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Congress' Iffy Wedding Gift

Economic Trends


The pros and cons of a tax break

Few ideas are more popular among Washington legislators in this political season than reducing the federal income tax code's so-called marriage penalty. Republicans have made it a major feature of the tax-cut bill just passed by the House of Representatives. Dem-ocrats have weighed in with several rival plans. The betting is that any tax cut plan that finally flies will take at least a modest step in that direction.

What's often passed over in the public debate, however, is that the current tax system is more biased in favor of marriage than against it. That is, for every four couples who pony up more in income taxes than they would if each partner were single, five couples actually pay less. And those who benefit the most are "traditional" families in which one spouse is the main provider and the other's main energies are devoted to child-rearing and homemaking tasks.

A recent Congressional Budget Office study estimates that some 51% of couples filing joint returns wind up with marriage bonuses, compared with 42% who lose out because of their marriage status (the rest aren't affected). On a net basis, married couples paid some $4.1 billion less in taxes in 1996 than they would if they had filed individual returns, with $2 billion of the net bonus going to couples with adjusted incomes over $50,000.

This pattern exists because past legislators wanted married couples with equal incomes to be taxed equally regardless of how much each partner earns, but they also wanted to hold down the gap between taxes levied on single people and the taxes paid by workers with similar earnings who happen to be married. The upshot is that couples with relatively equal individual earnings now pay higher taxes than they would if they were single, but couples with relatively unequal earnings come out ahead.

Needless to say, it's the couples who pay higher taxes because of their marital status that have been griping. The challenge Congress faces in providing them with relief is to do so in a cost-efficient way without increasing the relative tax bite on single taxpayers. (Already, a single worker earning $64,000 pays 42% more in income taxes than a married co-worker with the same pay and a nonworking spouse).

By that standard, the House-passed Republican tax bill falls short of the mark, says analyst Iris Lav of the Center on Budget & Policy Priorities, a liberal Washington-based think tank. By increasing the standard deduction for joint filers, the bill would provide relief to many middle-income couples, she notes, but it still wouldn't lessen the stiff marriage penalty facing some low-income working families who qualify for the Earned Income Tax Credit.

More important, the bill would actually increase the marriage bonus for many couples who already benefit significantly from the tax code. In the process, it would widen the already large gap between what single people pay and the taxes levied on married people with nonworking spouses. A similar proposal targeted only at couples facing marriage penalties could avoid this effect and cut the estimated $6-billion annual tab in half, Lav says.

While singles have yet to be heard from, she adds, their numbers aren't small. About a fourth of adult Americans live alone, and single taxpayers file 58% of all returns.BY GENE KORETZReturn to top

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Is Europe blind to danger signs?

Europe may be far more vulnerable to the widening world financial crisis than it believes, contends economist Stephen Roach of Morgan Stanley Dean Witter. The news that Switzerland's UBS bank just took a $686 million charge to reflect losses on its exposure to Long Term Capital Management's Hedge fund may be only the tip of the iceberg.

Roach estimates that European banks had $426 billion worth of debt exposure to emerging markets at the end of last year, equivalent to approximately 7% of the Euro region's gross domestic product. By contrast, U.S. banks' exposure came to $117 billion, or just 1.5% or so of American GDP. Even in Latin America, Europe's exposure was double that of U.S. banks: $133.6 billion, vs. $64.3 billion.

The bottom line, says Roach, Is that Europe may well experience a credit crunch as its banks write down their emerging market assets. What's really worrisome, he adds, is that European policymakers seem to be totally oblivious to such a possibility. And with economic growth in Europe running 2.5% on a year-over-year basis, compared with 3.5% in the U.S., it has a far smaller growth cushion should credit scarcity foster a slowdown.BY GENE KORETZReturn to top

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