Saturday, August 30, 2008

Obama Wife Penalty

DIANA FURCHTGOTT-ROTH
http://www.nysun.com/opinion/obama-wife-penalty/84829/

With Michelle Obama, once the quintessential working mom (full-time job, two children, working husband), taking center stage at Monday's opening session of the Democratic National Convention, it's logical to assume that her husband's tax proposals would help women. They would not. Rather than change we can believe in, Senator Obama's tax plan would take us back to the days when women stayed home and baked cookies.

By raising taxes on upper income Americans, Mr. Obama would worsen our tax system's marriage penalty on two-earner married couples, who would pay more taxes than if both earners were single.

The penalty would be greatest for women who have invested the most in their education, hoping to shatter the glass ceiling and compete with men.

In contrast, Senator McCain has promised not to raise taxes, and so he wouldn't worsen the marriage penalty.

The marriage penalty falls harder on married women, especially mothers. When a mother takes a job, her earnings are reduced by taxes paid at her husband's higher rate, in addition to costs for childcare and her transportation. This discourages married women not just from working, but also from seeking the next promotion, from pursuing upwardly-mobile careers.

Women are more affected by the marriage penalty than men because they have a greater tendency to move in and out of the labor force, depending on the ages of their children. About 80% of American women, married and single, have children, and many take time out of the workforce at some point to look after children, and then return when their children are in school.

Mr. Obama says that he isn't going to raise taxes on people earning under $250,000 of gross income. For those earners, he says, taxes will still be lower than they were in the 1990s.

But the candidate's assurance is not correct. Many couples with gross income under $250,000 would be affected. Tax rates on the two top tax brackets, now 33% and 35%, would rise to 36% and 39.6%, their pre-2001 levels. Those are rates on taxable income, after gross income has been reduced for such allowances as itemized deductions (charity contributions, mortgage interest, etc.) and personal exemptions, chiefly children.

Singles earning $165,000, and married couples earning $201,000 in taxable income, are at the 33% rate now, so their tax rate would rise to 36%.

To be sure, some couples who gross $250,000 might have sufficient deductions to bring their taxable income below $201,000, but others might not.

Under current tax law, two singles, each with $104,000 of taxable income, would pay federal tax at a 28% rate. If they were to marry, they would pay tax at a 33% rate. Under Mr. Obama's plan, their tax rate would rise to 36%. That would be a tax increase of 8 percentage points just for getting married.

Alternatively, if the wife decided not to work, or to work part-time, the federal tax rate of the couple would remain at 28% rather than rising to 36%.

Add Social Security, Medicare, and state and local income taxes, and the rate in New York would climb to well over 50%. That's a penalty from the 1970s, when few women worked outside the home and the top tax rate was over 70%, rather than a tax plan for the 21st century.

Income taxes aren't the only taxes that would rise under Mr. Obama's proposals. Mr. Obama's advisers, economists Jason Furman and Austan Goolsbee, have said that he would raise Social Security taxes on incomes greater than $250,000 by four percentage points, to fix the Social Security deficit. Presently, the Social Security tax applies only to the first $102,000 of wage and salary income.

Never mind that this additional payroll tax increase would close only 15% of the Social Security funding gap. At some point the additional payroll tax increases would have to start further down the income scale to be effective, unless Congress decides to raise the retirement age or otherwise trim benefits.

And then there is the cost of health care. Employers would have to raise workers' contributions for health insurance to pay for Mr. Obama's new health insurance program. According to Mr. Obama's Web site, "The benefit package will be similar to that offered through Federal Employees Health Benefits Program (FEHBP), the plan members of Congress have." The congressional plan is costly.

This combination of higher tax proposals might discourage couples from getting married. When married, it would discourage America's most educated women from working. When working, it would give Uncle Sam a bigger bite out of women's raises.

In order to help women, taxes should remain at their present levels — or go down.

Modern women such as Michelle Obama, and even less advantaged women, want to be able to move in and out of the workforce. They don't need an exacerbated marriage penalty keeping them at home.

Mrs. Obama, tell the candidate that his tax plan is change we don't need.

Ms. Furchtgott-Roth, dfr@hudson.org, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.

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