Negating the Cost of 'I Do': Ending the United States Tax Code's Family Penalty Through Permissive Joint Filing

• Author: Christine D. Allie
• Position: Assistant Professor of Law, Delaware Law School.
• Pages: 499-546

Negating the Cost of “I Do”: Ending the United States Tax Code’s Family Penalty Through Permissive Joint Filing Christine D. Allie * In June 2016, Republicans in the House of Representatives announced their vision for a simplified tax code built for economic growth in a 35 page policy paper released as part of a six part series. 1 In November 2016, Republican Donald Trump was elected as the 45th President of the United States, which, along with the elections of a Republican-controlled House and Senate, allowed for significant changes to the United States’ tax structure to become law on December 22, 2017. 2 Though Congress purports to strive for simplicity, support for families, fairness, and progressivity, these changes fell short of meaningful progress in moving toward these goals. This Article argues that such fairness and support for families may only be expressed through a code that eliminates the family tax penalty created by application of the Head of Households filing status and the mandated filing status based on marriage. To support the family, the tax code must end its use of marital status as a measure of economic circumstances where it penalizes the family. Copyright 2017, by CHRISTINE D. ALLIE. * Assistant Professor of Law, Delaware Law School. I am grateful for my husband, Stuart, and newborn daughter, Clare Rose (July 14, 2016), who have inspired this paper. Thanks also to the 2017 Junior Tax Workshop participants and the Honorable Aida Wasserstein for comments on earlier drafts. 1. “A Better Way” is a series of six policy papers on Poverty, National Security, The Economy, The Constitution, Health Care, and Tax Reform available at the Speaker of the U.S. House of Representative’s website https://abetterway .speaker.gov/, which are presented as the GOP’s vision for a confident America, at home and abroad. See A Better Way, SPEAKER OF THE HOUSE OF REPRESENTATIVES, https://abetterway.speaker.gov/ (last visited Jan. 13, 2018) [https://perma.cc/Q443-LZHH]. The introduction of a new tax code has been a persistent initiative for recent Congresses, with Congressmen regularly citing its complexity, having grown from 26,000 pages in 1986 to about 70,000 pages today. 2. Donald Trump secured 304 electoral votes to Hilary Clinton’s 227, with 270 electoral votes needed to win. The 2016 General Election formed a 115th United States Congress with 52 Republican senators, out of 100 total senators, and 241 Republican Representatives in the U.S. House of Representatives, out of 435 total Representatives, with 218 seats needed for control. FEDERAL ELECTIONS 2016, FED. ELECTION COMM’N (Dec. 2017). The changes to the tax structure were enacted as Pub. L. No. 115-97, 131 Stat. 2054 (2017). 500 LOUISIANA LAW REVIEW [Vol. 78 TABLE OF CONTENTS Introduction .................................................................................. 501 I. The Individual Income Tax Was Introduced as Pro-Family and Pro-Marriage ...................................................... 505 A. In the Beginning, There Was Only Tax Filing Per Individual ........................................................................ 506 B. Introducing Income Splitting to the Tax Code ...................... 509 II. The 1951 and 1969 Purported Horizontal Equity Reforms to the Code Diluted the Status of the Wife and the Mother ......... 511 A. The 1951 Addition of the Head of Household Filing Status Introduced the “Family Penalty” ...................... 512 B. The 1969 Amendments Addressed the “Singles Penalty” by Adding More Complexity to the Code ............................. 515 C. Legal Challenges to the Marriage Penalty Demonstrate New Attitudes Toward Marriage ...................... 518 D. The Limited Reintroduction of Income Splitting .................. 520 III. The Code’s Aversion to Marriage: A Concrete Discussion of Congress’s Attack on Marriage................................................ 524 A. Beyond the Brackets: The Family Penalty and the Earned Income Tax Credit ............................................... 525 B. The Premium Tax Credit’s Impact on the Family Penalty ....................................................................... 529 C. The Mortgage Interest Deduction’s Marriage Disincentive ........................................................................... 533 D. Certain Tax Credits and Deductions Further the Anti-Family Structure of the Tax Code ................................. 535 IV. Permissive Joint Filing Will Allow for Necessary Support of the Family ................................................................................ 536 A. Defining Permissive Joint Filing ........................................... 536 B. Permissive Joint Filing, the Marriage Bonus, and a Win for Gender Equality .............................................. 539 C. Permissive Joint Filing is American ...................................... 541 Conclusion .................................................................................... 546 2017] NEGATING THE COST OF “I DO” 501 INTRODUCTION That ubiquitous and seemingly amiable query of “what do you do?” when encountering new acquaintances tends to lead to an awkward moment for many tax practitioners. Upon divulging their field, accountants and tax attorneys likely are responded to with stiff smiles lined with a smidge of pity; though, those persons called to the profession know that they work in a dynamic area of practice that should be met with envy rather than pity. The study of a nation’s tax system is quite remarkable in considering that nation’s values—where that system places the burden of taxation indicates who it believes should contribute financially to the well-being of the nation. Conversely, when a party receives a tax deduction or a tax credit 3 for certain expenditures or actions, the country is indicating its support for those expenditures or actions. Through the tax code, the American citizenry purports to support children, home ownership, environmentally friendly initiatives, health insurance, and much more. 4 3. Tax credits provide a dollar-for-dollar reduction of a taxpayer’s income tax liability. In other words, a $100 tax credit reduces the taxpayer’s tax liability by $100. On the other hand, tax deductions reduce a taxpayer’s taxable income and, as a result, only reduce the taxpayer’s tax liability by an amount equal to the amount of the tax deduction, multiplied by the taxpayer’s marginal tax rate. Thus, a $100 tax deduction reduces the income of a taxpayer in the 25% marginal tax bracket by $25. These examples illustrate two points. First, a tax credit always is worth more than a dollar-equivalent tax deduction because the deduction reduces the tax liability by only a percent of the deduction amount, unless the taxpayer is subject to a 100% marginal tax rate. Second, the benefit provided by a tax deduction increases as the taxpayer’s marginal tax rate increases; the tax benefit associated with a tax credit does not. For example, a taxpayer in the 25% marginal tax bracket receives a $25 tax benefit—that is, reduction in tax liability—from a $100 tax deduction, while a taxpayer in a 33% tax bracket receives a $33 tax benefit from the same deduction. Axiomatically, those taxpayers who earn more benefit more from an identical tax deduction. See, e.g., Alvin C. Warren, Jr., The Relationship between a Credit and a Deduction for the Foreign Taxes of a Multinational Corporation (Harvard Pub. Law, Working Paper No. 14-23, 2014), https://papers.ssrn.com/sol3/papers.cfm? abstract_id=2442306 [https://perma.cc/ED92-WT92]. 4. Children and childcare are supported through myriad Internal Revenue Code provisions including the exemption for expenses for dependent care, § 21, the Child Tax Credit, § 24, and dependent care assistance programs, § 129. Home ownership is subsidized through the Qualified Residence Mortgage Interest Deduction, § 163(h)(3). Green initiatives are supported by the energy credit, § 48, a credit for nonbusiness energy property expenditures, § 25C, and the Residential Energy Efficient Property Credit, § 25D. Health insurance is supported by the exclusion of the value of such insurance provided by an employer to an employee from the employee’s gross income under § 106, as well as through the refundable 502 LOUISIANA LAW REVIEW [Vol. 78 Keeping these national values in mind, deductions and credits that provide greater value to an unmarried couple than to a dual income, wedded pair earning the same amount are tough to reconcile. There is an inherent conflict with state-mandated filing statuses 5 and phase-outs 6 that credit for coverage under a qualified health plan, § 36B. See I.R.C. §§ 21, 24, 25C, 25D, 36B, 48, 106, 129, 163(h)(3) (2012). 5. A taxpayer’s “filing status” is the mechanism that the Internal Revenue Code uses to determine a taxpayer’s filing requirements, standard deduction, eligibility for certain credits and deductions, and, ultimately, tax liability, by determining which tax rate schedule the taxpayer must use. There are five filing statuses: (1) Single; (2) Married Filing Jointly; (3) Married Filing Separately; (4) Head of Household; and (5) Qualifying Widow(er) with Dependent Child. See IRS Tax Tip 2011-09, TAXING SUBJECTS (Jan. 13, 2011), https://taxingsubjects.com/ourblog/taxnews/irs-tax-tip-2011-09/ [https://perma.cc/96UF-5TQZ]. A taxpayer’s filing status results from the taxpayer’s marital status and family situation, that is, whether or not the taxpayer has dependents. Id; see also IRS, PUBLICATION 501, EXEMPTIONS, STANDARD DEDUCTION, AND FILING INFORMATION 6 (2015), https://www.irs.gov/pub/irs-prior/p501--2015.pdf [https://perma.cc/UCC9-ABWE]. 6. A “phase-out” refers to a situation in the tax code in which the value of a tax benefit—a deduction or credit—is reduced as the taxpayer’s income rises. Phase-outs occur because of congressional preferences to target tax benefits towards middle and lower-income households and...