Taxes by Shutterstock.com
- An individual-based tax system helps resolve fairness concerns by treating individuals equally.
- A family-based tax system creates unequal treatment between married couples and unmarried partners.
- Marriage bonuses and penalties are unlikely to influence marriage decisions, but are perceived as unfair.
- Individual taxation improves work incentives for secondary earners.
Both advocates and opponents of same-sex marriage eagerly await the Supreme Court's decisions on two cases challenging the constitutionality of laws - one federal and one state - that deny recognition for same-sex marriage. These court cases come in the wake of increasing public support for same sex marriage: according to a recent Gallup poll, half of Americans now support same-sex marriage. Last week, Minnesota adopted legislation to allow same-sex marriage, joining the 11 states and the District of Columbia that had already taken that step.
This subject divides Americans, pitting cultural conservatives against cultural liberals. Part of the reason that same-sex marriage is such a divisive issue is that many existing government policies treat families as a single unit, collecting taxes and providing government benefits on a household rather than individual basis. A switch to taxing individuals rather than families - as many other industrialized countries do - has the potential to both improve tax fairness and reduce the government's role in defining the family. Moreover, because a family-based tax system penalizes work done by secondary earners, this change can also increase economic output.
As we argued in a recent study, an individual-based tax system helps resolve a number of fairness concerns by treating all individuals equally, regardless of marital status. In contrast, a family-based tax system - which taxes married couples on the spouses' joint income - will necessarily create marriage "bonuses" or "penalties" as long as it has progressive rates. This results in unequal treatment between married couples and unmarried partners.
To see how a marriage penalty can arise, consider two hypothetical married couples, the Johnsons and the Millers. Mr. and Mrs. Johnson each earn $30,000. Mr. Miller earns $60,000, while Mrs. Miller earns nothing. Suppose we have a simple, progressive, family-based tax system in which the first $10,000 of income is tax free for all households (married or single), and the remainder of income is taxed at a 20% rate. Under this system, both couples pay taxes of $10,000 on a combined household income of $60,000. However, if Mr. and Mrs. Johnson were unmarried partners, they would each have paid only $4,000. So, the Johnsons face a marriage penalty of $2,000.
Now suppose policy makers attempt to remove the marriage penalty by making the brackets for married couples twice as wide as those for singles, so that the first $20,000 of income is tax free for married couples and the remainder is taxed at 20%. Under this alternative system, both couples pay $8,000 in taxes. However, the Millers receive a $2,000 marriage bonus: if they were single, Mr. Miller would have paid $10,000 and Mrs. Miller would have paid nothing.
Although the tax brackets in the above example are hypothetical, they illustrate the dilemmas faced by actual family-based tax systems, including the U.S. system. In contrast, under individual-based taxation, there are no marriage penalties or bonuses because each person pays the same tax as he or she would have paid if not married. In the example above, under individual taxation, Mr. and Mrs. Johnson would each pay $4,000 on their individual incomes of $30,000, Mr. Miller would pay $10,000 on his individual income of $60,000, and Mrs. Miller would pay nothing. These taxes would apply regardless of their marital statuses.
While marriage bonuses and penalties are unlikely to influence marriage decisions, they are often perceived as unfair. These fairness concerns have grown as the fraction of unmarried partner households has nearly doubled since 1990. As the debate over same-sex marriage illustrates, family-based policies require the government to decide what kinds of relationships qualify for family treatment. On the other hand, if policy were to shift in the direction of treating people as individuals rather than households, this controversial issue would become less important.
Individual taxation also improves work incentives for secondary earners. Under the current family-based tax system, a non-working spouse who enters the labor force faces a high tax rate on his or her very first dollar of earnings, based on the working spouse's tax bracket. As we have argued elsewhere, shifting to an individual-based system would increase economic prosperity by removing barriers to work for secondary earners. And, because most secondary earners are women, it would help reduce the gender earnings gap as well.
Individual-based taxes do raise some complex issues, which are discussed at length in our recent study. We also examine the thorny issues that would arise if policy makers tried to put benefit programs, like Medicaid and food stamps, on an individual basis. However, individual-based policies have the potential to treat different kinds of families fairly and to increase economic output. Moreover, to the extent that individuals, rather than families, become the basis for government policy, personal choices like marriage, cohabitation, same-sex partnership, or other kinds of relationships can remain just that - personal choices that are none of the public's business.
Aspen Gorry is a research fellow at the American Enterprise Institute (AEI) and an assistant professor at the University of California, Santa Cruz, and Sita Nataraj Slavov is a resident scholar at AEI.