February 17, 2009
McMahon: Rethinking Marital Property for Federal Income Tax Return Filing
My colleague Stephanie McMahon (Cincinnati) has posted To Have and to Hold and to Shift between Us: Rethinking Marital Property for Federal Income Tax Return Filings on SSRN. Here is the abstract:
Wealthy taxpayers have always attempted to reduce their federal income taxes. One method popular before 1948 was to use a variety of legal devices to shift income between family members so that more of the family's income could be reported by and taxed to lower income members. In 1948 Congress removed married couples' incentive to use these devices by adding nationalized income-splitting to the joint return. This gave whereby married couples filing joint income tax returns tax brackets twice as wide as single taxpayers, and, as a result, married couples with a single or primary income-earner enjoyed a marriage bonus paying relatively lower income taxes than their single counterparts. Today there is debate over returning to an individual-based income tax system, similar to that which operated before 1948. This paper explores the development of the income-splitting joint return to explore the potential costs of such a move. Individual filing incentivized avoidance behavior, radically reducing the effective progressiveness of the income tax while, at the same time, not treating similarly-situated taxpayers similarly by giving tax advantages to those who engaged in tax-planning and an increased relative tax burden to those who did not. This author concludes that, despite the costs and relative burdens imposed by the joint return, returning to a system of individual filing will increase complexity in the tax code, add incentives and opportunities for tax avoidance, and very likely reduce the overall equity and progressiveness of the individual income tax.
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