Affluent, Dual Income Families Get Creamed By The Feds

Although many Americans posted scant real income gains in the 1980s, one positive development was the emergence of a significant number of affluent dual-income households earning over $100,000. Now, economist Michael R. Englund of MMS International warns that recent increases in federal tax rates imposed on upper-income taxpayers may well throw this trend in reverse. In many cases, he says, lower-wage spouses in such families are likely to find that their earnings are subject to a marginal tax rate of 60% or higher.

Take a dual-income household with two kids, one spouse earning $110,000, and the other $55,000. Not only does such a family face a marginal federal income tax rate of 36%, says Englund, but the lower-wage spouse must also pay a tax bite of 7.65% for Social Security and Medicare. And the phaseout of itemized deductions and personal exemptions should add an additional 4% to the tax rate. Factor in a state income tax of 8% on high-income families, and you wind up with a 55%-plus marginal tax rate on the wages of the lower-income spouse.

That's not all. Englund figures that such a family spends about $15,000 a year on day care, home cleaning, laundry, and other costs that would be avoidable if one spouse decided to stay at home. That means the lower-earning spouse comes out just $10,000 ahead after taxes and home maintenance costs--a calculation that implies an effective marginal "tax rate" of over 80%.

If such considerations induce a lot of women to withdraw from the labor force, says Englund, the government's tax take could take a hit. Although households reporting $100,000-plus incomes represent just 3% of the U.S. population, they provide a hefty 34% of government revenues.