Progressivity and Assignment of Income

AuthorWilliam Kratzke
Chapter 5: Progressivity and Assignment of Income
The principle of progressive taxation is
that tax rates applicable to increments
of taxable income increase. Currently
there are seven marginal brackets
eight if we count income that is below
the threshold of taxable income.65 If a
taxpayer can spread her income among
other taxpayers, more of taxpayer’s
income will be subject to lower
marginal rates of tax.
The following table represents the
computation of the income tax burden
of a person whose taxable income is
$210,000. Imaginary marginal tax
brackets are as noted. The total tax
burden of this taxpayer is $50,000.
Income range
Marginal Tax Rate
$0 to $10,000
$10,000 to $60,000
$60,000 to $110,000
$110,000 to $160,000
$160,000 to $210,000
Our taxpayer might try to reduce her tax burden by “assigning” some of her taxable
income to persons she controls – perhaps two children. Our taxpayer might decide
65 The personal exemption and the standar d deduction assure that some income i s not subject to any
income tax.
The Tax Formula:
(gross income)
MINUS deductions named in § 62
EQUALS (adjusted gross income (AGI))
MINUS (standard deduction or
itemized deductions)
MINUS (personal exemptions)
EQUALS (taxable income)
Com pute incom e tax liability from
tables in § 1 (indexed for inflation)
MINUS (credits against tax)
that she and each of the two children should receive $70,000 of the original
$210,000 total. The new tax computation table would be the following:
Income range
Marginal Tax Rate
$0 to $10,000
$10,000 to $60,000
$60,000 to $110,000
$7000 x 3 = $21,000
The total tax burden of three different persons, each with taxable income of
$70,000, would be less than half the tax burden of one person with taxable income
of $210,000. This characteristic of progressive tax rates has led taxpayers to create
many schemes to “split income” so that more of it would be subject to lower rates
of income tax.
The courts have created the “assignment of income”67 doctrine to prevent abusive
income splitting. In addition, Congress has created some statutory rules that limit
assignments of income. We begin with the leading case.
I. Compensation for Services
Lucas v. Earl, 281 U.S. 111 (1930).
JUSTICE HOLMES delivered the opinion of the Court.
This case presents the question whether the respondent, Earl, could be taxed for the
whole of the salary and attorney’s fees earned by him in the years 1920 and 1921,
or should be taxed for only a half of them in view of a contract with his wife which
we shall mention. The Commissioner of Internal Revenue and the Board of Tax
Appeals imposed a tax upon the whole, but their decision was reversed by the
66 Only $10,000 of each taxpayer ’s taxable income would be subject to the 20% rate of income tax.
67 This is really a misnomer. T he “assignment of income” doctrine prevents assignme nt of income.
A more accurate name would be the “non-assignment of income” doctrine.
circuit court of appeals. A writ of certiorari was granted by this Court.
By the contract, made in 1901, Earl and his wife agreed “that any property either
of us now has or may hereafter acquire ... in any way, either by earnings (including
salaries, fees, etc.), or any rights by contract or otherwise, during the existence of
our marriage, or which we or either of us may receive by gift, bequest, devise, or
inheritance, and all the proceeds, issues, and profits of any and all such property
shall be treated and considered, and hereby is declared to be received, held, taken,
and owned by us as joint tenants, and not otherwise, with the right of survivorship.”
The validity of the contract is not questioned, and we assume it to be unquestionable
under the law of the California, in which the parties lived. Nevertheless we are of
opinion that the Commissioner and Board of Tax Appeals were right.
The Revenue Act of 1918 approved February 24, 1919, c. 18, §§ 210, 211, 212(a),
213(a), 40 Stat. 1057, 1062, 1064, 1065, imposes a tax upon the net income of every
individual including “income derived from salaries, wages, or compensation for
personal service ... of whatever kind and in whatever form paid,” § 213(a). The
provisions of the Revenue Act of 1921 … are similar to those of the above. A very
forcible argument is presented to the effect that the statute seeks to tax only income
beneficially received, and that, taking the question more technically, the salary and
fees became the joint property of Earl and his wife on the very first instant on which
they were received. We well might hesitate upon the latter proposition, because,
however the matter might stand between husband and wife, he was the only party
to the contracts by which the salary and fees were earned, and it is somewhat hard
to say that the last step in the performance of those contracts could be taken by
anyone but himself alone. But this case is not to be decided by attenuated subtleties.
It turns on the import and reasonable construction of the taxing act. There is no
doubt that the statute could tax salaries to those who earned them, and provide that
the tax could not be escaped by anticipatory arrangements and contracts, however
skillfully devised, to prevent the salary when paid from vesting even for a second
in the man who earned it. That seems to us the import of the statute before us, and
we think that no distinction can be taken according to the motives leading to the
arrangement by which the fruits are attributed to a different tree from that on which
they grew.
Judgment reversed.

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