Page 255 - The Principle of Economics

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:
N Two married couples with the same total income should pay the same tax.
N When two people get married, their total tax bill should not change.
N A person or family with no income should pay no taxes.
N 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.
TAX INCIDENCE AND TAX EQUITY
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
CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 259