How the Tax Code Discriminates Against the Traditional Family
by David A. Hartman, Allan C. Carlson on 02/12/2002
16 Pages
This report offers an analysis of current taxation of married-couple families. In brief, taxation of the married-couple family is neither equitable nor economically efficient. Furthermore, discriminatory taxation of families comes at an enormous social welfare cost. What is needed to end the numerous marriage tax penalties is nothing less than fundamental tax reform.
Between the years 1965 and 1995, the total cost of government as a percentage of median married-couple family (MMF) compensation rose from 37.5 to 46.7 percent. On the other hand, in 1995, the total cost of government as a percentage of total compensation was 39.4 percent. Married-couple families paid 7 percent more in taxes than the average taxpayer.
The disturbing flipside of this financial burden is that the income taken from married-couple families has increasingly gone to fund unproductive government programs that support costly dependents. In 1960, a 7.1 percent share of total personal incomes represented welfare spending on low-income families. By 1995, the cost of welfare spending had grown to 17.7 percent of total personal incomes.
As a result, the well-being of married couples, as reflected in their income, has stagnated. MMF income has remained practically unchanged (in real dollars) for over 25 years. This despite the fact that workforce participation of married women and mothers has dramatically increased over the same period of time.
Analysis of actual tax incidence on families shows a far-reaching, negative impact on United States capital formation. Because the family has less incentive to rear children, our human capital is diminished, and the gap left by decreased fertility is being filled by immigration. Furthermore, American families have little incentive (or opportunity, as the case may be) to save and invest. High marginal tax rates deplete the amount available for investment, and capital gains taxes discourage investment.
The pyramiding of taxes as a culmination of a lifetime of taxation can be extraordinary. Income after a maximum income tax at 39.6 percent saved for investment produces corporate income that is also taxed at 38 percent, and then taxed again at 39.6 percent on dividends or at 20 percent as capital gains. The decedent’s death results in a final 55 percent, with the effect that his or her heirs receive only 16.5 to 19 cents out of the original dollar saved.
The government burden of taxes and fees in total—federal, state, and local—is estimated to have reached 46.4 percent of MMF total compensations as of 1995. Since married families with working adults receive little direct benefit from government subsidies, the effect of taxation is equivalent to supporting two families.
Token reform of the marriage tax penalty is not enough. Fundamental tax reform requires replacing virtually all federal taxes with one or two simple taxes. A single flat tax on consumption would correct all of the discriminatory measures against the family. What would result is a far more efficient, equitable, and pro-growth tax system, one that supports higher real after-tax incomes for all Americans, married-couple families or otherwise.
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