One effect of the landmark Supreme Court ruling that knocked down the Defense of Marriage Act is that come April 15th, married same-sex couples can file joint federal tax returns for the first time. Too bad—joint filing, that is—because the tax code option for married couples is both a social and economic anachronism. The U.S. should confine joint filing to the dustbin of history and embrace individual taxation instead. “Joint filing is really outdated,” says Anne L. Alstott, professor of taxation at Yale Law School. “It doesn’t reflect the new normal.”
The joint return became law in 1948, only a few years before the sitcom Ozzie and Harriet premiered. Until then the U.S. federal income tax was an individual-based system. The joint return had the effect of rewarding married couples that contained a breadwinner and a homemaker. It penalized single filers, by comparison (PDF). Over time, as Congress kept tinkering with the individual tax code, adding layers of complexity, the joint return developed its own set of marriage penalties and marriage bonuses. Nevertheless, the core tax bias toward the traditional household remains.
Martha McCluskey, law professor at State University of New York, Buffalo illustrates the point this way. Breadwinner Bob is a lawyer married to Homemaker Hannah. He earns $100,000 and in 2008 paid $13,213 in taxes (assuming no non-wage income and a standard deduction). Single Sophia works at the same law firm as Bob and also earns $100,000. She paid $19,472 in taxes. “I call it, being provocative, a subsidy for husband care,” says McCluskey, quickly adding that the result applies to any couple with unequal earnings (PDF).
The family has unquestionably changed a lot over the past half-century. For instance, about 45 percent of U.S. households are headed up by unmarried men and women. The percentage growth in same-sex-couple households is an estimated 80.4 percent, to 646,000, from 2000 to 2010, calculates the U.S. Census Bureau. The most striking social change (PDF) is that nearly 70 percent of all married women worked for wages in 2009 and almost 62 percent of mothers with children under the age of 6 labored in the pay-stub economy. (PDF) The comparable figures for 1970 were nearly 40 percent and 30 percent, respectively.
Here’s the rub: The joint filing system is not only unfair to the growing ranks of singles, it’s a disincentive for middle-to-upper-income married people to work, depending on how much they take home in pay. (The married, file separately category doesn’t really solve the problem, under the current system.) “In a nutshell, the bias of the tax system is against two worker marriages with children,” says Edward McCaffery, law professor at the Gould School of Law at the University of Southern California. “It’s less about marriage penalties and marriage bonuses and more about a bias against secondary earners—male or female.”
Take the women’s labor force participation rate. It fell sharply during the last recession, but it had stagnated well before the downturn. For example, in 1990 the U.S. women’s labor force participation rate was 74 percent, sixth-best in the world. Two decades later the figure had merely climbed to 75 percent and the U.S. rate ranked 22nd in the world, according to economists Francine Blau and Lawrence Kahn of the ILR School at Cornell University. Among the reasons the scholars cite for the relative decline in “Female Labor Supply: Why Is the US Falling Behind?” is the expansion in family friendly policies overseas, compared to the U.S.
Additional scholars have pinned some of the blame on the joint tax system. The trend among industrialized nations that want to encourage more second earners—usually women–has been toward adopting an individual-based tax system, while abandoning joint filing. “The shift has been driven by the desire to encourage greater female labor force participation,” says McCaffrey. To be sure, tax systems everywhere reflect a hodge-podge of competing social goals, making it difficult to figure out just how much any one policy weighs on labor market choices. Still, eliminating joint returns would remove a tax code penalty against second-earners and eliminate a systemic prejudice against single people. And at some point during this business cycle, business will want to add workers to payrolls, and they’ll find more takers willing to earn something with individual filing.
Tax reform is a topic of discussion in Washington. Senator Max Baucus (D-Mont.), head of the Senate Finance Committee, and Representative Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, have launched a national tax reform tour. The two top Congressional tax writers are drumming up support for a major tax overhaul. All the major bipartisan blueprints for fiscal reform—such as Simpson-Bowles—call for comprehensive tax reform.
To be sure, any tax system has problems. There are always ways to game any government revenue-raising rules, especially with the help of high-priced financial planners. Yet adopting an individual-only tax code better reflects current American society and economy. The shift in tax policy takes a step toward meeting the standards for a good system laid out by Adam Smith in The Wealth of Nations. The 18th century Scottish philosopher-economist had four maxims “with regard to taxes in general”: equality, certainty, convenience, and economy. Smith’s maxims don’t describe in detail the specifics and mechanics of tax reform. But benchmarking his list against an individual-based tax system it certainly seems to offer greater equality, certainty, convenience, and economy than a joint return centered system. Not bad.