The federal income tax system imposes high tax rates on secondary earners,… (Rebecca Gibbon / For the…)
In proclaiming March as Women's History Month, President Obama stated that "too many women feel the weight of discrimination on their shoulders." Liberals often make this claim, citing the fact that women earn only 77 cents for every dollar earned by men, and call for stronger protection against gender-based discrimination by employers.
Conservatives typically respond by pointing out that men and women tend to make different choices about occupation, working hours and whether to take time off from the labor force. They cite studies showing that, after controlling for these choices, the gender wage gap falls to only a few cents.
Unfortunately, both sides are missing an important point. Our society does indeed discriminate against working women. But the main culprit isn't employers. It's the government.
Fortunately, some simple policy fixes can help create real fairness for women. But these reforms will require liberals to accept tax and entitlement changes and conservatives to accept more mothers working outside the home.
The federal income tax system imposes high tax rates on secondary earners, and the Social Security system punishes two-earner households relative to single-earner households. As secondary earners are typically women, both the tax and Social Security systems discourage married women from working.
If we remove these barriers, many women would make different choices about their careers, taking less time off from the labor force and working more hours. Changing these choices would, of course, have a direct and immediate effect on the gender pay gap. But that's not all. When women work more during the early part of their careers, they gain valuable experience that increases their future wages.
To see how the tax system discourages women from working, consider the case of the Smiths, a single-income family with two children. According to the Tax Policy Center's online calculator, if Mr. Smith earns $60,000 and the family has no other income, the Smiths would owe the government $3,938 in total taxes (before credits) — 6.6% of his earnings.
Now suppose Mrs. Smith is considering a job that pays $30,000. Because her husband's earnings place the family in the 15% tax bracket, her entire salary would be taxed at a 15% rate, more than double the average tax rate on her husband's income. The system unfairly taxes secondary earners, thereby discouraging them from working.
The Social Security program adds to this problem because of the way family benefits are structured. Unmarried individuals pay payroll taxes and claim retirement benefits based on their own earnings. Married individuals pay payroll taxes on their own earnings but can collect retirement benefits based on their spouses' earnings if these benefits are higher than their own.
If a worker expects to collect a Social Security benefit based on his or her own earnings, then the payroll tax isn't fully a tax because working more and paying additional tax also increases the worker's benefit in retirement. That is the case for most primary earners. But it's not the case for many secondary earners.
For those who expect to claim a spousal benefit (which is available regardless of the secondary earner's work record), working and paying extra payroll taxes generate no additional retirement benefits. So, if Mrs. Smith expects to claim Social Security benefits on her husband's record, then the entire burden of the payroll tax — 10.6% for the Social Security retirement program — is an added penalty on her work.
Several reforms could alleviate this problem.
Because the current tax system treats a household as a single unit, secondary earners can face high tax rates on even the first dollar of their earnings. Switching to an individual-based tax system, which is used in many industrialized countries, would fix this problem by treating a secondary earner's income just like the primary earner's income. Alternatively, a flatter tax system — with lower marginal rates — would reduce the tax rates that apply to a household's second source of income.
In addition, Congress could improve Social Security's work incentives by reducing the ability of spouses to claim on one another's records. Or, the total income earned by a household could be divided evenly between the husband and wife, equalizing both their gains from additional earnings and retirement benefits.
The president is correct in saying women still face discrimination. But if he wants to address this issue, he should focus on reforming government programs. Reducing work disincentives for secondary earners gives women the freedom to make choices based on their preferences and opportunities rather than on the basis of government policies.
Aspen Gorry is a research fellow at the American Enterprise Institute and an assistant professor at UC Santa Cruz. Sita Nataraj Slavov is a resident scholar at AEI.