As Congress has learned to it sorrow, tax breaks beget other tax breaks. Give one to one group and instantly there are other groups loudly crying, "Me, too."
This year, Congress is all but certain to respond to a chorus of such cries that has been swelling since passage of the Tax Reform Act of 1969.
In that law, Congress gave single taxpayers a break, creating as a consequence the so-called marriage penalty for two-income families, a quirk in the tax code that has generated enormous protest.
In the same law, the top tax rate on earned income theoretically was cut from 70 percent to 50 percent. That, too, has produced counter-effect, a demand for equal treatment from taxpayers with investment income.
The Reagan administration and Congress both seem bent on reducing the misnamed and often misunderstood marriage penalty.
And in framing an alternative to President Reagan's proposed three-year, 30 percent cut in personal income tax rates, Democrats surprisingly have suggested cutting the top tax rate on all income to 50 percent, not after the Republican's suggested three years, but immediately.
Both of these changes involve questions of equity and economic efficiency that have been largely obscured in the clouds of rhetoric.
Given all the howling, many will be surprised that the provisions of the 1969 act did not raise rates for the two-income family. On the contrary, the family rates were cut -- but not by as much as were rates for single individuals.
Today, many families in which both spouses work or have other income are "penalized" in the sense that they would pay less tax if they had the right to separate their incomes and file as single individuals.
These two-income households are a rapidly growing part of American society, obviously one reason Congress is eager to give them a break. Since the penalty in some high-income families can exceed $4,000, these households are up in arms.
Most of the complaints make a case on ground of equity, asking why two working people must pay more taxes merely because they are married. The answer involves another question -- should two families with the same taxable incomes pay the same amount of tax?
As long as the nation has a progressive income tax system, under which rates rise as incomes rise, both tests of equity cannot be met. If a two-income married couple is allowed to pay tax as if both spouses were single, it will often end up paying less tax than a married couple with the same total income but only one wage earner.
Congress must decide whether it is more equitable to continue taxing in the same way all married couples with similar incomes or to put two-income families more on a par with two single individuals.
Prior to 1948, the income tax system was progressive and basically marriage-neutral -- married couples with similiar incomes were not necessarily treated the same way.
From 1948 until 1949, married couples received similiar treatment, and there was no marriage penalty. But there was a whopping penalty for singles -- at some income levels during those years, a single person's tax was as much as 42 percent higher than that paid on a joint return with the same taxable income. The 1969 act lowered that differential to no more than 20 percent.
Nevertheless, a single individual now pays more tax on a given amount of income than does a married couple. Generally speaking, there is a marriage bonus, not a penalty, because joint returns implicitly split a couple's income between the spouses.
With a $50,000 income, deductions equal to 23 percent of that and no dependents, a single individual owes $12,559 in federal tax. On the same basis, a married couple owes $10,183. But, if the two spouses each had incomes of $25,000 and were taxed as individuals, their combined tax would come to only $8,728.
Aside from the equity issue, some people urge a reduction in the marriage penalty on efficiency grounds. Typically, when one spouse is at work, the other faces a high tax rate if he or she also takes a job.
For instance, if the first spouse earns $27,000 and the other were to begin earning $13,500, the average tax on that second income would be 25 percent, according to a study on the marriage penalty released last week by the Congressional Budget Office. Any reduction in the marriage penalty would reduce that high tax rate for the second spouse and perhaps encourage more to work.
Congress is considering several methods of reducing the marriage penalty, but the most likely would be to allow a deduction equal to 10 percent of the income of the lower-paid spouse up to an income maximum of $30,000. This would mean a deduction of as much as $3,000 or, assuming a 50 percent maximum tax rate, a cut in the marriage penalty of as much as $1,500.
Such a deduction, which would cost the Treasury about $7 billion in revenue annually, would be the equivalent of lowering the tax rate on the second spouse's income by 10 percentage points. However, it would also be a bit of a windfall for two-income couples whose incomes are far apart.
If a $50,000 income is split $5,000 and $45,000, there is under current law a $1,230 marriage bonus, not a penalty; the couple's tax bill is less that it would be if the spouses were taxed singly. But such a couple still would qualify for a deduction.
Many of the same sort of equity arguments have been mounted to persuade Congress that the present tax system discriminates against income from investments as opposed to work. Proponents of lowering the top tax rate on investment income from 70 percent to 50 percent ask why investment income should be discriminated against.
Whatever the merits of lowering the rate, such advocates overlook the source of the "discrimination" -- the 1969 act that supposely lowered the maximum rate on earned income to 50 percent. Giving a break to one type of income now is perceived as discriminating against another.
Actually, there often is precious little discrimination. Most taxpayers who earn enough for it to be an issue still pay a top tax rate well in excess of 50 percent on their earned income.
So many people pay more than a 50 percent rate on earned income that Congress' Joint Committee on Taxation estimates that half of the $5 billion in revenue that would be lost by lowering the top rate to 50 percent now is paid on earned income.
Virtually the only taxpayers who truly pay a 50 percent maximum rate on earned income are those who have no income from any other source. This is why:
To ensure that income from other sources continued to be taxed at higher rates, Congress required that a taxpayer's income be "stacked" with the earned income on the bottom. Thus, if a single taxpayer has $75,000 of taxable income, one-fourth of which is from investments and three-fourths from a salary, the $56,250 in earned income is stacked on the bottom and the remainder taxed at rates applicable to higher tax brackets.
At the same time, the taxpayer must allocate personal deductions between the two types of income according to the percentage of his gross income that is earned. In the example in the previous paragraph, the taxpayer would allocate three-fourths of his deductions to his earned income and one-fourth to the other income.
If this taxpayer has deductions equal to 23 percent of his gross income, or $17,250, and earns an additional $100, he would owe only an additional $50 in tax if there were a true 50 percent maximum rate. Instead, under present law, he owes $58.36 more.
The additional $8.36 is due for two reasons. First, he must make that added income part of the stack of earned income and, since that is on the bottom of the stack, the investment income is boosted a bit in the tax brackets.
Second, he now has earned $75.03 percent of his total income instead of just 75 percent. That means 75.03 percent of his deductions -- which are assumed not to rise with the additional $100 -- must be allocated to his earned income, instead of 75 percent.
This has the effect of reducing slightly his taxable earned income while increasing his taxable unearned income. Since the latter, because of the stacking, is taxed at a higher rate, this also adds to his tax.
In this example, the taxpayer's marginal rate turns out to be not 50 percent but 58.4 percent on an additional $100 of earned income.
The maximum tax effects single taxpayers only after their taxable earned income -- not just gross income and not just earned income, but earned income reduced by any deductions -- passes $41,500. For married couples, the figure is $60,000.