56

Is this a bad thing? It is pro-family, I'd say-- because it discourages married women from working. And there are positive externalities from married women not working, so it might even be efficient. But many people see the discouragement of female labor supply as a disadvantage.

Posted by erasmuse at August 22, 2004 04:00 PM

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