Thinking like an economist

A few months back one of my colleagues sent me the following email:

Dear dismal scientists (all you econ prof’s too)

I am happy to report that after going to my tax accountant Wed night, this dismal scientist reduced his tax burden by $12,000 by divorcing the love of my life  (I was expecting as high as 15K)
As a result, we will be sending you postcards from Hawaii, Fl or where ever.  The only downside is that when we get re-married, Leslie wants a destination wedding.  I told her that Lawrence is a destination.  She had no sense of humor.

John

And here’s Justin Wolfers:

Because Betsey and I earn similar incomes, we would pay a marriage penalty.  The U.S. has a household-based taxation system which subsidizes married families when one person stays home and taxes most people extra if they choose to marry and both work full-time.  The average tax cost of marriage for a dual-income couple is $1,500 annually.  When our accountant ran the numbers for us a few years back we discovered marriage would cost us substantially more.  I love Betsey and all, but is the marriage certificate worth thousands of dollars annually?  I can love her plenty without the certificate.  But this isn’t just about a bean-counter saving his beans.  Truth is, I find it offensive that the tax man treats me differently according to a  very private decision””whether I marry or not.  And so I prefer to remain unmarried, at least in the eyes of the tax man.

I agree with Wolfers, and yet I am married.  Can you guess why?

By the way, both the Dems and GOP support me and my wife having to pay far more in taxes than Wolfers and his partner–even with identical incomes.  It’s not even controversial in Washington.  And yet nearly 100% of Americans are outraged when they find out about the marriage penalty.   Most don’t even know why it exists, why their reps support it.

Just one more reason why academics should pay no attention to “public opinion” polls.  There is no such things as public opinion, there is only election results.  No one knows what Americans would believe about Medicare if that sat down with all the government programs and tax revenues in a spreadsheet front of them, and told they had to equate the NPV of all future taxes with the NPV of all future spending.  We simply don’t know.  And anyone who argues otherwise isn’t thinking deeply enough about the issue.

Whether you want more or less money spent on Medicare, I guarantee that I can frame a poll question that gets the result you want.


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21 Responses to “Thinking like an economist”

  1. Gravatar of Hyena Hyena
    17. September 2011 at 11:11

    It is better, on the whole, to simply incorporate your marriage in Antigua, I think.

  2. Gravatar of John Thacker John Thacker
    17. September 2011 at 11:20

    There are a few in the GOP who support either a flat tax or the “Fair Tax” / consumption tax. Technically those then oppose the marriage penalty– but it’s a fringe position that appeals to part of the base only.

  3. Gravatar of Hyena Hyena
    17. September 2011 at 11:45

    John, I’d just like to point out that an even more fringe view opposes marriage and thus the penalty.

  4. Gravatar of John Thacker John Thacker
    17. September 2011 at 13:06

    Fair enough.

    You cannot have a progressive income tax and not have one of a marriage penalty for equal earners, a marriage penalty for unequal earners, or a penalty for single people.

  5. Gravatar of Jason Jason
    17. September 2011 at 13:36

    Only as far as marriage is meaningless is there such a thing as a marriage penalty. You pay more if you put the label on yourself and less if you don’t; if nothing is different except for that tax then marriage is ipso facto meaningless except that it is taxed (like paying for a brand name, a fake degree, or a knighthood).

    But I’m sure there are other benefits to being legally married that have a value on the order of $1500. Reduced car insurance is one of them. My friend was allowed to accompany her husband who worked on a cruise ship and circumnavigated the globe only because they were legally married. Being married allows marital privilege in legal cases. In most places you don’t have to draw up wills or living wills or HIPAA documents as your spouse can automatically be your beneficiary, legal guardian, etc. without separate paperwork. Alimony after divorce. Joint bankruptcy. There is lots of stuff:

    http://en.wikipedia.org/wiki/Rights_and_responsibilities_of_marriages_in_the_United_States

    Thinking like an economist seems to be thinking in such a way that you miss the bigger picture.

  6. Gravatar of Donald Pretari Donald Pretari
    17. September 2011 at 14:32

    “Whether you want more or less money spent on Medicare, I guarantee that I can frame a poll question that gets the result you want.”

    OK. Let’s see them.

  7. Gravatar of Scott Sumner Scott Sumner
    17. September 2011 at 14:42

    Hyena, Does a marriage in Antigua allow me to avoid the marriage penalty?

    John, Good point.

    Jason, You said;

    “But I’m sure there are other benefits to being legally married that have a value on the order of $1500.”

    Then why not cap the marriage penalty at $1500, it will greatly exceed $50,000 for me (lifetime).

    You said;

    Thinking like an economist seems to be thinking in such a way that you miss the bigger picture.”

    Or perhaps you are missing the big picture. Perhaps there are social benefits to marriage, such as fewer families without fathers. Maybe we should subsidize marriage. (I’d prefer neither tax or subsidy.)

  8. Gravatar of Scott Sumner Scott Sumner
    17. September 2011 at 14:59

    Donald, One poll asked people the appropriate rate of increase in Medicare spending (when the first Bush was President.) People were given a number of choices of percentage increases, and only about 2% favored as much as Bush was proposing.

    But when asked if they approved of Bush’s Medicare “cuts” (from say a normal 10% increase to 8%) most disapproved. So which represents the true public opinion? Two percent, or 60%?

  9. Gravatar of Kindred Winecoff Kindred Winecoff
    17. September 2011 at 15:20

    Scott, I think you’re completely wrong on public opinion, and there is a huge body of literature in political science that disagrees with you. The effect of public opinion on policymaking is very large, and very robust.

    Public opinion research isn’t really my bag but I know a little bit. I wrote a bit on this, including a few cites to some classics in the literature, here: http://ipeatunc.blogspot.com/2011/09/fighting-words.html

  10. Gravatar of GU GU
    17. September 2011 at 16:02

    The selection of the taxable unit is far more complicated than you’re letting on. See, e.g., Boris Bittker, “Federal Income Taxation and the Family,” Stanford Law Review 27:1389 (1975); Daniel Shaviro, “Households and the Fiscal System,” Social Philosophy and Policy, 23;185 (2006); Joel Slemrod & Jon Bakija, Taxing Ourselves (4th ed. 2008) pp. 91-95; David Bradford, Untangling the Income Tax (1986) pp. 161-2, 278-80.

  11. Gravatar of Doc Merlin Doc Merlin
    17. September 2011 at 17:08

    @Kindred Winecoff

    Actually no, the medial voter theorem and such have been very well smacked down by subsequent economists. What the population wants has been shown to matter, but not very much.

    For good examples, look at death penalty in the UK, or the adoption of the Lisbon treaty in Germany.

  12. Gravatar of Kindred Winecoff Kindred Winecoff
    17. September 2011 at 18:00

    @Doc

    The median voter theorem is only one theory of how preferences are aggregated, and it’s about voter behavior rather than public opinion. Some of the best research on voter behavior was done by George Rabinowitz, who argued forcefully against the median voter theorem. See, eg, here: http://www.jstor.org/pss/1956436. (In a nutshell, median voter theorem works pretty well in some contexts where the voters are very well-informed, like legislatures, but much less well in general elections, where signaling and partisan cues become much more important.)

    But all that is separate from the literature on the ways in which public opinion affects policy. There is mountains of literature on this in political science, and it’s pretty clear that public opinion matters. If you want to check any of this you could start with the cites on Jim Stimson’s CV: http://www.unc.edu/~jstimson/Welcome_files/Stimson%20Vita.pdf.

  13. Gravatar of Scott Sumner Scott Sumner
    17. September 2011 at 18:38

    Kindred, I agree that the views of the public matter to some extent, my point was that one shouldn’t talk about the “public opinion” on economic issues as a single view, which can be ascertained through public opinion polls.

    See my reply to Donald for an example of what I was getting at. It’s possible to argue “the public wants to spend more on Medicare” and “the public wants to spend less on Medicare” and have both sentences be completely true at the same time. They might say they want to spend more, and they might also say they want to spend less than we are currently spending.

    GU, Rather than direct me to law review articles that I wouldn’t read even if I had time (and of course I don’t have time) perhaps you could tell me what is complicated about the issue of marriage. Does the complication relate to common law marriage, for instance?

  14. Gravatar of Jason Jason
    17. September 2011 at 19:10

    Scott, you said:

    “Or perhaps you are missing the big picture. Perhaps there are social benefits to marriage, such as fewer families without fathers. Maybe we should subsidize marriage. (I’d prefer neither tax or subsidy.)”

    Ah, but those social benefits do not suddenly appear when one goes from being de facto married to being de jure married and that is where the marriage penalty suddenly appears. The legal benefits of going from de facto to de jure suddenly appear along with the marriage penalty tax. Wolfers’s kid receives the benefit of a two-parent household without a legal marriage. (Currently in most states so do many children with gay and lesbian parents.) People don’t decide to not be even de facto married on the basis of the de jure marriage penalty — Wolfers doesn’t live in a separate household or date other women. The marriage penalty strictly arises with the legal benefits of legal marriage.

    I agree that we should neither subsidize nor penalize marriage, but if we do that I also think we shouldn’t enshrine benefits to marriage in law. With our current system, the legal benefits of legal marriage should be taxed — you are consuming an excludable resource: your spouse.

    Also, I left off the $1500 *per year*. I could see benefits coming out to be worth that much.

  15. Gravatar of Robert Easton Robert Easton
    17. September 2011 at 23:52

    Is the reason you are married that your wife is not an economist, and therefore would be offended by the idea you would avoid getting married for tax advantages? If so perhaps the GOP (and Bill Clinton) are doing gay couples a favour! The couple can avoid getting married and avoid the tax penalty in the process, but do not have to worry about offending their partner by doing so, since they can blame the government for not allowing it.

    Alternatively, you could rationally do it for employer health insurance benefits or other legal reasons?

  16. Gravatar of Yup. | Eggshells and Fury Yup. | Eggshells and Fury
    18. September 2011 at 07:59

    […] on Medicare, I guarantee that I can frame a poll question that gets the result you want.” Scott Sumner. Share this:TwitterEmailPrintDiggRedditStumbleUponFacebookLike this:LikeBe the first to like this […]

  17. Gravatar of Scott Sumner Scott Sumner
    18. September 2011 at 08:27

    Jason, You said;

    “Ah, but those social benefits do not suddenly appear when one goes from being de facto married to being de jure married and that is where the marriage penalty suddenly appears.”

    Yes, but discouraging marriage also, de facto, discourages living together. Those who have the highest marriage penalty in percentage terms (low wage workers) are the least likely to get married. And if they don’t get married, they often don’t have stable familes. Wolfers is the exception.

    But I do agree with you on policy. Eliminate all references to marriage from all laws and regulations.

    Robert, I’ve thought about that angle as well. It’s ironic, and I think it explains the low rates of gay marriage (as compared to lesbian marriage.) Gay men feel no social pressure to marry, and often don’t benefit economically. So they don’t marry very often, even in Massachusetts.

  18. Gravatar of beowulf beowulf
    18. September 2011 at 10:50

    I always grit my teeth when I hear of unmarried couple having children (on economic grounds, I mean, the morality of it is their business). If a married parent of a minor dies, Social Security pays survivor benefits to both widow(er) and child. If an unmarried parent dies, the surviving partner receives only the child’s benefit.
    A widow or widower, any age, with a child younger than age 16, receives 75 percent of the worker’s benefit amount.
    Children receive 75 percent of the worker’s benefit amount.

    http://ssa.gov/pubs/10084.html

    Of course, the 50% haircut on SS survivor benefits could easily be hedged by purchasing inexpensive term life insurance. However the cohort of people who purchase life insurance is strongly correlated with those who’ve already purchased marriage licenses.

  19. Gravatar of Morgan Warstler Morgan Warstler
    18. September 2011 at 15:21

    It isn’t a marriage penalty it is a stay at home mom incentive!

    Yes sure, raise my taxes relatively, we’ll still be a one worker household… for three more years.

    But this is such a damn yawner.

    NOW SUDDENLY, Scott will get into the shallow weeds of tax code, rather than a 30K foot response, “consumption tax, no corporate tax.”

    BUT FAR MORE compelling at this level of discussion is making SMB profits a capital gain.

    So before we do Scott’ thing, we’re doing mine.

  20. Gravatar of Jonas Edholm Jonas Edholm
    18. September 2011 at 22:31

    I didn’t know the US taxed on household income (and you promote individual freedome?)

    I have to agree with Morgan.

    This create a incentive for the lowest earning spouse to not enter the labour market (which in a hetrosexual marriage is the woman).

  21. Gravatar of Scott Sumner Scott Sumner
    19. September 2011 at 10:00

    beowolf, Good point.

    Morgan, But why would we discourage work?

    Jonas, That’s right, and there’s evidence that it has an effect of female labor force participation.

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