Law Students

In my Income Tax class, we pointed out that there are three principles to which the tax code tries to adhere. Progressivity, or vertical equity is one (why they use the word ?equity? for an inherent inequality is beyond me). The second is horizontal equity between individuals or married units. Third is neutrality between remaining single and getting married.

This discussion is based on the terms ?marriage penalty? or ?marriage bonus.? The idea here is that persons may have an economic incentive or disincentive to get married or work once married. The marriage penalty occurs when two individuals of roughly equal income get married. Individually, they would be in one income bracket (say 15%), so if they file independently, they would pay a total of 15% in taxes. However, their combined income pushes them into a higher tax bracket, perhaps 20%. Just for getting married, there is a 5% penalty.

Before we go on, yes, I realize I am simplifying this and not including a broad number of things, including progressive marginal tax rates and tax credits. I?ll come back to that momentarily.

As you can see, in our current system, we can achieve the first two principles, but fail on the third. We are not neutral between being single and being married. But at least we have achieved progressivity and horizontal equity.

Lawmakers often talk of ?eliminating the marriage penalty?. The way they do this, as the Bush tax reforms attempted to do, is to adjust the width of brackets and play with tax credits and deductions. That may achieve near neutrality, but it screwed up the second principle. Now we treat married units who file individually different than married units who file jointly.

The truth is, there is no way to achieve both horizontal equity and neutrality between married persons and single persons. At least, not by staying in the tax system that we have had for the last hundred years. The more you try to create neutrality, the less equal you make the system. Like a balloon, you squeeze one and expand somewhere else.

My cynical nature says that politicians want it this way. First, they can all stump on removing the marriage penalty, thus sounding like people with good family values. But they don?t fix it wisely. They try to achieve their goals by adding other deductions and credits, further complicating the tax code. And as we all know, it?s so confusing right now that even the people writing the tax code (I?m talking to you, Barney Frank) and other politicians (you too Daschle, Killefer, and Geithner) can?t figure it out.

Of course, there is one way to simplify the tax code while still achieving equity and neutrality. Of course, it?s the one that few politicians actually talk about. Why not tinker with the first principle: progressivity? After all, whereas equity and neutrality should be goals of every good government, progressivity isn?t exactly something about which people revolt. ?Darn you, George III, why won?t you tax rich people at higher rates than me?!?!?

Let?s assume that you have a flat tax of 10%. If people combine their incomes at marriage, they still will pay only 10%. If you decide to stay single, you still only pay 10%. If that couple over there pays 10%, this couple over here will pay 10% too. We have achieved equity and neutrality while sacrificing only this antiquated notion of progressive rate structures. 10% is 10%, no matter who you are or how much you earn. Even Tim Geithner could figure that one out.

Yes, there could still be tax credits that would have the effect of a progressive tax code. The EITC and Child Tax Credit could still exist. Poor people could still get perks in the tax code that just aren?t available to the wealthy. But at least we could say we are trying to be equal while still doing something about it.

Of course, such a system would require the government to spend less. I could talk about that for months. But I won?t. Government should have to spend less. But whether you agree with me on that point or not, I hope we can see eye-to-eye on a flat tax and eliminating the prejudicial, archaic, biased progressive tax system.

One of my friends once tried to defend the progressive tax system by using a logical fallacy. ?Progressive means moving forward, achieving progress. You don?t want to be moving backwards do you?? Fallacy aside, the progressive tax doesn?t move us forward or achieve progress. It means that people are treated differently based on their income. Just because it?s the reverse of what most people think of as income discrimination doesn?t mean it?s any less invidious. Reverse-racism is just as bad as racism. We should focus on treating all Americans equally before the law.

After all, that?s what we were founded on.

Full post as published by The Oratorical Snob on February 03, 2009 (boomark / email).