Uneven Treatment of Family Life? Horizontal Equity in the U.S. Tax and Transfer System
Posted: 18 Sep 2012
Date Written: September 18, 2012
How well the US tax and transfer system achieves distributive justice in the tax treatment of families is the focus of our paper. To our knowledge this is the first such study to take into account not only the federal income tax but also other taxes and transfer programs on the federal and state levels with a primary focus on employment income. We consider the federal income tax, state income taxes, federal social security taxes (old age, survivors and disability insurance or OASDI), the supplemental nutrition assistance program (SNAP), and federal/state temporary assistance for needy families (TANF). The state income tax, or lack thereof, and social welfare programs of California, Florida, Michigan, New York, Ohio and Texas have been selected as representative.
Methodologically, the study is based on the concept of needs-adjusted income taxation. Using value judgments inherent in the calculation of the federal taxable income, we compare the treatment of seven different types of family households with the single individual as point of reference. The diversity of state tax and transfer systems are analyzed against the backdrop of universal federal programs. This comparison allows us to draw conclusions on the consistency of the aggregate tax and transfer system with regards to three aspects: (1) different levels of income; (2) different subsystems; and (3) state tax and transfer systems in relation to the federal system.
We find that single parents and couples with children enjoy a distinct preference among households with a low market income. This is broadly in line with previous contributions focusing on the federal income tax. The effect is driven by SNAP, the child tax credit and especially the earned income tax credit, which do not reflect the same value judgments about income utility as the federal taxable income.
The preference for low-income households with children is enormous, when additional TANF benefits are taken into account. This may be interpreted as a contradiction between the federal system and state tax and transfer systems. For households with a middle-sized and high market income our results are not as decisive. In our baseline scenario, the OASDI contribution ceilings drives the preference for families and married couples. The preference for middle income families is significantly smaller if employment income is evenly distributed among both spouses. Therefore, two-income-earner couples tend are disfavored compared to couples with only one income earner, again by reason of the OASDI contributions ceilings, here because maximum contributions of dual-income earners are doubled, while corresponding benefits are typically not. We do not find strong effects for higher market incomes on the state level. Thus, the analyzed state income taxes are broadly in line with the value judgments of the federal system. Overall, our results reveal significantly different and conflicting value judgments within the aggregate U.S. tax and transfer system.
Keywords: Tax policy, transfer payments, horizontal equity
JEL Classification: H20, H31, H 53, H72
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