To Have and To Hold: Rethinking Marital Property and Federal Tax Filing

Abstract:     
Wealthy taxpayers have always attempted to reduce their federal income taxes. Before 1948, one popular method was to shift income between spouses so that more of a husband’s income could be reported by, and taxed to, his lower-income, and thus lower tax bracket, wife. In 1948 Congress removed married couples’ incentive to engage in this tax avoidance behavior by adding nationalized income-splitting to the joint return. This effectively gave those filing joint returns tax brackets that were twice as wide as those of single taxpayers, and, as a result, married couples with a single or primary income-earner paid relatively less income tax than their single counterparts. Today there is debate over returning to an individual-based income tax system, similar to that which operated before 1948. Evaluating that proposal, this paper first explores the development of the income-splitting joint return to evaluate the potential costs and consequences of a return to an individual system. Individual-filing incentivized avoidance behavior, reducing the progressiveness of the income tax while giving tax advantages to those who engaged in tax-planning and an increased relative tax burden to those who did not. Second, the paper considers the prospect of the Internal Revenue Service reining in a renewal of this type of tax avoidance today. Returning to a system of individual filing will increase complexity in the tax code and add incentives and opportunities for tax avoidance at a time when the IRS is already struggling under the burden of non-compliance. Finally, in case practical concerns are not persuasive enough, this paper examines how best to evaluate married couples’ ability to pay taxes on a theoretical basis. Calculations on a unitary basis, it contends, remain more accurate for comparing married taxpayers to other taxpayers and it is that comparison, between couples as opposed to within couples, which reflects relative abilities to pay. As a result of these considerations, this paper concludes that joint filing remains the best filing unit.

Keywords: income tax, marriage penalty, tax avoidance

Working Paper Series