Marriage, Poverty and Signaling

I often end up disagreeing with Bryan Caplan at EconLog. However, his writings tend to be thought-provoking and I find that if I spend some time considering what he says, I will frequently end up changing my mind on something. His writings on marriage and income are no exception. Most recently, he wrote an interesting post advancing marriage as a highly attractive option for poor people who wish to improve their lives.

Now far be it from me to challenge the obvious economies of scales that one gets from marriage. Shared housing and transportation costs are huge savings, division of labor in household chores can greatly increase utility and we haven’t even talked about the fact that the married couple might enjoy each other’s company. Also, despite Bryan linking to the Wikipedia article on marriage penalty, most tax accountants will tell you that it is at least for now no more than a myth and that marriage substantially reduces your tax bill. But that is not the story Bryan wants to tell us. He actually focuses on the correlation in the NLSY data-set between marriage and income and argues that marriage causes a higher income.

I couldn’t find where he posited a mechanism whereby this causation would be effected, but there are a number of plausible explanations. Marriage could induce one to become more responsible, sociable, better at teamwork etc… Marriage most assuredly allows a division of labor which may raise productivity. Bryan advances for evidence a study looking at marriages which occur while a baby is on the way. What this study tries to do is separate marriages that are selected into from marriages which would be “accidentally” entered into after an unexpected pregnancy. If spouses and employers just happen to look for the same thing in a spouse and employee, getting married because of an unexpected pregnancy would not increase your income. On the other hand, if marriage makes you more productive, marriage due to an unexpected pregnancy should be just as effective in raising your income as marriage for other reason. The study finds some support for Bryan’s argument.

I, however, believe there is an intermediate model that explains the results of the study but rejects Bryan’s implied conclusion that more poor people should get married: signaling. Being in a relationship with somebody requires a certain skillset: ability to work with someone else, reliability, perseverance, etc… If you have those skills and qualities, you are much more likely to end up in a long-term committed relationship, get married and stay married. Those qualities as it turns out are also highly valued by employers and so they may end up using marriage as a signal for those qualities.

The shotgun marriage example is simply an example of someone mimicking the signal. They get the same advantages as people who sent out the signal legitimately. But if Bryan successfully convinces individuals to marry as a way to increase their income, the signal to noise ratio will drop until the signal has no value.

PS: To my lovely wife. I didn’t marry you to get a better job.

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8 Responses to Marriage, Poverty and Signaling

  1. Tim says:

    Could you explain how there is no marriage penalty? A quick look at the federal income tax tables will show that there is indeed a penalty for two single people getting married when both those people make roughly equivalent amounts of money. OTOH, there is a benefit to couples with one primary breadwinner who choose to get married. But there is still a penalty for some people.

    This seems to me a matter of simple arithmetic, but given the other posts I’ve read on this blog, I’d hesitate to dismiss your claim out of hand. Maybe a link to a source of yours on the topic?

    • PrometheeFeu says:

      My understanding is primarily the result of informal discussions with accountants. So less than perfect, I will grant you. However, looking at the 2011 tax tables, (http://www.irs.gov/pub/irs-pdf/i1040tt.pdf) I can find no marriage penalty. I’m assuming persons earning the exact same amount. I looked at $10,000, $40,000 and $50,000 of taxable earnings each and in all cases, you were better-off married filing jointly than each filing your own return.

    • vikingvista says:

      PrometheeFeu, you must have misunderstood your accountant, or you should verify his credentials. Take another look at the tax schedules. The marriage penalty is not uncommonly discussed on accounting and financial blogs, and is a well known fact. Additionally, anyone a little mathematically minded can see that it is a necessary consequence of progressive tax rates. Let me explain…

      First, MFJ brackets are precisely twice the MFS brackets, meaning that there is no difference between the two sets of brackets for equal income earners. However, if one spouse makes next to nothing, the two sets are different, and MFJ lowers the tax burden.

      Second, MFS and single brackets are NOT identical, which they would have to be if there was no tax difference between being married and single. Instead, the MFS brackets are LOWER, meaning you hit higher brackets at lower levels of income when you are married. Since MFS=MFJ for equal income earners, taxes unavoidably go up when equal earners marry. However asymmetric dual income earners although also taxed more under the MFS status, have the option of the MFJ status, as described above.

      In general, if you pool your income with another person of equal income so that it is taxed as a single income, then more of those dollars will be pushed into the higher brackets and will be taxed at the higher rates in any progressive system. The only way to not discriminate between married and not married is to have each individual income earner file as single–as though not married. That of course, is illegal.

      Giving all married couples the option of filing as single would immediately remove the tax penalty. This too is well known, and from time to time a Congressman proposes it in a bill. It never passes, because this “myth”, as you call it, is seen to bring in too much revenue.

      I have first hand experience. My wife earns roughly the same income that I do. We lived together for a couple years before we married. One day we got married, but changed nothing else. That year our taxes, as my accountant warned me, and as my spreadsheet calculations showed, went up. Was it significant? Well, it would’ve paid for a fairly high end 1 week vacation anywhere in the world–every year. Yes, that is money we miss, and will particularly miss in retirement with loss of the compounding interest contributions.

      The flip side, is that for asymmetric incomes, marriage reduces your tax burden. This reaches its most beneficial at head of household status where you not only benefit from the inherent progressivity of the tax code, but also by your own special more favorable tax schedule.

      It is possible your accountant was practicing collectivist accounting when he advised you, by thinking that since some people benefited and other people suffered from the marriage discrimination in the tax schedules, that it was a wash–one man’s loss cancels another man’s gain. Whether that accounting is true or not, I won’t dignify with a reply.

      It is simple enough to put together a spreadsheet to see what the tax effect is under the different schedules for spouses of varying income levels. You can do this and see for yourself if you consider it insignificant. I did before I married (I know, not very romantic), and the results reasonably matched what our actual experience has been.

      • PrometheeFeu says:

        I wasn’t looking for an accountant at the time and we were just chatting at a friend’s house, so the stakes of the discussion were low enough that I may not correctly recall or that they may have been sloppy. But here is my work with the following IRS tables: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

        $10,000 each
        MFS = $1079 * 2 = $2,158
        MFJ = $2,154

        $50,000 each
        MFS = $8631 * 2 = $17,262
        MFJ = $17,244

        But tax law is not my expertise and so I’m more than willing to concede I may be missing something.

        • vikingvista says:

          1. I don’t know how you can hope to discover whether or not there is a marriage penalty by looking only at schedules for married people.

          2. The marriage penalty is a function of tax progressivity. Let’s try crossing a few brackets:

          Two people each make $210K. From the 2011 1040 worksheet page 86:

          Combined tax:
          Filing as single: 2 * ($210K * 0.33 -$15.103K) = $108.394K
          MFS: 2 * ($210K * 0.35 -$15.064K) = $116.872K; penalty=$8.478K
          MFJ: 2 * $210K * 0.35 -$30.12850K = $116.8715K; penalty=$8.4775K

          This tax is before credits and deductions on the 1040 form. Credits and deductions drop off dramatically as income rises (primarily because of the AMT), increasing progressivity and therefore the marriage penalty as well.

          There are, of course, some people who will say that anything that doesn’t impact them personally can be proclaimed a “myth”, and without doubt our political system is plagued by such thinking. But as will the collectivist assumption, I will not dignify this type of thinking with a response.

  2. Max says:

    He also never says why roommates couldn’t realize many of the same benefits of living together that married people get.

  3. PrometheeFeu says:

    Marriage or similar long-term relationships offer a certain stability and permanence that roommate arrangements do not. When my wife left for her PhD program, we didn’t have to sell the car which we owned together or spend hours disentangling our common assets because there is a strong expectation that we will simply move back in later. Also, I trust my wife to not attempt to free-ride in our relationship a lot more than I would trust a roommate. I recently looked at the prices for 2 bedroom apartments vs 1 bedroom apartments. Well, having a single master bedroom is a lot cheaper than 2 smaller bedrooms. There are a lot of benefits that one gets from marriage that are not available to roommates.

  4. Steven says:

    Shotgun weddings don’t make for a very good natural experiment. People can get pregnant and choose to either (a) not have the child (b) put the child up for adoption or (c) not get married and have 1 or both parents raise the child. So people who get married with a child on the way chose not to do either of those 3 things (none of which is extremely rare).

    Since people select into shotgun weddings (despite the name), I think Bryan Caplan’s evidence is pretty weak. People don’t accidentally get married. People get married because they want to make a commitment. Why they want to do that varies, but the important thing is that you don’t NEED to get married if you have a child. As another point, there is no way to know how many of those people, even if they hadn’t gotten pregnant, would have gotten married anyway. Surely some of them would have, and so really belong in the married by choice group. It could be that if you take all the shotgun weddings that were really by choice, that the remaining would actually look like single people with respect to wages.

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