The 1948 tax reform fixed one inequality but created a new inequality – this time between single taxpayers and married taxpayers.
In 1949, John and Jane are married and have combined taxable income of $3,000 (approximately $29,000 today). Their total tax owed is $600.
Jack is a single taxpayer with taxable income of $3,000. His total tax owed is $620. Jack pays $20 more in taxes (approximately $192 today) even though he has the same amount of income as John and Jane.
As income levels increased, the disparity became more pronounced.
In 1949, John and Jane are married and have combined taxable income of $10,500 (approximately $101,000 today). Their tax liability is $2,330.
Jack is a single taxpayer with taxable income of $9,500. His tax liability is $2,470. Jack owes $140 more in taxes than John and Jane (approximately $1,350 today) even though his income is $1,000 less than theirs.
Single taxpayers complained about this inequality. In 1951, Congress created another filing status, called “head of household.” The filing status was (and still is) intended for single taxpayers who are raising children.
A new tax bracket was created for head of household filing status, with rates that were halfway between what a single person would pay and what a married couple would pay on a joint return.
More changes came in 1969 when Congress revised the tax brackets to further equalize the tax treatment of married people and single people. The changes took effect in 1971.
And again, in fixing one set of inequalities, the problem was over-corrected and a new set of inequalities was created – the “marriage penalty.”