Arnold Kling  

More Tax Day Thoughts

Tax Day Thoughts... Elastic Economy...

Virginia Postrel writes,

most Americans want the tax system to do three things: to be progressive, to treat households with the same incomes equally, and to treat all individuals with the same incomes equally, whether or not they're married.

The problem is, we can have any two of those things at the same time, but not all three. No matter how often politicians and various interest groups suggest otherwise, no technical fix can eliminate the marriage penalty while preserving progressive taxation and ''horizontal equity.''

For Discussion. Would the trade-off between horizontal equity, progressivity, and having taxes be independent of marriage still exist with a consumption tax?

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COMMENTS (8 to date)
Eric writes:

I don't get the comment. I don't see how the marriage penalty has any bearing on the progressivity of the tax system, or vice versa.

Is the issue that by ending the marriage penalty, you are therby increasing the marriage bonus of single worker households? Is the problem that a household where the father works and the mother stays home, making a salary of $100k, will pay less than the household where both spouses work and each make $50k?

With modern society as it is, is this a problem that is phasing itself out? Isn't the stay at home mom and endangered species? Isn't the marriage penalty a much bigger problem than the marriage bonus?

scott writes:

Eric – A couple of years ago, my wife’s marginal tax rate was over 50% on the first dollar she earned. That came about because my income put us in the 33% income tax bracket. Since she was self employed, we had to add to that both the employer and employee portions of FICA and Medicare. Then you add on a state income tax rate of 4% or so and you’re at over 50% on the first dollar of income.

If we weren’t married, the initial marginal rate would have been substantially less. My marginal tax rate was a fair bit less (about 15%) since I had already maxed out FICA and didn’t have to pay the employer portion. That’s the marriage penalty in action.

David Thomson writes:

On purely pragmatic ground, our so called progressive tax structure is ludicrous. The abstract Rawlsian philosophical arguments may seem somewhat plausible, but in the final analysis it wastes so much of our valuable time and productivity. A rational person should find it appalling that it takes so much effort to figure out one’s taxes. And let us not forget, that there is no such thing as a consensus understanding of our tax laws. Every expert will provide you with a different opinion. Lastly, even if an IRS employee mistakenly gives you erroneous information---you are still held responsible for the resulting mistake!

Only a flat tax makes any sense. Logically, it is absurd to deny the obvious. Why then do some people dissent? That’s really an easy question to answer. These folks are ideological utopians who refuse to allow a few facts to get in the way of their childish fantasies. They are usually Democrats, and that's why it is normally foolish to vote for the candidates of this highly destructive political party.

Eric writes:

I understand the mechanics of the marriage penalty. What I don't understand is the comment that you can't end the marriage penalty and keep a progressive tax system.

My understanding of the mechanics of the marriage penalty is that it is a result of the standard deduction for married people being less than twice that of the individual deduction. Also, the rates of married people are not the same as twice tha rates for individuals, because the income cutoffs between different rates are different.

I just don't see the impact to progressivity that ending the marriage penalty would have. I don't see how our tax system would be less progressive if the marriage penalty were ended.

On the other hand, I DO see how a flat tax would end the marriage penalty. The marginal tax is the same on the first and last dollar of income.

Kevin writes:

Eric you aren;t considering one of the three things they say you can't have.

You can have no marriage penalty, and you can have a progressive system; but then you are left with the fact that two households making the same amount of money are taxed differently.

To wit, if the marriage penalty ended today. My wife and I would a certain amount on our combined $100,000 of income.

But our single neighbor who makes $100,000 pays a higher rate. He only gets one standard deduction from the 100,000, whereas we get two.

That logically follows if you accept the author's premise that the public desires those three things. I don't readily accept that the public sees a married family with an income of 100,000 the same way they see a single individual making 100,000.

Eric writes:

I don't think that the public wants to see households taxed at the same rate. They want to see individuals taxed at the same rate. An individual making 100K should be taxed at a higher rate than a couple making 50K each. At least, he should in a progressive tax system.

Back to the original quote. In a prograssive tax system, if we eliminated the "married filling jointly" designation, and made everyone file as individuals, why wouldn't the measures of fairness, equality, and progressivity be met?

Mark writes:

David, the complexity of the tax system, and of figuring out one's taxes, have little to do with the progressivity of the system, and a great deal to do with all of the exemptions, adjustments and deductions to income that we make. Figuring the amount of tax you owe isn't the hard part, it's figuring what your taxable income is.

John Thacker writes:

Eric, if you made everyone file as individuals, then there would be a penalty for single-breadwinner families. The family with one husband making $100,000 and the wife staying a home would pay significantly more taxes than a family where each spouse made $50,000. The $100,000 would be taxed in a higher bracket.

Of course, one solution is to do as you do and simply assume that the stay at home spouse and parent is going to go away.

Another solution would be to allow couples to redistribute their income, and be essentially taxed as two individuals each making the average of the two salaries. This would make all married couples making the same total amount be treated the same.

Then of course there would be a penalty for singles, and clear gains from trade for people getting married for tax purposes. Of course, that already exists to an extent with, say, medical insurance benefits.

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