Sunday, April 13, 2003

Virginia Postrel has an excellent op-ed in the Boston Globe on the tax code's marriage penalty. Key passages:
How did marriage and taxes form their unholy union? As public-finance economists point out, most Americans want the tax system to do three things: to be progressive, to treat households with the same incomes equally, and to treat all individuals with the same incomes equally, whether or not they're married.

The problem is, we can have any two of those things at the same time, but not all three. No matter how often politicians and various interest groups suggest otherwise, no technical fix can eliminate the marriage penalty while preserving progressive taxation and ''horizontal equity.''
* * *
The penalty persists not only because Americans want contradictory things from the tax code but because the code's very distortions simultaneously serve two political constituencies: traditionalist conservatives who don't want married women to work, and redistributionist liberals who don't want them to earn too much money.
Imagine that you have three households. In Household A, there is one wage-earner with $50,000 in income. In Household B, there is one wage-earner with $100,000 in income. In Household C, there are two wage-earners with $50,000 in income each.

If you believe in progressive taxation, then you should want Household B to pay a higher tax rate than Household A. If you believe in treating households equally, then you should want Household B and Household C to pay the same tax rate, because they both have a total of $100,000 in income, after all. But then that creates a "marriage penalty" -- because the two wage earners in Household C are now paying a higher tax rate (because they belong to a $100,000 household) than if they were single (in a $50,000 household).

But if you tax the two wage-earners in Household C as if they were single -- just looking at their individual $50,000 incomes -- then you're penalizing the one-wage-earner household for getting its entire $100,000 income from one person rather than from two. In other words, getting rid of the marriage penalty creates what one might call a "stay-at-home parent penalty".

So how does one decide which is worse -- the marriage penalty or the stay-at-home parent penalty? I don't know. But the root cause of this dilemma is progressive taxation.


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