Why is the government trying to force me to divorce my wife?
Over the next few months I plan to explain my deep hatred for the income tax. What most bothers me about the tax is not the amount that I pay (although I believe my wife and I pay more than usual for people with our incomes) but rather the sheer insanity of the entire system. We can certainly afford to pay our tax, so I am not trying to plead poverty. What bothers me is that I must spend several days each year just doing the paperwork. This year I finally relied on HR Block, and had to pay $610 dollars for the privilege. I read that in Sweden the government simply sends you a bill.
Then there are the perverse incentives created by the tax. Today I’ll discuss the marriage penalty.
Why is there so little discussion of the marriage penalty in the press? And why do both political parties seem to favor it? I can’t answer these questions, but will try to speculate anyway. I’d also appreciate your thoughts.
I first became aware of this problem after I got married. I noticed that the combined income of my wife and I pushed us up into higher tax brackets. Initially the problem was trivial. But as we got older and got promotions our income rose into the upper middle class range (low 6 figures) and then it became very noticeable. Suddenly we had to pay the AMT, although if we were single we would not earn enough to trigger an AMT tax. The official 15% capital gains tax rate became a joke, as the realization of significant capital gains can push you into the AMT, which can dramatically affect the tax on your non-capital gains income. I won’t bore you with all the confusing details, but I am shocked each year when I compute how much lower our total tax would be if we were both single.
Indeed the new health care bill makes the marriage penalty even worse for married couples earning between $250,000 and $400,000. Contrary to what Obama says, workers making $130,000 (married to each other) might have to pay higher taxes as a result of the health care bill. So it isn’t just the “rich,” the upper middle class will also be affected. Under the bill a cohabitating couple where each person makes $200,000 from interest, dividends, or rental income will pay an extra $5900 in taxes if married, but no extra taxes if “living in sin.”
You might think this is just some sort of unfortunate “glitch” in the tax code, and that it will be fixed once the authorities become aware of it. I think they already are aware of it. The marriage penalty has been around for decades; it would have been fixed if the government wanted to fix it. But why would the government be so opposed to people getting married? Isn’t marriage generally considered a good thing? My theory is that both parties want to fix it, but they can’t agree on how to do so, so nothing gets done:
1. The Republicans might prefer a flat tax, which would avoid the problem of people getting pushed into higher tax brackets after they get married. But the Dems consider that sort of tax regime to be insufficiently progressive (especially given the regressive nature of payroll taxes.)
2. The Dems might be willing to allow married people to file as a single person, but Republicans oppose that because they think it would favor working moms over stay at home moms. I.e. consider two families that live next door to each other. In one family both husband and wife make $100,000. In the other family the husband makes $200,000 and the wife is a homemaker. Under current law they pay the same amount of taxes, and I think Republicans are OK with that. If married people were free to file under the single person’s tax rates, then the family with two people each making $100,000 would pay less taxes than the person making $200,000. Actually, that seems very fair to me, as a family with someone making $200,000 plus a homemaker is much better off economically than a family where each spouse makes $100,000. In the latter case they still have all the chores to do at home, or else they’d have to hire maids and nannies.
Here is the bottom line. The government is discriminating against people according to their marital status. Two families that live side by side, each with two adults earning $130,000, might each pay very different amounts of taxes. The family where the two adults are legally married pay more taxes than the next door neighbors, who might tell all their friends and relatives that they are married, but in fact secretly got a divorce and are now living in sin. Does that seem fair?
BTW, this isn’t just a problem that affects the upper middle-class; low income workers also face a large implicit marriage penalty, as benefits like the EITC get phased out much more quickly if two low income people get married. Indeed in percentage terms this probably affects them much more than me. (Interestingly, as the marriage penalty got worse for low income workers, their marriage rate fell.)
My wife and I would be better off getting divorced. Unfortunately, women tend to be rather sentimental about marriage. So it may not be easy for me to convince my wife of the logic of this argument. But here’s something I can say for sure. If we did get divorced to save $80,000 to $100,000 in taxes over our lifetime, you’d never know about it. It would be between us and the IRS.
As a good libertarian I oppose having any government policies hinge on whether people are married or not. (I.e., governments should not recognize marital status.) I believe all upper-middle class libertarian couples should stay single, to help “starve the beast.” Let’s hope Megan McArdle’s recent ceremony was just for show, and that they “forgot” to have it formalized at City Hall.
Gay men may actually benefit when gay marriage is legalized at the Federal level, as the social pressure to get married is lower than for heterosexual couples. So they will be able to more easily choose the marital status that best fits their particular tax status—assuming that society doesn’t start pressuring gays to get married. Unfortunately, Americans often seem to want to either ban things or mandate them—with no in-between option of freedom.
I suppose some of my more conspiratorial readers think that Obama is increasing the marriage penalty because gays are an important part of the Democratic coalition. Please spare me! That would be about as likely as the first African-American President paying for health care with a tax that only hits white people.
PS. I do know that many gays are actually hurt by being forced to file as single.
PPS. I am one of what Joe Biden calls the “super-rich” who will be hit by the planned expiration of the Bush tax cuts for upper income people, and I make well under $150,000. So much for Obama’s promise not to raise taxes on people making less than $200,000. My income is a bit more than a Boston cop, but a lot less than a Massachusetts turnpike cop. I guess a Boston cop who is married to a highly-skilled nurse is also “super-rich.” Again, the money doesn’t bother me, I have plenty since I am a high-saving nut. What bothers me is the thought that when I retire I’ll be paying more taxes or getting less Social Security benefits to help those “unfortunate” guys who made just as much as me, but never saved anything. The guys who have garages filled with expensive toys.
Tags: Income tax, Taxation
29. August 2010 at 13:22
Nick, come to Spain! here marriage we have the privilege of choicing to pay taxes as singles -thanks to an important sentence of Suprem Court 25 years ago…
Perhaps an example to US… (But i´m affraid taxes are higher in Spain.)
29. August 2010 at 13:34
The goal of different tax rate schedules (at least in theory) is to capture the relationship between your nominal income and the demands made upon it by your family situation. A single person has fewer demands on their income than a married couple, obviously. Therefore, the same income earned by a partner in a married couple should be taxed at a lower rate than the same by a single person, again obviously. This works very well in “traditional” situations where one partner earns the lion’s share of the wealth, and the other earns little or nothing. Note that forcing a traditional couple to file separately would overtax the husband’s income relative to other single taxpayers who have lower nominal incomes, but comparable wealth once the demands on their income are taken into account.
As you point out, the anomaly arises when two married taxpayers each make a substantial income. It’s not clear at all though that this is tax policy. For one, for most marriages, it really shouldn’t matter at all which partner earns income. If you earn $300,000 and your wife earns $100,000, why should it have different tax consequences than if you each earn $200,000? In either case, you will probably be using the money in precisely the same way. Second, each partner in a married couple earning $400,000 probably really is wealthier relative to demands on income than a single person earning $200,000. Therefore, you really should be taxed at a higher rate, because you’re wealthier.
It seems like the reason you find it offensive is that there appears to be a tax arbitrage where you and your wife could divorce, save money on taxes, but still live together in exactly the same manner. Or to put it another way, the tax system really wants to capture the impact of romantic cohabitation but instead uses marriage as a potentially imprecise proxy. However, you will note that you are not planning to go get divorced to save money. In fact, very few couples (for social, psychological, nontax legal, etc., reasons) will be willing to live with their partner forever without getting married.
Given this fact (which is an example of what tax types call a friction), using marriage as a proxy for romantic cohabitation is sound policy. It’s much easier than trying to investigate whether taxpayers are actually living together in a romantic relationship, and it’s much fairer than just taxing everyone using the rate schedule for single people.
29. August 2010 at 13:36
I find myself in a nearly identical situation – but this issue is no more or less significant than failing to adjust income tax liability by regional cost of living. 150k combined income in boston is not even upper middle class, particularly if one has children and both parents work. In Oklahoma, it’s quite a different matter.
Consider this – there’s a 5,000 cap on child care deductions. The cost of one child in full time daycare (while both parents work) is approx. 1,300 to 1,600 a month in Boston, not 600 a month. However, there are regions of the country where 600 a month buys decent daycare.
The tax system currently favors the very poor, single earner families, and super-wealthy. It also favors couples living in sin (why do gay people want to get married again? that whole debate sort of reminds me of Puerto Rico wanting to be the 51rst US state) Middle income dual working parent households are getting annihilated.
29. August 2010 at 13:38
Sorry, Scott, so much time without reading yo…
29. August 2010 at 13:43
Excellent points–and I am sure there are many more to be made about our ‘system’ –really a confounding set of rules–of federal taxes.
Consider the home mortgage interest tax deduction. (I have benefitted from it).
Yet it encourages (nearly compels) the wealthy to overallocate resources to housing. But, were we to change the deduction now, millions of homeowners, who invested under the ground rules, would (unfairly, perhaps) suffer the consequences.
Housing is a wonderful investment. You can leverage 10-to-1, yet never have to meet a margin call, if the investment goes south. Your loan is non-recourse, meaning limited to your equity. If the property increases in value, your equity balloons–a mere 10 percent rise in the value of the house, and your equity doubles. Risk-free leverage!
All the while, your buying of the house is tax-subsidized, and you can live in it to boot. No matter how wealthy you are, nor how many “homes” you buy, the federal government will help you invest in this manner. As marginal tax rates rise, the better sense it makes to buy.
Like many before me, and surely many to follow, I call for simplified taxes, that encourage work and investment, and tax pollution, consumption, gasoline and sin (except for horseracing).
29. August 2010 at 13:43
Scott,
You wrote:
“Then there are the perverse incentives created by the tax.”
There are perverse incentives created by all taxes, and those incentives (or disincentives) can have a huge effect on long run growth. That’s the subject of my PhD dissertation. But I’ll leave that for another time.
You also wrote:
“Unfortunately, women tend to be rather sentimental about marriage.”
That depends on the woman. My woman wasn’t interested in marriage for the entire 11 years we lived together.
However, as it turns out, she is highly sentimental about money. Within six months of moving out of my house she hired a lawyer to extract as much money as she could from me. (Thankfully none, so far.)
29. August 2010 at 14:02
As another married person fucked by the AMT, I would like to add that it wouldn’t be a problem had the law simply been written with inflation-indexed numbers.
29. August 2010 at 14:10
Interestingly, in germany married couples have a tax advantage over couples living “in sin”, because their income is summed, then split equally and finally taxed as if they were single. So married couples benefit if they have very unequal incomes and are taxed like singles if their incomes are the same.
29. August 2010 at 14:15
[quote] Consider the home mortgage interest tax deduction. (I have benefitted from it).
Yet it encourages (nearly compels) the wealthy to overallocate resources to housing. But, were we to change the deduction now, millions of homeowners, who invested under the ground rules, would (unfairly, perhaps) suffer the consequences. [unquote]
I don’t buy this argument: whenever you suddenly cut the deduction millions of homeowners will suffer, whether there is a crisis or not. The deduction should be phased out gradually over like a decade or two. Why could that not start right now? By the way, I don’t know about the US but this is a current issue in my own country.
29. August 2010 at 14:25
Funny definition of “force” you’ve got there. Next I’ll be robbing a hot dog stand with this $5 bill. 😉
It seems really to be a dual-income-marriage tax. Two earning single people do better than a dual-income couple, who in turn do better than two single people only one of whom earns a salary but supports the other. I feel like all three should be treated similarly … perhaps by allowing groups of adults to pool their income and divide it evenly for bracketing purposes, regardless of marital status? But now I’m avoiding punishing people who live in sin (or even group marriages!) so the republicans will never go for it.
29. August 2010 at 14:33
Reportedly, for the majority of couples filing, marriage rates result in lower taxes than filing as singles. The major pain is dual high income. If we are to have a progressive federal tax system, this isn’t the worst outcome.
It’s not easy designing a system that has neither a marriage penalty nor a single penalty, at least not without a major loss of revenue.
29. August 2010 at 15:16
“Marriage penalty” you mention was introduced to counterbalance “singles’ penalty”. It would be really unfair to punish only unmarried people, so they decided to spread it.
Take a look at UK income taxes, it’s amazing how sane and really simple it is, even if it hits high rates far too early.
29. August 2010 at 16:17
“Sometimes our expectations are betrayed by the numbers”
29. August 2010 at 16:40
@woupiestek Or you could grandfather existing mortgages (leave them alone) and only remove the credit for new mortgages.
Or you could offer a credit for rent expenses. In 2005, I suggested a temporary rent credit as a politically-feasible way to ease the housing bubble.
29. August 2010 at 17:20
Woupiestek: Yes, once tax law becomes tangled, it is not easily undone. People’s livelihoods come to depend on the tax code.
All the hoary grandstanding about a flat tax…let’s see anybody actually do it.
29. August 2010 at 19:23
There should be no phasing out. Just like the horrible limit on property taxes in CA, some people are living in too much house.
The real effect is this: The moment the change is made, the value of their home is going to be reduced. As home values shift downward, the moral thing is to grant people time to sell without killing their credit…
This isn’t about continuing different policies for different people, this is simply about making sure those affected, are not doubly screwed on their credit score, so they can quickly move into a new smaller house – so they can get with the program if they so choose.
The point of a consumption tax, is to cause people to not consume as much – so they save more – savings that can be lent for investment.
29. August 2010 at 19:45
“Fairness” in taxes is pretty much a matter of interest group action and majority political consensus. What the public will accept.
E.g., the original income tax was applied to the individual who earned the income, marriage didn’t matter.
However, in community property states income was legally split between spouses. With progressive tax rates, back in the era of the one-earner couple that resulted in a lower net tax bill for married couples in community property states than in the rest of the US. That “wasn’t fair”, so in the 1940s spousal income splitting on couples’ returns was allowed to everyone (leading to today’s joint returns).
But that was soon recognized to be “not fair” too. After all, two can live more cheaply than one (according to the Census, a couple can live together for about 70% of the cost of two individuals living separately). That creates a “singles penalty” as to welfare, so the income tax rate on joint returns was increased accordingly.
But come the era of the two-earner couple that was seen to be “not fair”, because when two people with roughly equal income marry their tax rate goes way up just from the act of getting married. (This penalty was sharply reduced a few years ago.)
I could go on — but already here’s an irreconcilable argument about fairness. Some say two-earner couples *should* pay higher tax rates than singles with the same per-person income, else they enjoy higher welfare on the same income due to lower household costs. Others say they shouldn’t, because then they are penalized with a higher marginal tax rate (and a disincentive to be married).
Of course there are still plenty of one-earner married couples, and reducing this marriage penalty for two-earner couples increases the “single penalty” incurred by the single worker versus the single-earner couple, which then pays lower tax on the same income.
Now some argue that a couple with one income should pay less tax than a single person with the same income, because of the couple’s higher houseold living costs (and as an incentive supporting the institution of marriage). But that’s the same as saying a couple with two incomes should pay more tax than two single earners, because of the couple’s lower household costs.
So “what is tax justice?” Pontius might have asked. Whom do we choose to penalize? The answer comes just from politics and interest-group influence, what the majority will accept.
The above of course doesn’t even consider the 10,000 permutations of the issue. If one *really* wants to experience a marriage penalty, try filing as “married filing separately”. Why does Congress *hate* people who do? I don’t know, but it does.
As to needless tax code complications in general, there are at least five different cents-per-mile rates for deducting driving your car. If Congress can’t even simplify down to one rate for a thing as simple as that…
BTW, for pictures of the impact tax rules have on new home construction in New Orleans:
http://candychang.com/form-follows-tax-laws/
“… The government taxed property based on lot frontage; so people made their houses as narrow as possible … [The Shotgun] is as wide as a room, up to a half block long, made of consecutive hallway-less rooms … arranged so that in some homes you could potentially shoot a shotgun straight through from the porch to the backyard, hence the name….
“And in more Best Value strategies, people often joined forces to save on property width. Known as a Double-barrel Shotgun, two homes share the same roof and a central wall (above). This is the kind of house I now live in, owned by my friends next door. Our homes are each one room wide and a half block long…”
Never imagine that tax laws are directed by justice or reason on the part of the tax law writers. It’s all just what related politics drives them to and lets them get away with.
29. August 2010 at 20:40
@Benjamin Cole:
AGREED!
29. August 2010 at 22:30
To have couples file jointly seems counterproductive – it just increases the cost of filing and checking tax returns and creates perverse incentives for giving the appearance of staying single if both partners have incomes. A simple progressive tax on individuals, regardless of marital status is both easy on the taxpayer and on the IRS, but it looks like too many people are employed to find holes in tax returns for them to do this.
Removing the perverse housing tax-deduction will hurt a huge element of GDP in the short term but will encourage investment in other fields. The political establishment, though, finds it difficult to remove that tax cut – and not just in the US. Over in India, our new “simplified” direct tax code had to bring back an exemption for mortgage interest after pressure from politically powerful entities.
30. August 2010 at 02:31
In Sweden you will get a ‘preliminary tax bill’ which you can accept and go to a web page and enter a code (if you need to pay more taxes you, of course, have to pay them too, and if you got taxes back they would be sent to your account a few months later). This is quite common and takes about 5 minutes each year. However, if the preliminary tax was incorrect, due to your or the governments error, you have to pay a fine or, in the worst case, go to jail. So if you have done something unusual, like selling a house, you have to do your taxes the old way.
As for the marriage problem, I had a co-worker in the nineties who would marry or get a divorce (with the same woman) every year depending on how the tax code changed.
30. August 2010 at 03:37
Lithuania has adopted Swedish “preliminary tax bill” concept as well.
30. August 2010 at 05:16
Two stupid questions:
1) I thought you could file as a single, irrespective of your actual marital status? I didn’t know the IRS actually checked marriage certificates.
2) I thought you advocated pro-divorce policies? Or at least, anti-“substance of marriage” policies. That is, if people didn’t enter marriage-like relationships, they would have to buy more services (like childcare and you-know-what) on the cash economy, satisfying the NGDP god. That’s a good thing … right?
30. August 2010 at 05:34
“PPS. I am one of what Joe Biden calls the “super-rich” who will be hit by the planned expiration of the Bush tax cuts for upper income people, and I make well under $150,000.”
I know you’re not really complaining about the amount you are paying, but just for context – if a person earns, say, $130,000, even if their spouse earns nothing, they are still in the top 10% of American households. If the spouse earns $130,000 as well, they are in the top 2%.
Now I’m not suggesting you aren’t good value – after all this blog is worth a billion dollars – but in the richest country in the world it’s not a bad result to be in the top 2%.
People in London are always surprised when I tell them where a £70,000 income puts them in the UK population distribution – though with a median income of £25,000 or so, it’s not that surprising when you think about the stats.
You could certainly quibble about the word “super-rich” but most people would probably think it’s fair for the top 2%, or even the top 10%, to get a tax raise.
(from http://www.census.gov/hhes/www/macro/032008/hhinc/new06_000.htm)
30. August 2010 at 05:37
Luis, I’m flattered you think I am Nick.
Robert, You said;
“Second, each partner in a married couple earning $400,000 probably really is wealthier relative to demands on income than a single person earning $200,000. Therefore, you really should be taxed at a higher rate, because you’re wealthier.”
I would argue just the opposite, that in the real world the costs for married people are more than double that of single people (as many have children, for instance) Up in the lofty income level where I reside (and the marriage penalty is severe) there is no child tax credit, so on fairness grounds the married should perhaps pay a lower rate. Certainly our expenses are much more than double when I was single.
Another problem with your argument is that the marriage penalty is severe at very low incomes as well, and it almost certainly explains part of the sharply depressed marriage rates among lower income people. Is that something tax policy should be encouraging?
And finally, if you really want to make an argument that two can live less twice as cheaply as one, it would presumably be based on shelter costs (not food or clothing.) But that suggests that taxes should be based on dwelling units, not families. Everyone who lives in a single housing unit should be forced to file a joint tax return by your logic.
And shouldn’t men be taxed less than women with the same income? Men must pay more for life insurance, and (because they are larger on average) they must pay more for food. How is this argument different from the argument for the marriage penalty?
You said;
“In fact, very few couples (for social, psychological, nontax legal, etc., reasons) will be willing to live with their partner forever without getting married.”
In fact, lots of unmarried people live together, but none do so forever. Not do any married people live together forever.
I know lots of young professionals who share apartments with 2 or 3 others.
Statsguy, I like the gay/Puerto Rico analogy. Correct me if I am wrong, but didn’t the gay marriage rate in Massachussetts turn out to be surprisingly low? I seem to recall the lesbian marriage rate was higher, but don’t quote me on that as I’m not sure.
Benjamin, The best way to get rid of the home mortgage deduction (which is stupid, I agree) is to get rid of the income tax.
Mark. My sympathy.
Carl, The AMT is beyond Kafkaesque. It is diabolical.
Felix, In the US everyone used to file as single. I don’t believe it is even the government’s business knowing whether I am married. Why should they have that information?
woupiestek, I agree.
JeffreyY, You said;
“Funny definition of “force” you’ve got there. Next I’ll be robbing a hot dog stand with this $5 bill.”
It’s not funny at all. Don’t heavy fines for speeding force people to drive less than 90mph? I think most people would say so.
foosion, You said;
“Reportedly, for the majority of couples filing, marriage rates result in lower taxes than filing as singles. The major pain is dual high income. If we are to have a progressive federal tax system, this isn’t the worst outcome.
It’s not easy designing a system that has neither a marriage penalty nor a single penalty, at least not without a major loss of revenue.”
I disagree for three reasons.
1. It has nothing to do with progressivity, and doesn’t add any progressivity to the tax system. Rich married people with two earners pay more than if not married, but equally rich. That is a horizontal equity issue, not progressivity.
2. It is easy to get rid of the problem, force everyone to file as single.
3. It hurts the poor most, not the rich. It is the poor who face by far the biggest marriage penalties in percentage terms.
Tomasz, You said;
“”Marriage penalty” you mention was introduced to counterbalance “singles’ penalty”. It would be really unfair to punish only unmarried people, so they decided to spread it.”
I hope they weren’t that stupid. The solution is obvious, everyone should file as single. Two wrongs don’t make a right. If they want to add deductions for dependents, that is fine, but it should apply to equally to married or single. The government should not even know if people are married, that is private information.
Morgan, You sure want low house prices! Seriously, I agree, we should tax consumption, not investment.
Jim Glass, You said;
“But that was soon recognized to be “not fair” too. After all, two can live more cheaply than one (according to the Census, a couple can live together for about 70% of the cost of two individuals living separately). That creates a “singles penalty” as to welfare, so the income tax rate on joint returns was increased accordingly.”
No, No! You are confusing two different issues, whether people live alone, and whether they are married. By your logic three young professional women who live alone should pay less tax then three young professional women that share an apartment. But most people would consider that completely unfair, even if their were zero enforcement costs in establishing who lives where. People are free to choose whether they want to share an apartment with others, regardless of whether they are married or not.
Thanks for the New Orleans story.
Deepak, Good points.
malavel, Is the back and forth between marriage and divorce allowed by the IRS, or is it considered a tax evasion?
123, Good for them. Even better would be no income tax.
30. August 2010 at 05:57
Silas, The answer to your first question is no.
I presume the second is a joke.
Leigh, You said;
“I know you’re not really complaining about the amount you are paying, but just for context – if a person earns, say, $130,000, even if their spouse earns nothing, they are still in the top 10% of American households. If the spouse earns $130,000 as well, they are in the top 2%.
Now I’m not suggesting you aren’t good value – after all this blog is worth a billion dollars – but in the richest country in the world it’s not a bad result to be in the top 2%.
People in London are always surprised when I tell them where a £70,000 income puts them in the UK population distribution – though with a median income of £25,000 or so, it’s not that surprising when you think about the stats.”
This is a common fallacy that I plan to explode in a future post. There is a reason most people’s instincts don’t match “the facts,” the facts are wrong, or at least highly misleading.
I have been in all five income quintiles during my adult life. I spent 8 years in the bottom quintile. And I have had a very normal career.
Ask yourself this, if so many Americans really had as a low an income as they seem to (according to data) why do 90% consider themselves middle class? When I was in the bottom quintile I still thought of myself as middle class.
Now here is why your friends are deceived by the top 10% incomes. It is very possible that 25% of the population is in the top 10% at one point or another in their life. Many people who think about typical imcomes, imagine a middle age family with kids. Those sorts of families tend to earn much more that an old guy picking up a few extra bucks working at Walmart, of a 18 year old working at McDonalds, or even a 25 year old college educated adult working at a bookstore a few years before getting serious about a career. Because the income distristion data ignores life-cycle effects, it is essentially worthless. Was I “poor” the 8 years that I was in the bottom 20% of the income distribution? Clearly not in any meaningful sense.
So the Obama tax increase will in fact hit far more people then the Krugmans of the world claim, and the public is smart enough to understand that.
As an aside, I did not complain that I pay too much taxes, I complained about:
1. Horizontal unfairness.
2. The diabolical income tax.
Eve if you are right that the top 10% should pay more (and you may be), both the personal and corporate income taxes should definitely be abolished.
So even if the cop or nurse making $130,000 are in the top 10%, they are not super rich, as Biden claims. They are middle class.
30. August 2010 at 06:32
For awhile now I’ve been a fan of combining a flat tax with a basic income guarantee.
Various welfare and income support programs (Medicaid, Social Security, TANF, unemployment, Food Stamps, EITC) should just be replaced with a basic income guarantee.
As someone who isn’t a budget wonk it’s hard to figure out the exactly levels that would work, but for the sake of argument suppose 28% and $1,000/mo for adult citizens.
The flat tax would be on labor compensation, rental, propreitor, partnership, dividend and interest income, but not on capital gains or corporate income.
Taxes for most individuals would be withheld at the source (which can be done for labor, interest and dividend income payments), and no taxes would need to be filed. To the greatest extent possible, all taxes would become much like FICA is now.
Rather than having a one size fits all public pension system with one primary retirement date, a married couple will get $2,000 per month no matter what and they can retire when they feel they have enough saved to do so. Likewise, a married couple in which both of the breadwinners are unemployed 99ers, they will still be able to rely on $2,000 per month. You could also get rid of minimum wages, since $1,000/mo works out to be about $6 per hour for all adults and reservation wages are likely to rise with a guaranteed minimum income.
Something special would have to be done for healthcare. If the basic income/flat tax proposal were on the table, I could go for a small system of public hospitals and then letting the larger private market largely (if not entirely) regulate itself. Another option which I admit I have no idea if it would work (it would be difficult to calculate the cost to the government) would be a massive lump sum contribution to a health savings account, in the low hundreds of thousands of dollar range, essentially the present value of an affordable amount for the government to spend over an individual’s lifetime.
Several obvious objections arise – work incentives under a guaranteed income could be hit hard, savings aren’t encouraged and there would be political pressure to increase the grant. I’d go into further detail although I think I’m already running into GYOB territory so I’ll end at this point.
30. August 2010 at 07:07
I wasn’t joking with my second question. Could someone explain what is wrong with the reasoning:
1) If people had to pay a babysitter instead of letting the spouse watch the kids, they would have to spend more money.
2) More spending = higher NGDP.
3) Higher NGDP = good for the economy (when it’s well below 5% trend).
30. August 2010 at 07:14
It is easy to get rid of the problem, force everyone to file as single.
This would help you, but hurt most people for whom married filing jointly rates are a benefit.
30. August 2010 at 07:17
Hi Scott
Very good point about lifecycles – I hadn’t thought of that.
One could, therefore, argue that this tax increase is, rather than hitting the top 10% fairly hard, hitting the top 25% more moderately, distributed over a longer period (as they move in and out of the higher brackets). From a utilitarian point of view that might be a similar outcome (though it’s hard to compare the two quantitatively), but the political calculation is quite different.
It’s politically more logical to hit a tiny group hard than a big group less hard – once you’ve lost the votes of the tiny group, you can’t lose them again, so you may as well keep taxing them. Of course you can only push that argument so far, but I guess that’s the basic calculation.
30. August 2010 at 08:37
Scott, I don’t know but I really doubt that it’s illegal. However, it seems like there are no tax rules now for married couples. I have searched and searched and can’t find anything when it comes to income tax.
30. August 2010 at 08:45
At what household income does AMT become higher than regular taxes, assuming a very simple case?
I realize this is probably a question to ask a tax accountant, but I was trying to get an idea of who we’re talking about when we say “people who are getting screwed by AMT.”
I assume from your characterization where you describe moving into the low 6 figures that its somewhere around there. 110k? 120k?
30. August 2010 at 13:11
Scott, you said:
“123, Good for them. Even better would be no income tax.”
But I thought the first priority for small open economies like Lithuania should be to abolish corporate income tax, like Estonia has done?
30. August 2010 at 18:49
> I hope they weren’t that stupid. The solution is obvious, everyone should file as single. Two wrongs don’t make a right. If they want to add deductions for dependents, that is fine, but it should apply to equally to married or single.
Your hope is futile, that’s exactly what happened. “The marriage penalty originated in 1969, when Congress tried to equalize what was then an advantage for couples, as compared to single taxpayers“.
Everyone filling as single would be better, I’m not arguing. But if we cannot do that due to the public choice failure that tax system is, status quo is the second best thing. Allowing but not requiring single filling, and pre-1969 2x multiplier both mean very high single’s penalties. Status quo spreads the pain.
If it bothers you that much, you can always move to UK.
> The government should not even know if people are married, that is private information.
That’s just silly aynrandism. Marriage is the way to organize society, and there was never any marriage-agnostic government in history. States don’t get involved in people’s sex lives or cohabitation decisions much, or if they want to make some private vows or purely religious ceremony. “Marriage” is a public thing.
30. August 2010 at 22:26
@Tomasz Wegrzanowski
I think a better argument against governments recognizing marriage, is that marriage should be left as a religious institution. Therefore it should be protected under the first amendment, but married couples should not have special benefits or penalties imposed against them. Otherwise, it would further blur the line that separates church from state.
31. August 2010 at 08:15
In Sweden everyone pays taxes as individuals since 1972. The prepared tax form works very well in my opinion.
31. August 2010 at 09:14
[…] Why is the government trying to force me to divorce my wife? On the marriage penalty […]
1. September 2010 at 08:19
Justin, There are 200,000,000 million adults here. Wouldn’t your plan cost 2.4 trillion, nearly the entire national budget before the recession?
Silas, If people spend more money in one area, they spend less in others. It doesn’t boost NGDP, unless the extra spending is motivated by less demand for cash.
foosion, They should be hurt!
Leigh, You said;
“It’s politically more logical to hit a tiny group hard than a big group less hard – once you’ve lost the votes of the tiny group, you can’t lose them again, so you may as well keep taxing them.”
Oddly, democratic countries favor farmers when they are only 2% to 5% of the population, and discriminate against farmers when they are 50% of the population.
malavel, I’d be surprised if it was legal. Perhaps divorce and remarriage requires a lot of legal hassles.
Brian Morre, it was around 110,000 for me, or 220,000 for combined. But I don’t know exactly.
123, I suppose you are right. But they should also switch from income to payroll taxes.
Tomasz, You said;
“That’s just silly aynrandism. Marriage is the way to organize society, and there was never any marriage-agnostic government in history.”
That’s the silly argument. My argument has nothing to do with dogmatic libertarianism. I oppose them knowing for pragmatic reasons–they will misuse the data. And it’s silly to defend something because it’s always been done that way. Womem were never allowed to vote, until they were. Gays were never allowed to marry, until they were.
Mattias, Sweden is sounding better every day. BTW, it supports my idea that Republican social conservatives are behind the penalty. Sweden is much more comfortable with working moms.
1. September 2010 at 11:59
“I suppose you are right. But they should also switch from income to payroll taxes.”
Agreed. Good news is that Lithuania exempts many important categories of capital gains from personal income tax. There are also horrible features, e.g. 100% MTRs for retired people.
2. September 2010 at 10:30
123, Wow! How much revenue to they collect from that tax?
2. September 2010 at 13:41
You get roughly 100% MTRs at some income ranges via reduced social security payments, so Lithuanian conservatives see no problems with tax collections, only social security savings.
3. September 2010 at 06:32
123, My point was to ask whether people actually are willing to work for zero net wages? Mighty nice of them if they are.
3. September 2010 at 11:44
“why do 90% consider themselves middle class?”
90% of people consider themselves above-average drivers.
$130k/year income puts an individual in the top 10% of income. If that is not rich, then there is probably no useful definition of the word rich.
I think even people who make more money tend to consume similar fractions of their incomes on expenses (nicer house in a nicer neighborhood, car, food, etc.), however, they still value their marginal dollar less as can be seen from data on desired rates of savings.
The result of this is even though you have a larger amount of disposable income, and possibly is even a larger percentage of your total income, it seems to you to be worth the same amount you’ve always had, hence you feel middle class.
As an aside, as a “poor” student and then grad student, I did always have the security of my “upper middle class” (aka rich) family at the ready. So my desired rate of saving (the marginal value of my dollar) was closer to someone who is middle class than someone who was living off of $10k/year.
4. September 2010 at 02:07
“My point was to ask whether people actually are willing to work for zero net wages? Mighty nice of them if they are.”
The main result is increased tax avoidance. Average tax rates are lower than marginal rates.
4. September 2010 at 05:41
Jason, You said;
“$130k/year income puts an individual in the top 10% of income. If that is not rich, then there is probably no useful definition of the word rich.”:
It is a free country, and one is entitled to define terms as they wish. But if you use the term that way, you’ll will have your own private languange that virtually no one else uses. When American’s use the term ‘rich’ they almost always refer to the top 1%, or even less. If you drove through a Boston neighborhood where all those $130,000/year cops live in average bungalows, and said to your friends “look at all those rich people,” they probably would think you need to be locked up in an insane asylum. Again, you are free to use terms as you like, but almost no one else in America uses terms that way.
90% of drivers are above average, according to their own criteria of how people should drive. Some think driving should be aggressive, some thin cautious, etc.
As an aside, I didn’t have an upper middle class family to get me through college, or a scholarship. I worked and borrowed my way through college and grad school. I always wondered why liberals from upper middle class families thought poor people couldn’t afford to go to college. There may be a good reason, but I don’t see it.
123, Legal tax avoidance? Or cheating?
Either way I presume the government gets almost no net revenue from the 100% marginal bracket.
4. September 2010 at 12:21
Tax evasion, cheating. Hopefully this will change before net revenues disappear, there are some retirement law cases in the constitutional court.
5. September 2010 at 11:14
“If you drove through a Boston neighborhood where all those $130,000/year cops live in average bungalows, and said to your friends “look at all those rich people,” they probably would think you need to be locked up in an insane asylum.”
While true and a good point, it also seems very strange to me. Boston does have a higher cost of living than average, but I think that statement would be just as true in Houston or Denver. It seems arbitrary to define rich as 3 sigma above the mean, rather than 2 (I know income is not actually normally distributed). When I look at the desired precautionary savings rate data, people in the top 40% want to save a percentage of their money that is indistinguishable from the large income limit given the spread in the the data. That would seem to say that most people making $60k+ behave in a way that is close to how they would behave if they were in the top 1%.
This definition of rich vs poor can be a politically charged discussion. I was just trying to point out that there could exist definitions where the dividing line is much lower.
[Additionally, I also put myself through school with loans, probably even paying higher interest rates because of my wealthy parents; I didn’t get subsidized student loans. However my parents’ existence probably had an effect on my desired precautionary savings rate, so even though I was in the bottom 10% of income during my college years I spent as if I was in the middle.]
6. September 2010 at 10:15
Jason, Those are good points. Note that people like Obama and Krugman use data in such a way that you and I would have been considered “poor” in college and grad school, even though I at least didn’t think I was poor at all. Another problem with income data is that many people in small businesses, farms, etc, have very variable incomes. Their lifetime average income may be low, but tax records will show they are “rich” during particularly good years. So again, the term ‘rich’ is very misleading. What we think of as rich, often doesn’t correlate with the top income class. A better term is “affluent” for those with 6 figure incomes.
16. September 2010 at 18:30
An income tax inherently requires arbitrary choices, and cannot be “fair” to everyone. For instance, what is a hobby and what is a business? The IRS decides, afaik, that if costs exceed revenue for three years it must be a hobby, otherwise it can be business and you can write off your expenses. There are many many other examples.
An industry of loophole-finders inevitably emerges. Trying to head them off, IRS complicates the regulations further. All this absorbs too many of our sharpest minds, diverting them from productive work.
imho, the only robust solution is something like Henry George’s single tax. Land rent can be defined and pretty well measured, and the landowner gets a bill much as in Sweden (and, as far as the logistics, like the property tax bill in the U. S.). I can appeal if I think there’s an error, otherwise my calculations are done.
18. September 2010 at 06:13
Taxpayer, Yes, a land tax would be much better than an income tax. Indeed any tax is better than an income tax.
6. November 2010 at 16:51
[…] few weeks back I complained that Obama was trying to force me to divorce my wife. According to The Economist, the Swedish government doesn’t do that: In Sweden 88% of women […]