Want Tohelpwomen? Lower Marginal Tax Rates

Want tohelpwomen? Lower marginal tax rates

DIANA FURCHTGOTT-ROTH

MARCH 27, 2017

Thisyear April 17 is Tax Day.Thosewhopaylittle tax countthemselvesas lucky winners.Someofthebiggestlosers will bemarried, workingwomen, whoarebeingdiscouragedfromworkingbyhighratesof tax.

Higher marginal taxratesdiscouragemarriedwomenfromworking.Whensinglewomenworkandareconsideringmarriage, higherratesdiscouragemarriage.Sometimeshigh tax ratesresult in womenquittingtheworkforcealtogether.

Working womenaredisproportionatelyrepresented in the top fifthoftheincomedistribution, wherefederalandstateincome tax ratescanreachover 50 percent.Frequentlyitistheirworkthatpushesthefamilyintothe top brackets. After addingupcostsoftransportation, childcare, and professional clothing, thereis not muchleft.

Taxesdiscouragemarriedwomen not just fromworking, but also fromstrivingforpromotions, frompursuingupwardly-mobile careers.

Mothersaremoreaffectedbythemarriagepenaltythanotherwomenbecausetheyaremorelikelytomove out ofthelaborforcetolook after newbornchildrenandtoddlers, andthentoreturntoworkwhentheirchildrenare in school.

On average, households in the top fifth of the income distribution have twoearners.In themiddlefifth, itis 1.3 earners. In thebottomfifth, itis half an earner.Thatsecondearnerpushesfamiliesintothe top brackets.

Censusdatashowthatmenandwomenlivingalonearemostlikelytobepoor. Over 70 percentofwomenand 60 percentofmenlivingaloneare in thebottomtwofifthsoftheincomedistribution.

Lowering the top individualincometax rate to 33 percent, as bothHouse Speaker RyanandPresidentTrumphave proposed, canreduce the marriage penalty.

Manyeconomists have shownthatloweringindividual and corporateincome taxes is the key to increasingincentives for Americans to work and for businesses to invest.

Nobel Prizewinningeconomist Edward Prescott foundthat in the 1970s the laborsupply of France, Germany, and the United Kingdomexceededthat of the United States. In the 1990s, Americansworkedmuch more thanEuropeans. Controlling for otherfactors, heconcludedthatwhentax rates of European countries and the United States were comparable, theirlabor supplies were comparable as well. Prescott concludedthat the difference in the marginal tax rate accounts for the predominance of the differencesat points in time and the large change in relative laborsupply over time.

Similarly, Professors William Gentry of Williams College and Glenn Hubbard of Columbia Universityfoundthathigher marginal tax rates discourageentrepreneurship. Entrepreneurshipinvolvesrisk-taking, and people are lesswilling to takeriskswhen the rewardswillbetaxedaway. A five-percentage-point reduction in taxprogressivitywouldincrease the entry rate by 25 percent.

The increase in taxes in America in 1993, theyfound, loweredtheprobabilityofpeoplebecomingself-employedby 20 percent. The ensuingperiodofhighgrowthandlowunemploymentcouldhavebeenevenbetter.

Professors Christina and David Romer, in a 2010 article in the American EconomicReview, concludedthat “a taxincrease of 1 percent of GDP reduces output over the nextthreeyears by nearlythree percent.” Romer and Romersay the effectishighlystatisticallysignificant. Furthermore, the effectislarger and more significantthan if theyhadexamined all legislatedtax changes ratherthanjust the onestheydetermined to belegitimate. The effect on output wassmallerafter 1980 thanprior. The maximum output declinefrom 1950-1980 was 4.3 percent aftersevenquarters, compared to a 3.1 percent declineaftereightquarters in 1980-2007.

The majority of Americans are women. The majority of voters are women. Yetdespitetheirpolitical power, the federalgovernment all toooften ignores, or evenworse, militatesagainst the interests of women. This isparticularlytrue of the economicinterests of women. Especially in the details of tax codes, the economicinterests of women are neglected.

Withhigh marginal tax rates, American women are shuntedintohighertaxbrackets, discouragedfromworking, and giveneveryincentive not to pursueadvancement. Let’shopethatthings will be different in 2018 after President Trump andCongressmodernizethe tax code.