Tax Proposals: A Missed Opportunity for Addressing Implicit Gender Bias

by Janet G. Stotsky
November 28, 2017

Broadly, the tax bill before Congress (in both its House and Senate versions) proposes to cut the standard corporate tax rate from 35 percent to 20 percent, reduce personal income tax rates, reduce a range of tax preferences, including the deductibility of state and local income taxes, and increase the child tax credit and the standard deduction. The “sunsetting provisions” of many of the changes in the personal income tax suggest that the most important long-run effect would be the reduction in the corporate tax rate, and experts agree that the bill will bring disproportionate benefits to the wealthiest of the wealthiest Americans.

It’s difficult, though, to see how the tax bill will perform in terms of gender equity. All we can say for sure is that it represents a missed opportunity to move toward a more gender-neutral individual tax system or to use the personal income tax to better support working women.

Let’s examine income taxes from a gender-differentiated perspective. As I have written elsewhere, global tax codes based on individual filing can contain explicit gender bias in several different ways, including explicitly assigning different tax rates to male and female taxpayers, permitting tax preferences only for male or female taxpayers, or assigning joint business or asset income only to males.  In the United States, there is no such explicit gender bias in the personal income tax code. Instead, the personal income tax is based on joint filing for married taxpayers (aggregating spouses’ income before computation) and individual filing for singles. Married couples have the option to file individually, but generally don’t because it tends to raise their tax bill. And the U.S. corporate income tax applies taxation to the corporate entity, thus ostensibly removing gender from its calculation.

Implicit gender biases are a different story. The implicit bias in the U.S. personal income tax arises because women and men differ systematically in the ways they earn and spend income.

That is, behavioral differences mean the tax code inevitably reflects and can enforce gender bias. Here’s an illustration: If a deduction is available for unreimbursed work expenses that are predominantly borne by men (say, for instance, the purchase of uniforms or tools) but not for work expenses that are predominantly borne by women (say, for instance, the cost of emergency day care or finding secure transportation after dark), an implicit bias against women would result in tax disparities.

U.S. working women earn, on average, less than men, with recent estimates indicating that full-time working women’s wages are about 79 percent of men’s. Even after accounting for variables like education, fields of concentration or employment, years of experience, and so on, there is still an unexplained gap of about 8 percent, which social scientists mostly ascribe to gender discrimination.

But because the U.S. personal income tax is progressive, taking, on average, a higher proportion of tax from higher-earning households than from lower-earning households, some argue that the tax code actually enshrines an implicit gender bias against men (who earn more on average). They are wrong: like virtually all income taxes globally, the U.S. tax code actually reflects a broad consensus that a progressive income tax, which, to some degree, “evens out” after-tax income between richer and poorer households, is fair. Further, a change in the tax code to reduce progressivity might be viewed as having a disproportionately negative effect on lower-income households, in that it would shift the burden of the tax system toward them.

Since women earn less than men, a shift away from progressive taxation would most affect women—and it would do nothing to help achieve gender equality in pay.

Bear in mind that, though women earn less than men, on average, ownership (or control) of wealth is more even, according to recent estimates. Why is this? For one, women tend to outlive men, so widows inherit (or acquire control over) the assets of their late husbands; in turn, that wealth is presumably bequeathed in relatively equal shares to sons and daughters. Additionally, in divorce, many states require equal division of assets acquired from earnings during the marriage, even if one spouse earned more than the other. Thus, asset holdings could very well end up more evenly distributed by sex than income. And for several decades, women have been acquiring higher education at a higher rate than men, even though they remain underrepresented in many of the highest earning occupations, such as science and engineering. This growing advantage of women with tertiary educations means that the gap in earned income is shrinking, especially for younger cohorts of women, constituting one more channel by which asset ownership is equalizing across the sexes.

Considering all these vectors, let’s return to examining key proposed tax reform provisions from a gender perspective:

  • Corporate tax rate cut: To the extent that asset holdings (or control) are relatively equal by sex, there is no implicit bias of this first-round effect on aggregate, though it surely worsens the relative economic situation of households with low asset holdings, where single women are overrepresented.
  • Personal tax rate changes: The highest-income taxpayers (those in the top 1 percent of the country’s income distribution) will reap the greatest long-term benefits from these changes. The reduction in progressivity, as noted, can be viewed as implicitly biased against women, who earn less than men, on average. The overall pattern of benefits and losses varies a lot for women, depending on where they live, how they earn income, and what kind of deductions they take. Some women will save a considerable amount of taxes under the reform, while others will pay significantly more taxes, depending on their personal circumstances.
  • Child tax credit expansion: This change would benefit lower and middle-income households with children, particularly helping working women, who bear a disproportionate burden of responsibility here and would gain both monetary benefits and time savings should the government assume more responsibility for childcare costs. Still, the proposed increase is relatively modest, in comparison to the cost of childcare as well as in comparison to the overall proposed changes to the personal income tax code.

Over the longer-term, the loss of federal revenue resulting from this tax reform might lead to cutbacks in government spending, with uneven effects on women and men. Social safety net program cuts would certainly harm women, who receive a larger share of key programs’ spending (including support for low-income households with children and Medicaid). Another significant failing of this tax reform is that it misses the opportunity to undertake fundamental reforms to reduce the “marriage tax”, whereby households are discouraged from dual-earning. That is, because there is a higher effective tax rate on second incomes, reflecting the progressive rate structure of the tax code. Women (typically considered the “second earners” in heterosexual households) are discouraged from workforce participation, increasing their risk of poverty, reducing their work experience, and reinforcing gendered wage gaps.

A more radical reform plan might move to taxation on an individual basis, as is common in most other developed countries. Such systems take better account of the wide variety of households and reduce “marriage taxes.”

Some European countries have even noted these gender equality benefits when moving away from joint or household filing to individual filing. Without undertaking a more systematic overhaul that accounts for the ways women are economically disadvantaged in the U.S., any tax reform is a missed opportunity to leverage fiscal incentives toward gender parity in the labor market.

Janet G. Stotsky is a self-employed consultant on fiscal policies and gender and economics and a retired economist with the International Monetary Fund.

— Photo by Phillip Taylor