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Friday, May 17, 2013

AEI: Taxing Individuals Rather Than Families

AEI:  The Tax Treatment of the Family, by Aspen Gorry & Sita Nataraj Slavov:

In two recent cases, the U.S. Supreme Court considered constitutional challenges to the federal Defense of Marriage Act—which denies federal recognition of same-sex marriage—and to California’s Proposition 8, a constitutional amendment banning same-sex marriage. Regardless of the outcomes of these two cases, the controversy over same-sex marriage highlights an important tax policy question: should the US tax code treat people as families, as it currently does, or as individuals? This paper considers the costs and benefits of switching to a tax system based on individual, rather than family, income. 

http://taxprof.typepad.com/taxprof_blog/2013/05/aei--1.html

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From the paper: "In community property states, each spouse legally owns half of the couple’s property, including earnings from their jobs... the perceived unfairness of marriage bonuses in community property states was a main motivation for switching from an individual-based to a family-based tax system in 1948. One way to deal with this issue is to have an individual-based tax system disregard community property laws and in all states treat wages as belonging to the spouse who earned them"

It's not clear that the federal government has the power to tax someone on the half of earnings which under state law belong to another person. If the federal government had that power, the 1948 change to joint filing would not have been necessary. But perhaps the Constitution has magically changed since 1948, just as it has magically changed in many ways without the bother of actual Amendments.

Authors promoting individual-only taxation need to face this difficulty squarely. Otherwise it could surprise them, just as a strong Constitutional challenge surprised advocates of the federal mandate to purchase health insurance.

The only sure path to individual taxation is a formal Constitutional Amendment.

Posted by: AMTbuff | May 17, 2013 6:17:35 PM

The article seems to avoid explicitly dealing with the untaxed income gained by a high-earning spouse represented by the household chores of the stay-at-home spouse.

My partner earns a great income. We are unmarried and I qualify for Medicare, Medicaid and Food Stamps. Skilled in design and cabinetmaking, I spend my time improving her fine house. None of her considerable gains will be taxed until sale of the house to the extent that they exceed $250,000 single or $500,000 if we decide to later marry for tax reasons, and none of it will be taxed if passed on with stepped-up basis to heirs.

Although I've spend 27 years in schooling and could claim $100/hr as a computer programmer, I would have to be an idiot to sit in a cubicle when I can work at home, drinking beer, boss-free, commute-free, Obamacare-free, drug test-free, credit-check free, and payroll and income tax-free, all the while enjoying welfare benefits. If we married, I would lose Medicaid and Food Stamp benefits, so marriage is sensible only to save some $50,000 of capital-gain s tax upon sale of a house that will have gained $500,000 in value.

In law school I learned that you can have a better life applying your talents to tax-avoidance and to gaming the tax and welfare systems than you can by working in your trained profession.

Posted by: Jimbino |

Posted by: Jimbino | May 18, 2013 11:22:45 AM

Jimbino, for a good argument why your home improvement efforts should not be considered taxable income, see this recent Dodge paper:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2245818

Posted by: AMTbuff | May 18, 2013 4:00:18 PM