Faulty arguments for the marriage penalty
I was surprised that a number of commenters actually defended the marriage penalty in the comment section of my recent tirade. I thought it worth driving a nail into the coffin of one particularly popular but fallacious argument.
Some commenters argued something to the effect that “two can live almost as cheaply as one” (or more specifically at less than double the cost of one.) First let’s consider someone born with the love of the sea. It leads him to buy a sailboat as an adult. As a result, he has less income to spend on food, clothing, and shelter than the typical guy. Should he pay a lower income tax rate, to compensate for his unusually high living expenses?
Now consider six young professional women. Three are picky misanthropes who don’t like sharing bathrooms and kitchen counterspace with other women. The other three women share a three bedroom apartment, thus having lower per person shelter costs. How should we think about this situation?
Most people would say that the three women living alone are free to share an apartment with others if they wish, and thus must derive lots of utility of having their own private place. I can certainly understand that, I was a picky misanthrope who lived alone for more than 15 years. I can’t image anyone saying there should be different tax forms for the three women sharing an apartment, and that they should pay a higher tax rate than the other three. Indeed, I don’t think people would want that to occur even if the government could costlessly ascertain who is living alone and who is not. So why all the arguments for the marriage penalty based on the notion that it is cheaper to share an apartment with others? I don’t get it.
Tags: Marriage tax, Taxation
30. August 2010 at 07:13
I think the argument is that by sharing living space, you’re starving the NGDP god of its justly due 5% growth, which could provoke a volcanic erup… er, I mean, bad economy.
People who endorse the reasoning you gave would probably also endorse higher taxes on arrangements with similar cost-saving benefits if they could be as easily identified as marriage.
30. August 2010 at 08:01
As much as it pains me to eternally play the part of H.L. Mencken, I am here compelled to do so:
Our laws regarding marriage (include the taxation thereof) express democratic cultural values about the symbolic content of the married life, i.e., that the married are supposed to be “one person.” This is validated, in the mind of its supporters, by our numerous laws treating married “individuals” differently. Unless someone shares Professor Sumner’s libertarian ethical priors, they are unlikely to be persuaded (not that anyone is ever *likely* to be persuaded of anything).
Consult Robert Nozick’s The Examined Life for an elaboration of such reasoning.
30. August 2010 at 08:07
Silas, As I pointed out, they wouldn’t favor that. People drive utility from living alone, they are “disadvantaged.” People understand that for the three women living alone vs the three women sharing an apartment.
William Bruce. Now why didn’t I think of that! Yes, by all means, let’s give married couples only one vote in elections, and let’s have them serve prison sentences jointly.
30. August 2010 at 08:15
You’re 100% right. The argument is only made because it is completely self serving–these people want higher taxes and thus make silly arguments that sound good to people who don’t think things through, hoping they will buy their BS.
30. August 2010 at 08:29
scott sumner, 30. August 2010 at 08:07:
“Now why didn’t I think of that! Yes, by all means, let’s give married couples only one vote in elections, and let’s have them serve prison sentences jointly.”
Following the logic of “spousal privilege” may indeed twist one into that conclusion — which is why I consider such privilege far more pernicious, ethically, than the current tax structure. But that is getting into my personal ethics…
Alas, the above *reductio ad absurdum* does not follow if matters of property differ ethically from matters of person. Despite having classical liberal priors, I would assert that they do. But that is getting into my personal ethics…
30. August 2010 at 09:31
I always wondered how not recognizing marriage would work in a libertarian society with immigration law the way it is. Tons of people must be naturalized a year, solely based on the fact that they married an American citizen. Would they be put in the same queue as anyone else trying to live in the US? Or is there an underlying immigration law that would also be reformed by libertarians that would make it a moot point?
30. August 2010 at 09:35
People are willing to pay extra to be married. Thus, the government obliges by charging them more. The exception are those that can’t afford to pay more. And you thought a marriage license was cheap!
30. August 2010 at 09:40
@RD
Most libertarians believe in nearly open borders, so it would be a moot point.
30. August 2010 at 09:56
This discussion demonstrates why we should tax all income at equal rates, giving no special preferences for any reason whatsoever. Given that there will be income redistribution in any case, change the various safety net programs into one guaranteed minimum income which effectively makes the flat tax system progressive.
30. August 2010 at 10:07
Justin, 30. August 2010 at 09:56:
“This discussion demonstrates why we should tax all income at equal rates…”
That, or simply avoid taxing income — which is in line with Professor Sumner’s sentiments and what motivated much of the discussion in the first place.
30. August 2010 at 10:39
Neither of these analogies seems very good, because they both rely on idiosyncratic and impossible-to-measure variations in subjective preferences. (How do you tell between someone who has a roommate to economize and someone who has a roommate because they like it?)
More importantly, to avoid the marriage penalty, you need to embrace one of three alternatives, each of which is undesireable:
1. You can tax everyone on their single income, which is punitive with respect to one-income families.
2. You can tax married couples differently depending on what proportion of their income was earned by each spouse. This is a bad result because in most marriages, joint income is the number that has real meaning. A couple with two $200,000 incomes lives identically to one with one $400,000 income.
3. You can make the married filing jointly rate schedule SO favorable to married people that even those who reap the least benefit from it (by design and necessity) are STILL better off than single folks with the same individual incomes. This is an unjustified tax hike on singles.
I’m guessing you advocate alternative (3). But think about this. If you graph the benefit to both spouses of filing MFJ instead of single at a given joint income vs. the proportion of the joint income earned by one spouse, you’ll see that the benefit peaks at each end, and has a valley at 50%. With current schedules, the valley dips below the x-axis. You’re arguing that the benefit should always be greater than 0. Keep in mind that in order to do that without sacrificing goals (1) and (2), you have to give a tax break to all MFJ taxpayers, whether or not they suffer from the penalty. Why does this entire group need a tax break, and what criteria should we use to determine its size?
I can think of two answers. One is some argument based on effective ability to satisfy preferences from income, which you seem to be rejecting. The other is the argument that every single marriage, without regard to their income, should receive an income tax subsidy, compared to filing singly, even if almost no taxpayers would choose to remain unmarried to escape the marriage penalty or get married to take advantage of the MFJ schedule. That is a consistent position, but I really can’t see any good reasons to hold it.
30. August 2010 at 11:50
I think the mistake is assumption of a false dichotomy: you are either single and living on your own or married and living together. This assumption originates in the idea that two people won’t cohabiate as single people as that would be unamerican and sinful. This is obviously false, especially as non-married couples are becoming more acceptable and popular but that is likely the source of the defensiveness.
Me, as a fan of single couples (haha), don’t mind the marriage penalty so much. As a married man (and apparently hypocrite), however, I will hate it when I make enough to affect me. If there was ever an intention towards making nuclear families the norm, this is surely counter intuitive.
30. August 2010 at 12:57
“That, or simply avoid taxing income “” which is in line with Professor Sumner’s sentiments and what motivated much of the discussion in the first place.”
William,
While I agree a consumption tax with few to zero exceptions would be far better than what we have now, there are some difficult issues that require addressing.
I’m not sure it is fair to hit elderly savers with a consumption tax after they had been paying income tax their whole lives. Even outside of the elderly demographic, anyone in middle age who has been prudently saving suddenly sees a decent proportion of those savings confiscated by the government, and it will be an especially bitter taste for those individuals who chose to save via the Roth IRA.
If a consumption tax is to be revenue neutral, it will require a higher rate – not only because the static consumption base is smaller, but also due to dynamic effects of the tax itself.
The form of the consumption tax also matters.
If the consumption tax came in the form of a sales tax, the rate will appear to be even higher given that most people look at sales taxes from an exclusive basis. A 20% income tax might require, to raise the same revenue, a 25% inclusive sales tax which looks like a 33.3% sales tax as these types of taxes are normally expressed – on top of existing state sales taxes. If a 33.3% tax rate on sales drove greater evasion activity than a 20% rate on income, then we’d have to deal with a still higher rate.
If the consumption tax came in the form of an income tax with unlimited deductions for capital income, then I’m still stuck filling out forms and managing records. And if most taxpayers are still dealing with forms and deductions and the like, it’s only a matter of time before politicians end up adding back complications to the code (though to be fair the pols can ruin any tax system).
30. August 2010 at 14:03
Justin, 30. August 2010 at 12:57:
“I’m not sure it is fair to hit elderly savers with a consumption tax after they had been paying income tax their whole lives.”
I concur. Unfortunately, any measure of radical reform is inevitably unfair to particular constituencies, due to the role of expectations and planning. That is a strong motivator for Burkean attitudes toward these things. Therefore, one could “moderate” the reform through gradual implementation. Or, if one prefers, take a page from Machiavelli’s playbook and do a little evil to do a greater good.
Of course, that all assumes a relatively simplistic tax as you describe. However, a plenitude of variations on the simple consumption tax also exist for our evaluation and implementation.
As for the rest, I will only add that the *gains* to be had from a well-established consumption tax would dwarf the aforementioned costs (themselves hypotheses which I would not fully grant). Since the topic of the post (and comments) is the marriage penalty, I shall leave off here. Of course, I am always amenable to pursuing the matter further via email.
30. August 2010 at 14:45
Scott, it is obviously true that married couples have economies of scale.
The wife and I share an apartment with two rooms for €600. It would cost us €500 each if we were to live separately in a slightly smaller apartment.
The two of us use just as much heating and electricity as each of us would separately. It costs just as much to power a fridge and heat an oven for two frozen dinners. For water, the fixed costs outweigh the marginal costs.
We share a car; except for work, we always carpool (vacations, visits, etc.)
For food we also get bulk discounts: single serving sizes are more expensive than family packs.
And we save lots of time: Most chores (laundry, dishes, shopping, cooking, bookkeeping) have high fixed costs and only low marginal costs for each additional person served.
Taken all together, the economies of scale are huge, compared to our single friends. In fact, airplane tickets are the single major expense I can think of where we have no advantage compared to single people. So we do our vacations by car. 😉
Of course, the fact that couples benefit from working together does not mean that we should tax them extra. And I have always thought that an advanced society would fine-tune the tax code to better accommodate the different phases of a persons life.
Consumption taxes inherently have this feature, since people tend to spend money when they (think they) can afford to do so.
I have also thought that perhaps we should let people save their income tax free, and only pay taxes when the savings are withdrawn.
The government could limit such tax exempted savings to (TIPS) bonds, so that they don’t miss anything.
You earn a dollar tax-free, invest it in bonds. When you need it, you withdraw it, minus a flat tax. Then you either invest it in something else or you consume it, paying a consumption tax (VAT).
By its very nature, such a tax system would accommodate the different phases of human life.
30. August 2010 at 16:36
Jon, Thanks.
William, I am a pragmatist, and the complexity of the tax code is an affront to my pragmatism. For me it isn’t enough that there be “an argument” for X. Is it strong enough to overcome all the reasons not to micromanage things with the tax code. In most cases no.
RD, That’s a good question, and I’m afraid I don’t have a good answer. I tend to favor more immigration, but that’s a rather weak answer, as it wouldn’t address the issue you raise unless borders were 100% open, which won’t happen in the near future.
Dan, Unfortunately you are right.
Justin, I’d go further and get rid of the income tax. Replace it with a progressive consumption tax.
William, Yes!
RobertB, You said;
“1. You can tax everyone on their single income, which is punitive with respect to one-income families.”
Not at all. If there are special considerations, like dependents (children and housewives) then allow credits for dependents. But don’t have different rates for different people. Tax everyone on their own personal income. That is fair to everyone.
You said;
“I’m guessing you advocate alternative (3)”
How could you possibly think that after I clearly said the government should not even recognize marriage. I clearly favor the same taxes on everyone, regardless of marital status. Tax people as if marriage doesn’t exist.
I’m ignoring the rest of your argument, because you are attacking a position I don’t hold. There is only one question here. Should three professional women sharing an apartment pay the same tax as three professional women with the same incomes who live alone. If you agree with me that the answer is “yes” then no further discussion is needed.
EdMigPer, And don’t forget that many young people share apartments in big cities, because it is expensive.
Justin, A payroll tax is a consumption tax that doesn’t hit the elderly. It is my preferred approach. Also easier to make progressive than the VAT. VATs don’t hurt those on social security (because of indexing) but it does hurt them in non-SS income terms.
Wlliam, See previous answer.
JL, People didn’t seem to get my point. I agree that people sharing apartments can save money, but that just means that those who don’t chose to share an apartment with someone must feel the gains from privacy outweigh the cost saving of doubling or tripling up. Revealed preference. Those not sharing are not “worse off.” The arguments people make for marriage penalties have nothing to do with marriage. Some married people don’t even live together. The arguments they are making suggest that the tax unit should be the dwelling unit. And that three women sharing an apartment in NYC should be forced to file jointly. Unless people have that view, I don’t see how they cannot agree with me.
31. August 2010 at 01:47
Scott,
I agree with your argument, but I do think you’re downplaying the gains in discretionary income couples have, whether married or living in sin.
Friends/strangers living together have much less of these savings. Usually they each have their own stuff, their own rooms, they do their own chores, etc. You get all kind of tragedies of the commons and conflicts in these scenarios, which also take up time and energy. (e.g. queueing for the shower.)
If the objective is to tax discretionary income, then it makes sense to tax couples more.
And married couples living separately should simply get a divorce: there is no reason not too.
31. August 2010 at 02:57
I am a NZer, and in NZ tax is paid on individual income, so there’s no marriage tax penalty, or benefit (marital status and other family connections do affect some of the rules around the distinction between tax avoidance and tax evasion, and gift duty, but that’s a more arcane topic).
I used to work for the NZ Treasury and there we would get letters occasionaly arguing for married couples being allowed to pool their tax. The argument was typically in the form that a couple, where one person earned $60,000 per year and the other nothing paid a lot more in taxes than a couple where both earned $30,000 a year, because of increasing marginal tax rates, and that this was unfair to the first couple. (Which it is, for some definitions of “unfair”).
So I presume that the marriage penalty in the US came about because of trying to fix the fairness issue between the traditional husband-works-wife-raises-kids, and thus of course creating other sources of unfairness.
One could of course create the option for couples to chose whether to file individually or as couples, but then average rates would need to rise to offset the loss in taxes, and you would have created an unfairness, by some definitions, for those who don’t marry. Basically all taxes are unfair somehow.
My own politics is to favour a simple system, as you’re going to be unfair somehow anyway, so I prefer the NZ one. But that might be status quo bias.
31. August 2010 at 06:08
Tracy,
In the Netherlands the government has now opted to choose for (what you describe as) the NZ system, not for simplicity, but in order to incentivize women to work.
31. August 2010 at 07:29
Scott,
I agree with you on the payroll tax, though from a political perspective it is hard to see how the left would accept a payroll tax but no tax whatsoever on capital income, regardless of any appeal to economic efficiency. That said, if someone suggested getting rid of corporate taxes and taxing all capital income at the dividend level (or vice versa) would be a hard sell to the liberals, I would agree, but on the margin it would be easier to do and it would at least be moving in the right direction.
While a VAT wouldn’t hurt those who rely on Social Security, it seems a bit unfair to people who prudently saved their after tax income over the past several decades. Personally I am young and save a lot so a VAT wouldn’t bother me much today, but I can tell you I will be furious if a VAT is enacted sometime during the 2040s.
William,
I did stray a little bit from topic, but I had two related points:
1) Keep taxes simple – the marriage penalty is the result of trying to tinker with the tax code to correct for penalizing singles. A single flat rate on whichever base does not discourage or encourage marriage to begin with.
2) While I agree there are strong economic reasons to shift to a consumption tax base – and that on net the costs of transition will be dwarfed by the benefits – we should be wary of inadvertently creating new penalties (e.g. a thrifty baby boomer penalty), which raise fairness concerns and political opposition.
31. August 2010 at 07:50
Scott,
Sorry for misunderstanding your position.*
Taxing everyone on single incomes is superficially fair in that rates are uniform, but it has the huge drawback of treating similarly situated taxpayers differently. I.e., when one spouse earns all of the income, the tax treatment is much worse than when income is earned equally, even though the situation of the taxpayers is the same (in community property states, the taxpayers would have strictly the same legal rights in the income, whoever notionally “earns” it.) And the magnitude of the disparity in treatment will be quite a bit larger than the extant marriage penalty.*
I think the women living together example is more ambiguous than your intuitions are telling you. To the extent that the women dislike sharing living quarters, but are economizing for other purposes, it’s clear that they shouldn’t be taxed at higher rates. To the extent that they prefer living together, they probably should pay some tax.
This probably seems crazy, but imagine a slightly modified tax system in which a deduction is allowed for expenses incurred in obtaining a reasonable level of housing in your geographic area. (Reasonable meaning not 6 people in a flophouse, but also not a single-family home. Say the average local rent on a 1BR apartment.) This system is probably better than our current mortgage-interest deduction, and it’s part of what the standard deduction is trying to capture.
Under this system, the women who live together actually would suffer a penalty, because they wouldn’t have sufficient housing expenses to take the full housing deduction. I don’t think this hypothetical system is bizarre or unconscionable.
*If you’re going to insist on taxing people on single incomes, to have any fairness you’re really going to have to impute income to the nonworking spouse and exclude it from the income of the working spouse, which would effectively take us back to option (3), which you don’t like.
31. August 2010 at 17:27
William, I am a pragmatist, and the complexity of the tax code is an affront to my pragmatism. For me it isn’t enough that there be “an argument” for X. Is it strong enough to overcome all the reasons not to micromanage things with the tax code. In most cases no… Etc., etc.
You’ve just described maybe the biggest argument for monetary stimulus managed by the Fed (for all its faults) rather than fiscal stimulus directed by Congress.
1. September 2010 at 05:49
Jl, I’m afraid the opposite is true. Married couples are far more likely to have kids, and hence have less discretionary income. I’d be far better off economically if single. (We don’t get the tax credit for kids, too much combined income.)
tracy, What you describe is not unfair at all, the $60,000 family is far better off than the $30,000/$30,000 family. The $0 income person actually produces a lot of implicit income (homemaking services.)
Justin, You said;
“I agree with you on the payroll tax, though from a political perspective it is hard to see how the left would accept a payroll tax but no tax whatsoever on capital income, regardless of any appeal to economic efficiency.”
That’s because they don’t understand the concept of ‘income’. If they did, they’d support a progressive consumption tax. Matt Yglesias does.
You said;
“Personally I am young and save a lot so a VAT wouldn’t bother me much today, but I can tell you I will be furious if a VAT is enacted sometime during the 2040s.”
I’d favor it if it replaced the income tax. Yes, I’d pay a bit more VAT (but I don’t consume that much) but I’d save a lot in taxes on capital income being eliminated. Recall that those who have income above SS, often rely on capital income.
RobertB, You said;
“Taxing everyone on single incomes is superficially fair in that rates are uniform, but it has the huge drawback of treating similarly situated taxpayers differently. I.e., when one spouse earns all of the income, the tax treatment is much worse than when income is earned equally, even though the situation of the taxpayers is the same’
No, their situation is not at all the same, read my answer to Tracy, How can a family that earns $60000 from 40 hours a week work be considered equally well off to a family that earns the same for working 80 hours a week (half the hourly wage?)
You are certainly entitled to your opinion on the working women, but then I assume that you would also agree with me that the man with the sailboat should pay lower taxes, if his love of the sea was an inborn trait (say genetic.) He has less money left over for non-sailboat expenses like food and clothing.
Thanks Jim Glass.
2. September 2010 at 05:57
Scott Sumner – I presume then that the people who wrote in complaining about the unfairness of this had ineffective stay-at-home partners. Either that or they envisaged the $30,000-each couple each working half-time.
3. September 2010 at 06:28
Tracy, Yes, I suppose that is one argument, but how common is that?
3. September 2010 at 13:32
“Married couples are far more likely to have kids, and hence have less discretionary income”
Assuming no kids, couples have more discretionary income than singles.
With kids, couples still have more discretionary income than single parents.
And again, sharing a roof does not nearly bring in the same type of savings as does sharing a home and a life.
4. September 2010 at 05:46
JL, Just the opposite, If I suddenly became single, I would be much better off financially. Two upper middle class people don’t share cars, and we live in a house, rather than an apartment or condo. We each have our own clothes, food, etc. Plus I have one child, which is very expensive for the upper middle class (lessons, etc.) So I don’t see your argument at all
4. September 2010 at 06:26
I’m talking about discretionary income, not necessities.
Two cars, a house (instead of an apartment) and other middle class luxuries are not necessities.
If you had to maintain the same lifestyle without your wife, you would have much less discretionary income.
Only food and clothing can’t be shared.(And even then, buying food in bulk is cheaper.)
So, all else equal, a couple has less necessary expenditures than a single person.
4. September 2010 at 11:26
JL, I don’t see it. I’ve acknowledged that there are a few things that can be shared, but they can also be shared by two single people living together. When I think of discretionary items I think of eating out, movies, sports, skiing, all things where it costs twice as much for two, or where things can be shared (like a car ride to the ski slope) but it is equally likely that two single people will share the car ride. So I haven’t noticed the savings in my life. Others may have different lifestyles.
On the other hand there is a huge expense to raising children, no saving I could imagine from doubling up (outside housing) even comes close, and as I said before no one has ever proposed that single people sharing apartments should be forced to pay married tax rates. So that seems a weak argument.