CRS: MARRIAGE NEUTRALITY NOT POSSIBLE WITH PROGRESSIVITY AND EQUAL TAXATION OF COUPLES.

CONFLICTING EQUITY GOALS OF THE FEDERAL INCOME TAX: MARRIAGE NEUTRALITY, PROGRESSIVITY, AND EQUAL TAXATION OF COUPLES WITH EQUAL INCOMES ¹

Gregg A. Esenwein Specialist in Public Finance Economics Division

SUMMARY

A marriage neutral income tax is an elusive goal because it conflicts with two other concepts of equity: progressivity and equal taxation of couples with equal incomes. Regardless of how these three goals of equity are juggled, the individual income tax can achieve any two but cannot simultaneously achieve all three. It is critical to remember, however, that there are no unambiguous right or wrong answers to which of the three competing goals of equity (marriage neutrality, progressivity, equal taxation of couples with equal incomes) is the most important.

THREE EQUITY GOALS

It is a widely accepted goal that the individual income tax should not differentiate among individuals on the basis of their marital status. Marriage neutrality, however, conflicts with two other widely accepted concepts of equity: progressivity (income tax payments should rise as a percentage of income as income increases) and that couples with the same total income should pay the same tax.

These three concepts of equity are not mutually obtainable. An income tax can be designed to achieve only two of the goals, it cannot simultaneously achieve all three. The system might be marriage neutral and tax couples with equal incomes equally, but then it would not be progressive. Or, the system might be progressive and marriage neutral, but then it would not tax couples with equal incomes equally. The current tax system is consistent with the third alternative, progressivity and equal taxation of couples at the expense of marriage neutrality.

To demonstrate the logical inconsistencies of these three concepts of equity, consider the case of four taxpayers A, B, C, and D where A and B each have incomes of $20,000, C has no income, and D has an income of $40,000. ² If the tax system is progressive (as opposed to proportional), then the combined tax on A and B cannot equal the tax on D (if the taxes were equal then the system would be proportional). Hence:

(1) T(A) + T(B) is not equal to T(D)

At the same time, for the tax system to be marriage neutral, then the tax on A and B, if they got married, should be the same as their combined tax liabilities as singles. Hence:

(2) T(A) + T(B) = T(A + B)

In addition, to qualify as marriage neutral, the tax on C and D, if they got married, should be the same as the tax on D as a single individual (since C had no income and no tax). Hence:

(3) T(C) + T(D) = T(D) = T(C + D)

To achieve the goal that couples with equal incomes pay equal tax requires that the tax on A and B should equal the tax on C and D. Hence:

(4) T(A + B) = T(C + D)

Substituting equations (2) and (3) into equation (4) produces:

(5) T(A) + T(B) = T(D)

Equation (5) however, contradicts equation (1), which says that for the tax system to be progressive, the combined tax on A and B cannot equal the tax on D. This algebraic representation helps demonstrate the fact that the tax system can be marriage neutral and tax couples with equal incomes equally only under a proportional tax, but not under a progressive tax. Regardless of how the three concepts of equity are juggled, the income tax cannot achieve all three goals simultaneously.

The critical point to remember in this issue is that there are no right or wrong answers to which of the three competing equity goals is the most important. One could argue that the tax system should be more marriage neutral at the expense of progressivity, but it could just as easily be argued that we should sacrifice marriage neutrality to achieve more progressivity. Others could argue that the equal taxation of couples with equal incomes is the most important equity goal.

² This representation is based on an example in U.S. Congress. Joint Committee on Taxation. Income Tax Treatment of Married Couples and Single Persons. April 2, 1980.