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Give families’ second earners a break

Conservatives who worry about the ill effects of marginal tax rates on high earners rarely discuss the even higher marginal tax rates that some low- and moderate-income families face. A low-income single parent can experience a marginal rate as high as 95 percent ― for each dollar earned, the person takes home only 5 cents. And for married parents, the marginal rate for the family’s secondary earner can be almost as high.

This happens mostly because various means-tested benefit programs are phased out as income increases. A secondary earner who raises the family’s income to $30,000 from $15,000, for example, will trigger a decline of about $1,500 in the family’s Earned Income Tax Credit and a drop in food stamp benefits of almost $3,000. Factor in the child-care costs necessary for the second parent to work, and the family will take home less than 40 cents of each additional dollar earned.

If we care about encouraging work incentives, these high marginal tax rates for low-income families deserve as much, if not more, attention than the rates for the biggest earners.

One way to boost work incentives for secondary earners is to create a new tax break for them. This is what University of Maryland economists Melissa Kearney and Lesley Turner have proposed. (Kearney is also the new director of the Brookings Institution’s Hamilton Project.) They recommend a deduction of up to 20 percent of a secondary worker’s earnings.

This proposal is similar to a tax provision that was briefly in effect during the 1980s. And it could be paid for, as Kearney and Turner suggest, by paring back other, less important tax breaks. It would encourage employment among secondary earners, who are still disproportionately women, by increasing their net income when they work outside the home.

That’s important because labor force participation rates among women, after rising significantly during the 1970s, 1980s and 1990s, have stabilized and even declined a bit over the past decade. The labor force participation rate among women ages 25 to 54 rose to 64 percent in 1980 from 50 percent in 1970, then reached 74 percent in 1990 and 77 percent in 2000. Since then, however, it has fallen a little ― by about one percentage point before the recession and another percentage point during and after the recession.

A popular explanation for the decline is the “opt out” revolution among high-income mothers. It’s true that, over the past two decades, participation rates among highly educated married women with children under age 6 have been falling. However, labor force participation has also been dropping among single women and women without children, recent research by Diane Macunovich of the University of Redlands has shown. “What seems to have passed under the radar has been the significant change that has occurred among women without children under 18, especially those who are single,” Macunovich writes. “For women without children younger than 18, declines have been occurring since the early 1990s or even the late 1980s.”

Which brings us back to the proposed secondary-earner deduction. The broad declines in female employment suggest that concerns about labor force trends may extend beyond the low- and moderate-income married women with children who would benefit from the Kearney-Turner proposal. To keep the cost in check, they phase out their tax break as income rises above $110,000. Yet even higher-income secondary earners, the ones who are the embodiment of the opt-out phenomenon, can face relatively high marginal rates.

To be sure, no proposal is perfect; reforms don’t need to solve all problems to attenuate some. So the relevant question is whether the Kearney-Turner proposal addresses a real problem with a cost-effective solution. And the answer is yes.

The secondary-earner deduction would bolster the incentives for many secondary earners to find employment. And just maybe, as Congress approaches the end-of-year budget negotiations, liberals who want to help low- and moderate-income families and conservatives who worry about the deleterious effects of high marginal tax rates will find common ground in the Kearney-Turner proposal.

By Peter Orszag

Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. ― Ed.

Korea Herald daum