Page 254 - The Principle of Economics
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258 PART FOUR
THE ECONOMICS OF THE PUBLIC SECTOR
CASE STUDY 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?”
