In view of the Reagan administration's strong commitment to the supply-side philosophy of tax reduction, it is curious that its 1982 budget proposal passes up a potentially powerful supply-side opportunity: lowering the marginal income tax rate for a married couple's second earner. Also known as the "marriage penalty," taxation on the basis of a couple's joint income imposes a much higher marginal (and average) rate of tax on the second earner than if the tax were computed on the basis of that person's individual income. Lowering this tax would provide a much stronger impetus for supply-side growth than across-the-board tax cuts, adding both to saving and to work effort.
Acording to supply-side theory, a tax cut can actually reduce inflation as it increases real growth if it provides an incentive for increased work effort and saving. First, regarding work effort, common sense -- not to mention a myriad of statistical studies -- suggests that second earners have far more discretion than single earners in the choice of whether or not to work and for how many hours per week. If a reduction in marginal tax rates is to have any impact on work effort at all, it is likely to have a far greater effect on second earners than on any other group. Yet these individuals, under the current system, have the highest marginal tax rates of any group.
It is noteworthy that the labor force participation rate of Swedish women increased by roughly 10 percentage points following a chance from joint to individual taxation. In Sweden, however, the majority of these married women work part-time, suggesting that the supply-side effect was to increase work effort while permitting wives to combine paid employment with child care and other family responsibilities.
Turning to the impact on saving, again there is over-whelming evidence that many households can afford to save only if there is a second earner. Median earnings of two-earner married couples are about $25,600, compared with $18,000 for single-earner couples. The only way most families have been able to keep up with inflation since the early 1970s has been increasing labor force participation and hours worked of second earners. Declining productivity combined with the oil drain (as skyrocketing prices of imported oil have transferred income to OPEC national) would have meant a huge drop in family living standards had this supply-side response not occurred.
When incomes fail to keep up with inflation, most people attempt to maintain living standards by reducing savings and even going into debt. Obligations such as a mortgage and car payments must be met. And families who have not responded to inflation by having a second earner at work will save less than two-earner families. Thus, a tax policy that encourages a supply-side response by families burdened with inflation will mean greater overall savings, as fewer families need to dip into bank accounts or go into debt to meet their needs.
Clearly, the Reagan administration wants to minimize the tax loss associated with any supply-side policy. (Alternatively, of course, the aim could be simply to relieve excessive tax burdens on everyone -- probably a very sound policy.) But for real supply-side bang for the buck, tax cuts should be targeted where they are most likely to encourage saving and added work effort. Reducing taxes on second earners is clearly such a policy.
And there are alternative ways to accomplish it: either a tax credit against part of the second (lower) income, as proposed in the Carter budget, or optional individual filings two-earner married couplies, as suggested by Rep. Millicent Fenwick. Neither proposal would increase taxes for single-earner families. And such a tax reduction would avoid costly windfalls to individuals whose supply-side response is likely to be negligible.