Case Study Horizontal Equity And The Marriage

The treatment of marriage provides an important example of how difficult it is to achieve horizontal equity in practice. Consider two couples who are exactly the same except that one couple is married and the other couple is not. A peculiar feature of the U.S. income tax code is that these two couples pay different taxes. The reason that marriage affects the tax liability of a couple is that the tax law treats a married couple as a single taxpayer. When a man and woman get married, they stop paying taxes as individuals and start paying taxes as a family. If the man and woman have similar incomes, their total tax liability rises when they get married.

To see how this "marriage tax" works, consider the following example of a progressive income tax. Suppose that the government taxes 25 percent of all income above $10,000. Income below $10,000 is excluded from taxation. Let's see how this system treats two different couples.

Consider first Sam and Sally. Sam is a struggling poet and earns no income, whereas Sally is a lawyer and earns $100,000 a year. Before getting married, Sam pays no tax. Sally pays 25 percent of $90,000 ($100,000 minus the $10,000 exclusion), which is $22,500. After getting married, their tax bill is the same. In this case, the income tax neither encourages nor discourages marriage.

Now consider John and Joan, two college professors each earning $50,000 a year. Before getting married, they each pay a tax of $10,000 (25 percent of $40,000), or a total of $20,000. After getting married, they have a total income of $100,000, and so they owe a tax of 25 percent of $90,000, or $22,500. Thus, when John and Joan get married, their tax bill rises by $2,500. This increase is called the marriage tax.

"And do you promise to love, honor, and cherish each other, and to pay the United States government more in taxes as a married couple than you would have paid if you had just continued living together?"

We can fix the problem for John and Joan by raising the income exclusion from $10,000 to $20,000 for married couples. But this change would create another problem. In this case, Sam and Sally would pay a tax after getting married of only $20,000, which is $2,500 less than they paid when they were single. Eliminating the marriage tax for John and Joan would create a marriage subsidy for Sam and Sally.

In practice, the U.S. tax code is an uneasy compromise that includes a combination of marriage taxes and marriage subsidies. According to a study by the Congressional Budget Office, 42 percent of married couples pay a marriage tax, averaging 2.0 percent of their income, while 51 percent of married couples pay lower taxes by virtue of being wed, averaging 2.3 percent of their income. Whether a couple is better off (from a tax standpoint) being married or shacked up depends on how earnings are split between the two partners. If a man and woman have similar incomes (like John and Joan), their wedding will most likely raise their tax bill. But a marriage subsidy is likely if one partner earns much more than the other, and especially if only one of them has earnings (like Sam and Sally).

This problem has no simple solution. To see why, try designing an income tax with the following four properties:

♦ Two married couples with the same total income should pay the same tax.

♦ When two people get married, their total tax bill should not change.

♦ A person or family with no income should pay no taxes.

♦ High-income taxpayers should pay a higher fraction of their incomes than low-income taxpayers.

All four of these properties are appealing, yet it is impossible to satisfy all of them simultaneously. Any income tax that satisfies the first three must violate the fourth. The only income tax that satisfies the first three properties is a proportional tax.

Some economists have advocated abolishing the marriage penalty by making individuals rather than the family the taxpaying unit, a policy that many European countries follow. This alternative might seem more equitable because it would treat married and unmarried couples the same. Yet this change would give up on the first of these properties: Families with the same total income could end up paying different taxes. For example, if each married couple paid taxes as if they were not married, then Sam and Sally would pay $22,500, and John and Joan would pay $20,000, even though both couples have the same total income. Whether this alternative tax system is more or less fair than the current marriage tax is hard to say.

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