People are missing the point on taxes

I recently had a contest asking commenters to find an article or blog post on the fiscal cliff deal that did not contain factual errors regarding the change in tax rates.  No one succeeded, even my own blog post contained errors.  And so does the David Henderson post that I’m about to comment on, although it’s far better than most.  I sometimes have the feeling that the press doesn’t even care what the truth is.  I also think people are being far too kind to the Congress.  This is a terrible bill, and should be roundly ridiculed and mocked.  Consider the following analogy:

Suppose Congress declared April 15th to be “handheld calculator regression day.”  All Americans had to go to a public building and sit there all day doing complex regression analysis using simple hand held calculators, for no reason art all (I did regressions like this in the 1970s, BTW.)  Obviously there’d be outrage.  Now consider a recent post by David, who defends the bill as the best the GOP could have gotten:

Most of the criticisms that Scott Sumner and Steven Landsburg make are ones I share. So I’m not judging the tax bill to be good. Viewed in a political vacuum, it sucks. Viewed in the world we’re in, it’s actually a pretty good bill.  .  .  .

Think about the context. Republicans, who, since 1981 have been the anti-tax-increase party, hold only the House of Representatives. The President, who is very hostile to high-income people and very strongly in favor of double-taxing savings, was just re-elected. The Democrats hold the Senate.

Had the Republicans held out for anything like the reforms that Sumner and Landsburg wanted, the bill would have been Dead on Arrival in Harry Reid’s Senate.

Maybe I’m reading between the lines, but I wonder if David assumes that I view the GOP as the good guys, and the only question is whether they were able to hold back the evil Dems, who favor much higher taxes.  In fact, I see the GOP and the Dems as both favoring big government, both being the bad guys.  Recall that when the GOP took all three branches of government for the first time in my lifetime (in 2001) they went on an orgy of spending, after 8 years of pretty reasonable fiscal policy under Clinton.

Now let’s examine my criticism of the phase-outs.  These require taxpayers to do all sorts of complex mathematical calculations for no reason at all.  It’s just busywork.  These don’t bring in more revenue than you’d get from slightly higher MTRs, and they don’t affect the progressivity of the tax code.  Suppose the phaseouts bring in $100 billion.  Is David suggesting that Obama would not have accepted the following deal from the GOP:

“Mr. President, your proposed phaseouts bring in $100 billion from the people in the $250,000 to $400,000 income range.  We propose instead that the MTRs on that group rise from 33% to 35.7% (or whatever is needed.)  This increase would make the tax system far simpler, bring in equal revenue, and be just as progressive.”

Is David saying Obama will refuse that deal?  Indeed Obama is just as guilty as the GOP, for not proposing it.  Why didn’t it happen?  Perhaps the GOP was concerned with public relations.  Maybe they wanted to hide the fact that they were caving in to Obama and signing off on raising taxes on everyone making over $250,000 per year, and all the know-nothings in the press and blogosphere played along, parroting the GOP lies.

The marriage penalty was another big issue I raised.  I don’t recall hearing a single GOP Congressman complaining that Obama was actually increasing the marriage penalty.  It would have been great PR to tell the public that Obama’s bill would result in the government paying people thousands of dollars to get divorced and live in sin.  They could talk about how men living with their mistresses would pay much lower taxes than men living with their wives (if the women also worked.)  They could propose a revenue neutral fix.  Let’s be honest, the GOP silence on this issue shows they favor the marriage penalty.

I also discussed the higher MTRs.  As I noted in my post, I think you could argue that the upper middle class and rich should pay rather high MTRs on their wage income.  At least as long as we have government spending at these levels.  And as I said, the GOP favors big government, indeed they increased the size of Medicare, federal aid to education and homeland defense under Bush.  They want an even more bloated military, agricultural price supports, space program. etc.  What the GOP doesn’t realize is that these things have to be paid for.

But let’s accept David’s premise, and see if the GOP could have done better in holding down MTRs.  I claimed that their big mistake was made in 2011, when they might have latched on to Schumer and Pelosi’s proposal to just raise taxes for those making over a million dollars a year, and make the other tax cuts permanent.  Obama wanted a deal to cement his re-election.  But they never tried.  They refused to even discuss any tax increase at all.

A bit later I suggested the GOP would lose the 2012 election and end up with a far worse deal from their perspective, which is what happened.  So on the basic question of size of government, the GOP blew it in 2011, n0t 2013.  I certainly agree with David that the size of the tax increase in dollar terms is about the smallest the GOP could have gotten in 2013.  My criticism lay elsewhere.

We let our politicians get away with murder, partly because taxes are so complex.  If the public understood that there was absolutely no reason for the complexity, that it was just make-work so Congressmen could hide the extent to which they raised taxes, there would be outrage.  Or at least there’d be outrage in a country with high civic virtue like Denmark, maybe not Greece or Pakistan.  I don’t like where America is headed.

Someone in my department just got divorced and likes to point out that his taxes will fall by more than $10,000, and yet he still lives with his “wife.”  Is that fair?  BTW, I like him and applaud his decision, but he shouldn’t have to go that far.  What a sad, pathetic tax code we’ve constructed, and it doesn’t have to be that way.  In Sweden they tax individuals, and simply send you the bill.  No forms to fill out.  No estate tax.  We should demand no less.

PS.  My foaming at the mouth anger is directed at Congress and the press, not David, who I like a lot.

PPS. The funniest comment after my contest was this from Ben J:

Struggling to find any examples of the actual effective rates. Finally found a website with a collection of people talking about rates. I noticed someone mentioned the real capital gains tax rate of 23.8%…

…and they were quoting S.Sumner, Bentley University.

God help us if they are looking to me for expertise on taxes!  Later I found out that the top capital gains rate would be higher than 23.8%, so even I was in error.



46 Responses to “People are missing the point on taxes”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. January 2013 at 19:47

    Speaking of high marginal tax rates (on low income people), here’s a bit of support for Casey Mulligan’s ‘the benefit is the cost’ argument;

    But you have to read almost all the way to the bottom of the post to get to it;

    ‘It is possible that the long-term unemployed are increasingly made up of workers whose skills are not suited to available jobs. However, if this were the case why wouldn’t we see some outward shift [in the Beveridge Curve] in the short-term relationship as well? Furthermore, the fact that the vacancy-unemployment relationship has shifted in all industries when only the workers who were previously employed in those industries are considered calls the mismatch hypothesis into question as well.

    ‘Another possibility is that the long-term unemployed in this recession may be searching less intensively, either because jobs are much harder to find or because of the availability of unprecedented amounts and durations of unemployment benefits.’

  2. Gravatar of jknarr jknarr
    4. January 2013 at 20:02

    Ooh-rah. The tax code is a bipartisan abomination. All the more power to them.

  3. Gravatar of Benjamin Cole Benjamin Cole
    4. January 2013 at 20:41

    Regression analysis with the handheld calculator is maybe impressive….but only if you do not remember FORTRAN cards.

    Okay, its a wrap: I don’t understand our tax code, I don’t understand federal spending, and I don’t understand monetary policy.

    But why should this stuff be clear? I am only a citizen….

  4. Gravatar of Alexei Sadeski Alexei Sadeski
    4. January 2013 at 22:01


    Do you think that some politicians consider higher taxes an end in themselves?

    I’ve been thinking about this lately… seems plausible to me…

  5. Gravatar of Jim Glass Jim Glass
    4. January 2013 at 22:14

    The tax code is a bipartisan abomination…

    Yes, and it always will be. The best it has ever been in the USA was after the Tax Reform Act of 86 — and that was the best it ever will be. I say this as a professional who has worked in the area since before then. It is the same in all nations (much much worse in many, no, most). It’s the nature of public choice. Getting *too* upset about these details is letting the perfect be the enemy of the could be a whole lot worse.

    The big revelation in the whole episode, IMHO, is that the Democrats have shown themselves to have no stomach whatsoever to raise taxes on the scale needed to fund the entitlement society.

    After spending a decade demagoguing the Bush tax cuts as being so fiscally ruinous they just made 98% of them permanent. Now, having themselves made them the new revenue baseline, they have no bargaining leg to stand on to increase revenue in the future to cover the entitlement explosion — and no evident desire to try.

    The explanation is public choice again. If you are a Democrat it is easy to *pose* in outrage over “tax cuts for the rich”, but when it comes to actually increasing taxes on your own constituents … my own Sen. Schumer and his NY Democratic delegation wanted to limit the tax increase in the deal to income over $1 million.

    Obama originally demanded $1.6 billion of revenue, Boehner offered $800 billion, the Democratic Senate compromised at $600 billion and made it permanent — sacrificing the leverage that came from having the “temporary tax cuts” always about to expire, which they didn’t want to keep.

    Douhat in the Times put the public choice point this way:

    If a newly re-elected Democratic president can’t muster the political will and capital required to do something as straightforward and relatively popular as raising taxes on the tiny fraction Americans making over $250,000 when those same taxes are scheduled to go up already, then how can Democrats ever expect to push taxes upward to levels that would make our existing public programs sustainable for the long run?…

    There is a significant constituency among Congressional Democrats that was already uncomfortable with the $250,000 threshold and wanted to push it higher “” all the way to a million dollars, if a certain influential New York Senator had his way…

    Nor is this tax-wary caucus likely to grow weaker with time: It exists because many Democratic lawmakers represent (and are funded by) a lot of affluent professionals in wealthy, high-cost-of-living states, and that relationship is only likely to loom larger if current demographic and political trends persist.

    Is a Democratic Party that shies away from raising taxes on the $250,000-a-year earner (or the $399,999-a-year earner, for that matter) in 2013 “” when those increases are happeningly automatically! “” really going to find it easier to raise taxes on families making $110,000 in 2017 or 2021? Color me skeptical…

    Because Social Security and Medicare are so popular, the right-wing path to fiscal sustainability does sometimes have an air of fantasy about it. It’s just that on the evidence of what the Obama White House and Senate Democrats have been willing to concede this week, the left-wing path to solvency looks pretty implausible right now as well.

    The consequences of this will dwarf those of the marginal rate changes (etc.) in this law, which themselves will be very small compared to the consequences of many much larger tax law changes that I’ve had the pleasure to work with in the past.

  6. Gravatar of W. Peden W. Peden
    4. January 2013 at 23:04


    “All the more power to them.”

    That could also serve as a summation of the last 12 years in the US.

  7. Gravatar of Saturos Saturos
    5. January 2013 at 01:22

    Sack gets sacked (couldn’t resist):

  8. Gravatar of foosion foosion
    5. January 2013 at 04:17

    1) Marriage penalty. A couple with only one earner (or one much higher than the other) pays less than filing separately. A couple with both earning about the same pays more. One group or the other (or singles) will complain about any basic changes. There’s no revenue neutral way to satisfy them all.

    2) A large number of people don’t understand marginal rates – they think once they pass a threshold all income is subject to the new rate. Do you really think we’re ever going to make the tax code simple enough for them to understand?

    3) Calculating. We could just let the IRS send out bills, but the tax software and accounting lobbyists object, as does the GOP which wants people to hate taxes.

    Something like the flat tax would be simpler, but would be a huge boon to high earners compared to the present system. Those who complain about complexity are often looking for a less progressive tax code and are using complexity as a way to mask the distributional implications.

    4) The press doesn’t understand economics or math. Most people believe the press has a political agenda (although there’s no agreement on what the agenda is). Reporting on taxes is no worse. Dean Baker has a great blog called ‘Beat the Press’ in which he reports on major errors in reporting.

  9. Gravatar of bill bill
    5. January 2013 at 05:16

    A VAT tax, a carbon tax, taxes on other natural resources and pollutions… they are all simpler than taxing income. And could raise enough money that the tax on incomes under _____ (choose your favorite number – even choose infinity) could be zero.

  10. Gravatar of WP Knabe WP Knabe
    5. January 2013 at 05:43

    I could’t find any good MTR articles, so I tried myself here:

    Greg Mankiw linked to this site which tries in a different way

  11. Gravatar of Michael Barry Michael Barry
    5. January 2013 at 05:58

    Scott: with respect to the marriage penalty, I get it that you don’t think married people should be taxed more than single people. Do you think they should be (as joint filers with a non-working spouse are) taxed less? If yes — that is, if you want to give married people the “the lower of two rates” — then you would (inevitably) have to tax single people more (to cover the revenue loss). Unless you adopt a “no tax privilege for joint filers” position (the ubiquitous “families” we’re always hearing about), someone is going to lose. It’s not clear to me where tax policy ends and social biases begin, here. Perhaps gay couples will lead a movement to tax everyone as single — that certainly seem to be the trending urge (viz the increase the birthrate among unmarried women).
    This all begs a more important question — the high cost of family formation (as opposed to marriage) and raising children. Not sure I care how you tax a DINK — I expect they would get divorced if it was worth enough in any case. But a family with children raises certain issues …

  12. Gravatar of ssumner ssumner
    5. January 2013 at 06:55

    Patrick, Good observations.

    WP, I’m afraid that’s inaccurate, the actual increases in MTRs are larger than you indicate.

    Bill, Good point.

    foosion and Michael, You are both missing the point. It’s very simple. You tax everyone as single, just like many other countries. No one is treated unfairly. No one is helped and no one is hurt. Everyone is treated fairly. Having a piece of paper called a marriage certificate has no bearing on anything, it should not be a part of our tax code.

  13. Gravatar of Ram Ram
    5. January 2013 at 07:06

    What do you make of the stock market rally in response to the deal? I agree the deal was terrible in absolute terms, but presumably the stock market is happy because the most likely alternative was even worse? Or are they just happy because dividend taxes are not going up as much as feared?

  14. Gravatar of Michae Barry Michae Barry
    5. January 2013 at 07:13

    Scott: (1) I was asking for clarification, not missing the point.
    (2) You are missing my point: your answer depends on what you view as the primary social unit vis a vis the taxing authority. I suppose a (dogmatic?) libertarian views everyone as “just” individuals, but the notion that “man and wife are one person” and of family formation as commonly involving a very specific sort of division of labor is not utterly disreputable. Joint filing status “emerged” in the context of those notions. I dont’t think those who cling to those notions (together with their guns and bibles) are stupid – they live in different world than college professors and (describing myself) pension wonks.

  15. Gravatar of ssumner ssumner
    5. January 2013 at 07:45

    Michael, You said;

    ” You are missing my point: your answer depends on what you view as the primary social unit vis a vis the taxing authority.”

    Sure, but you can’t just claim that a married couple should be treated as a single unit for taxing. You must provide a reason. Brothers and sisters are all part of one family. Why don’t we put them all on one tax form? That would be idiotic, right? So give me just one reason why two people who happen to be married should be taxed at a higher rate than if they lived together unmarried. Just one reason.

    Indeed it’s none of the government’s business whether people are married or not–that should be private information, like what church you go to.

    Ram, I would expect stocks to rise–they avoided the fiscal cliff and they scaled the dividend tax increase way back. The stuff I complained about would have no effect on stocks.

  16. Gravatar of foosion foosion
    5. January 2013 at 07:58

    Scott, you assert that everyone should be taxed as an individual. Married couples with one higher earner disagree. Other than that it would help you and others similarly situated, you haven’t come up with much of an argument for your position. As Michael says, couples are treated as a social unit.

  17. Gravatar of ssumner ssumner
    5. January 2013 at 09:00

    foosion, Redheads should not be taxed a a higher rate than blondes. A married man and woman who live together should not be taxed at a higher rates that an unmarried man and woman who live together. If you can’t see that there’s really nothing I can do. You commenters keep telling me that married people should pay higher taxes, but don’t give me any reason why. Sorry, but that’s not good enough. The burden of proof is on you.

  18. Gravatar of Thomas Thomas
    5. January 2013 at 09:12

    Scott, your response on taxation isn’t really a response. To say that a married man and woman who live together shouldn’t be taxed at a higher rate than an unmarried man and woman who live together is to assert that similarly situated people should be taxed similarly. But that’s what everyone agrees on! How do you keep missing that? So when I say that my wife and I shouldn’t be taxed differently from you and your wife when we have the same combined income, your insistence that we should be isn’t an answer at all. It’s just your preference for lower taxes for you and higher taxes for me.

    You remain completely wrong on the 2011 budget negotiations, where Republicans committed to $800 billion in new tax revenues before Obama insisted on an additional $400 billion. The Pelosi insistence on accomplishing that through an increase in MTR on high incomes was simply a poison pill before the election.

  19. Gravatar of foosion foosion
    5. January 2013 at 10:24

    There are many cases in which married couples are treated as a single unit. For example, no gift tax or estate tax on transfers. Here’s the first article I found listing financial and other benefits of marriage. By the way, the article notes that joint tax filing benefits some and disadvantages others.

    As Thomas says, your answer is “just your preference for lower taxes for you and higher taxes for me.”

  20. Gravatar of Michael Barry Michael Barry
    5. January 2013 at 10:42

    Here’s my best shot at a reason: The joint filer rate is essentially a subsidy for stay at home spouse’s (typically, stay at home moms). It is an incentive for families to adopt this family unit “shape.” I expect, if we had the data (I certainly haven’t looked at it — does it exist?), that this particular family unit “shape” produces a disproportionate number of the future “positive contributors to ‘society'” — persons who get productive jobs and in turn form stable families. My guess (just a guess — I haven’t yet undertaken the research) is that families in which both spouses work have less children (in addition to creating a demand for someone to parent the two-working-spouses’ children while they work rather than parent their own (that is, the caregiver’s) children), and that single parent families produce more … problematic children.
    Anyone is free to disagree with that argument (and hopefully we could find some data to disprove it). I get no benefit from the joint filer subsidy and have no particular commitment to it. But I don’t think it is irrational.
    Finally — I’m not sure the “ontological” argument can be dismissed — many (although fewer each year) in our nation actually do view man and woman as one flesh in a way that brother and sister are not, and I’m not sure their views can be disregarded simply because they have a religious basis we do not share. Maybe that is hopelessly out-moded — it certainly sounds like it.

  21. Gravatar of Floccina Floccina
    5. January 2013 at 10:48

    One thing that disappointed me about the deal is that the SS tax was raised back up which continues the fraud that FICA is a contribution.

  22. Gravatar of foosion foosion
    5. January 2013 at 11:05

    Floccina the relevant dictionary definition of contribution is “A payment exacted for a special purpose; an impost or a levy.” That’s exactly what the SS tax is.

  23. Gravatar of Negation of Ideology Negation of Ideology
    5. January 2013 at 11:05

    “Someone in my department just got divorced and likes to point out that his taxes will fall by more than $10,000, and yet he still lives with his “wife.””

    There was a couple who would get divorced annually over New Year’s, take a trip to the Caribbean to remarry, file taxes seperately, and use the tax savings to pay for their annual “honeymoon”. The IRS had a case against them for fraud, although I don’t know how it was settled.

    As to the substance, marriage carries legal liabilties with it – joint property, responsibilty for children, etc. More marriage = less government welfare spending. So marriage should never increase taxes, it should either keep them the same or lower them. The easiest way to do this is get rid of the “Married Filing Seperately” tax schedule and just let couples file either “Joint” or “Single”. And if non married couples want to file as “Joint”, that’s fine, as long as they take on liabilities for each other. It would be simpler. Is Congress afraid that Warren Buffett will marry his secretary to save taxes?

  24. Gravatar of foosion foosion
    5. January 2013 at 12:11

    Negation, your proposal results in less revenue then existing law. Who are you planning to tax more to make up the difference?

  25. Gravatar of Mike Sax Mike Sax
    5. January 2013 at 13:41

    “This is a terrible bill, and should be roundly ridiculed and mocked.”

    We’ll have to agree to disagree on that one. The only thing I agree about is that the payroll tax holiday expiring is a major tax hike on the non-rich.

    Also I wish the debt ceiling were off the table-but you had to let the GOP think this would help them get what they want later-though of course they’re dead wrong.

  26. Gravatar of Mike Sax Mike Sax
    5. January 2013 at 13:41

    Other than that I loved the bill.

  27. Gravatar of Mike Sax Mike Sax
    5. January 2013 at 13:45

    “”Mr. President, your proposed phaseouts bring in $100 billion from the people in the $250,000 to $400,000 income range. We propose instead that the MTRs on that group rise from 33% to 35.7% (or whatever is needed.) This increase would make the tax system far simpler, bring in equal revenue, and be just as progressive.”

    Yes. I also agree there-I would take that deal.

  28. Gravatar of Bob Murphy Bob Murphy
    5. January 2013 at 14:35

    Scott, sometimes I think you assume too much on the part of your readers (by which I mean, me). I read your initial outrage about the marriage penalty, but didn’t see what the big deal was.

    You’re telling me someone who makes a college professor’s salary, and who presumably is married to a professional, can reduce his taxes by $10,000 per year by getting divorced?

    If that’s what you’re saying, I think you should just do a stand-alone blog post running through the calculation. I had no idea the numbers worked out like that.

  29. Gravatar of Mike Sax Mike Sax
    5. January 2013 at 15:03

    Regarding Bob Murphy’s last coomment-abovve my head-I say +1.

  30. Gravatar of Doug M Doug M
    5. January 2013 at 16:23

    Considering how frequently the results of regression analysis are abuses, perhaps there should be a law that regression calculation only be done on hand calculators.

    Regarding the marriage tax penalty — it is a tax break for some married people and a tax penalty for others.

  31. Gravatar of Negation of Ideology Negation of Ideology
    5. January 2013 at 16:28

    foosion –

    Fair question. I’m for reducing other deductions – I’d like to see the mortgage tax deduction reduced to 15 year loans for new mortgages, and get rid of the deduction for second mortgages/home equity lines. (And if you refinance, you can only deduct if you don’t lengthen the term or increase the balance.) That wouldn’t save anything at first, but it would probably more than pay for it over time.

    But I do think it’s useful to think about what type of tax system you think is fair first, even if you don’t know how to pay for it. If there were a special redhead tax as Scott floated, wouldn’t you argue that we should get rid of it, rather than worry about how much extra blondes will have to pay to make up the revenue?

  32. Gravatar of ssumner ssumner
    5. January 2013 at 16:45

    Thomas, You said;

    “Scott, your response on taxation isn’t really a response. To say that a married man and woman who live together shouldn’t be taxed at a higher rate than an unmarried man and woman who live together is to assert that similarly situated people should be taxed similarly. But that’s what everyone agrees on!”

    No they don’t, read the comment section. I’m getting hammered for asserting “what everyone agrees on.”

    Bob, I don’t know the situation, but I believe his wife is well off. Imagine he makes $100,000. If single, he pays maybe $15,000 or $20,000 in income taxes. If she’s in the top bracket, his income gets taxed at a 43.4% rate if married. There are some offsetting gains for married folk, but I could easily imagine a penalty of over $10,000. I believe my penalty is around $5000, but am not certain.

  33. Gravatar of ssumner ssumner
    5. January 2013 at 16:46

    Doug, Great idea.

  34. Gravatar of Steve Steve
    5. January 2013 at 18:05

    Here’s my proposal:

    * Get rid of the marriage penalty
    * Pay for it by ending the tax deductibility of mortgage interest and real estate taxes.

    That would address the “housing” argument in my view. I actually agree the marriage penalty is unfair, just not that it’s black and white.

  35. Gravatar of Daniel Daniel
    5. January 2013 at 20:08

    Seems like a decent enough article:

  36. Gravatar of Martin Martin
    6. January 2013 at 03:10


    “So give me just one reason why two people who happen to be married should be taxed at a higher rate than if they lived together unmarried. Just one reason.”

    As far as I can see, the marriage penalty is possibly a less inefficient way to raise revenue. For example, you could pay less in taxes yet refuse to do so. If it in turn does not affect the marginal tax rate you and your wife face, then the marriage penalty is non-distortionary.

    To illustrate let’s say that there are two people A and B both earning $100.000, and the rates are 20% to 50.000 and 40% over 50.000. Seperately, the tax burden for A is 0.2*50.000 + 0.4*50.000 = $30.000; for B, the tax burden is also $30.000. Taken as one unit the tax burden is 0.2*50.000 + 0.4*150.000 = $70.000. The penalty here is $10.000. The marginal tax rate however for earning more or less is 40% regardless whether taxed seperately or together.

    If we were to minimize the distortionary impact of taxation for every $ in revenue, it seems to me that a marriage penalty should be part of the mix.

  37. Gravatar of Saturos Saturos
    6. January 2013 at 06:57

    Let’s face it, most finance/economics journalists are not much better than this guy:

  38. Gravatar of ssumner ssumner
    6. January 2013 at 08:09

    Daniel, Great find, I linked right after the contest paragraph.

    Martin, But it does raise MTRs.

    Saturos, very funny!

  39. Gravatar of Martin Martin
    6. January 2013 at 11:44


    Correct me if I am wrong, but was your point not primarily that it raised average tax rates rather than marginal tax rates? I mean it could put you in a higher bracket, as I believe you stated your case to be, but it does not have to be the case necessarily.

    That said, if you were to keep revenue constant, would you have to raise the rates of the brackets more than without the marriage penalty? Perhaps I am missing something, but if I were in charge of taxation and would want to minimize the distortion per $ revenue raised, I would want to have the marriage penalty in the mix. This, for the reason that some people are not willing to divorce to pay less taxes.

    The latter seems to me to be good enough a reason to include the marriage penalty in the policy mix: compared to raising MTRs the marriage penalty raises MTRs for some, but for some only raises the average tax rate.

  40. Gravatar of People are missing the point on taxes « Tax Rate Calculator People are missing the point on taxes « Tax Rate Calculator
    6. January 2013 at 17:09

    […] People are missing the point on taxes […]

  41. Gravatar of ssumner ssumner
    7. January 2013 at 06:51

    Martin, I don’t see how it could raise the average rate without raising the marginal rate.

  42. Gravatar of Martin Martin
    7. January 2013 at 07:20

    Scott, in the example I gave above the marginal rate of both individuals remained the same (40%) whilst the average tax rate went up (from 30% to 35%).

    Let me clarify:

    If Ann and Bob both earn $100.000 and the brackets are such that you pay 20% over the first $50.000 and 40% over the amount over $50.000, then when Ann and Bob are treated as seperate tax units, their marginal rate is 40%, and their average tax rate is:

    Taxes to pay:
    0.2 * $ 50.000 + 0.4 * $ 50.000 = $ 30.000

    Taxes to pay expressed as a percentage of taxable income:
    $ 30.000 / $ 100.000 = 30%

    Both earn the same income, so both face the same marginal tax rate (40%) and the same average tax rate (30%).

    When Ann and Bob are treated as one unit, then each additional dollar earned will be taxed at 40%: the marginal tax rate for Ann and Bob is the same. The average tax rate however now is:

    Taxes to pay:
    0.2 * 50.000 + 0.4* 150.000 = $ 70.000

    Taxes to pay expressed as a percentage of taxable income:
    $ 70.000 / $ 200.000 = 35%

    Both face the same marginal tax rate (40%), but face a higher average tax rate (35%) than when seperated.

    In this example, the only effect the marriage penalty has is on average tax rates.

    It seems to me that for a policy maker who cares about the distorionary impact of taxation, the marriage penalty is a good instrument.

  43. Gravatar of Brian Donohue Brian Donohue
    7. January 2013 at 08:15

    Late entry? This one takes on the ATM, sorta:

  44. Gravatar of ssumner ssumner
    8. January 2013 at 07:42

    Martin, Yes, but you do so at the cost of making taxes more regressive.

  45. Gravatar of ssumner ssumner
    8. January 2013 at 07:45

    Brian, Interesting, it suggests even the press can’t figure it out.

  46. Gravatar of Martin Martin
    8. January 2013 at 15:21


    there is no reason why the tax system should necessarily become more regressive due to the marriage penalty. For example, if only people marry who face the top marginal tax rate, then the marriage penalty makes the tax system more progressive. It is possible that the marriage penalty makes the tax system more regressive, but this depends on:
    1. the tax brackets;
    2. the distribution of income;
    3. who marries.

    For the USA, given its distribution of income, its tax brackets, and who marries, the tax system is likely to be more progressive than regressive because of the marriage penalty.

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