|
A
VERAGE
T
AXES AS A
P
ERCENT OF
P
ERCENT OF
Q
UINTILE
I
NCOME
P
ERCENT OF
I
NCOME
A
LL
I
NCOME
A
LL
T
AXES
Lowest
$ 9,880
8.0%
4%
1%
Second
26,100
15.6
11
7
Middle
44,300
20.3
16
13
Fourth
68,200
23.1
20
19
Highest
174,000
29.1
49
59
S
OURCE
: Congressional Budget Office; estimates are for 1999.
2 5 8
PA R T F O U R
T H E E C O N O M I C S O F T H E P U B L I C S E C T O R
C A S E S T U D Y
HORIZONTAL EQUITY AND THE MARRIAGE TAX
The treatment of marriage provides an important example of how difficult it is
to achieve horizontal equity in practice. Consider two couples who are exactly
the same except that one couple is married and the other couple is not. A pecu-
liar feature of the U.S. income tax code is that these two couples pay different
taxes. The reason that marriage affects the tax liability of a couple is that the tax
law treats a married couple as a single taxpayer. When a man and woman get
married, they stop paying taxes as individuals and start paying taxes as a fam-
ily. If the man and woman have similar incomes, their total tax liability rises
when they get married.
To see how this “marriage tax” works, consider the following example of a
progressive income tax. Suppose that the government taxes 25 percent of all in-
come above $10,000. Income below $10,000 is excluded from taxation. Let’s see
how this system treats two different couples.
Consider first Sam and Sally. Sam is a struggling poet and earns no income,
whereas Sally is a lawyer and earns $100,000 a year. Before getting married, Sam
pays no tax. Sally pays 25 percent of $90,000 ($100,000 minus the $10,000 exclu-
sion), which is $22,500. After getting married, their tax bill is the same. In this
case, the income tax neither encourages nor discourages marriage.
Now consider John and Joan, two college professors each earning $50,000 a
year. Before getting married, they each pay a tax of $10,000 (25 percent of
$40,000), or a total of $20,000. After getting married, they have a total income of
$100,000, and so they owe a tax of 25 percent of $90,000, or $22,500. Thus, when
John and Joan get married, their tax bill rises by $2,500. This increase is called
the marriage tax.
“And do you promise to love, honor, and cherish each other, and to pay the
United States government more in taxes as a married couple than you
would have paid if you had just continued living together?”
C H A P T E R 1 2
T H E D E S I G N O F T H E TA X S Y S T E M
2 5 9
We can fix the problem for John and Joan by raising the income exclusion
from $10,000 to $20,000 for married couples. But this change would create an-
other problem. In this case, Sam and Sally would pay a tax after getting married
of only $20,000, which is $2,500 less than they paid when they were single. Elim-
inating the marriage tax for John and Joan would create a marriage subsidy for
Sam and Sally.
In practice, the U.S. tax code is an uneasy compromise that includes a com-
bination of marriage taxes and marriage subsidies. According to a study by the
Congressional Budget Office, 42 percent of married couples pay a marriage tax,
averaging 2.0 percent of their income, while 51 percent of married couples pay
lower taxes by virtue of being wed, averaging 2.3 percent of their income.
Whether a couple is better off (from a tax standpoint) being married or shacked
up depends on how earnings are split between the two partners. If a man and
woman have similar incomes (like John and Joan), their wedding will most
likely raise their tax bill. But a marriage subsidy is likely if one partner earns
much more than the other, and especially if only one of them has earnings (like
Sam and Sally).
This problem has no simple solution. To see why, try designing an income
tax with the following four properties:
◆
Two married couples with the same total income should pay the same tax.
◆
When two people get married, their total tax bill should not change.
◆
A person or family with no income should pay no taxes.
◆
High-income taxpayers should pay a higher fraction of their incomes than
low-income taxpayers.
All four of these properties are appealing, yet it is impossible to satisfy all of
them simultaneously. Any income tax that satisfies the first three must violate
the fourth. The only income tax that satisfies the first three properties is a pro-
portional tax.
Some economists have advocated abolishing the marriage penalty by mak-
ing individuals rather than the family the taxpaying unit, a policy that many
European countries follow. This alternative might seem more equitable because
it would treat married and unmarried couples the same. Yet this change would
give up on the first of these properties: Families with the same total income
could end up paying different taxes. For example, if each married couple paid
taxes as if they were not married, then Sam and Sally would pay $22,500, and
John and Joan would pay $20,000, even though both couples have the same to-
tal income. Whether this alternative tax system is more or less fair than the cur-
rent marriage tax is hard to say.
TA X I N C I D E N C E A N D TA X E Q U I T Y
Tax incidence—the study of who bears the burden of taxes—is central to evaluat-
ing tax equity. As we first saw in Chapter 6, the person who bears the burden of a
tax is not always the person who gets the tax bill from the government. Because
taxes alter supply and demand, they alter equilibrium prices. As a result, they
affect people beyond those who, according to statute, actually pay the tax. When
2 6 0
PA R T F O U R
T H E E C O N O M I C S O F T H E P U B L I C S E C T O R
C A S E S T U D Y
WHO PAYS THE CORPORATE INCOME TAX?
The corporate income tax provides a good example of the importance of tax in-
cidence for tax policy. The corporate tax is popular among voters. After all, cor-
porations are not people. Voters are always eager to have their taxes reduced
and have some impersonal corporation pick up the tab.
But before deciding that the corporate income tax is a good way for the gov-
ernment to raise revenue, we should consider who bears the burden of the cor-
porate tax. This is a difficult question on which economists disagree, but one
thing is certain:
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