Taxing polygamy.

AuthorBrunson, Samuel D.
PositionIV. Tax Discrimination and Fairness A. DOMA and Same-Sex Marriage through Conclusion, with footnotes, p. 138-169
  1. DOMA and Same-Sex Marriage

    Congress departed from the principles of fairness and nondiscriminatory taxation in its treatment of married same-sex couples under DOMA. In spite of the lack of negative externalities and revenue loss associated with same-sex marriage, Congress refused to recognize gay marriage in applying federal laws, including the federal income tax. Congress's failure to recognize same-sex couples as married for tax purposes has proven unfair and problematic. In essence, Congress's inaction in this regard exemplifies the institutional inappropriateness of using the federal tax law to discourage behavior states affirmatively permit.

    In 2004, after the Supreme Judicial Court of Massachusetts determined that prohibitions on same-sex marriage violated the Massachusetts constitution, (165) Massachusetts became the first state to legalize same-sex marriage. (166) Other states followed, and as of the date of publication, fifteen states and the District of Columbia permit same-sex couples to marry. (167) In spite of this, the federal tax law did not recognize such couples as married. (168)

    The tax law's refusal to recognize same-sex marriage did not rest on any tax policy consideration. Instead, its failure to treat same-sex married couples in the same manner as it treated heterosexual married couples resulted solely from the application of DOMA, a law intended to limit the viability of same-sex marriages and, at the same time, to signal Congress's disapproval of such marriages. (169) Various commentators have decried the application of DOMA to tax law, objecting to the inequity between opposite-sex and same-sex couples.

    One such inequity is that of uncertainty. Because the tax law refused to recognize state-sanctioned same-sex marriage, married gay taxpayers were left in federal tax limbo: holding a state-sanctioned marriage license that offered them neither guidance nor change in status for federal tax purposes. Because the tax law refused to acknowledge their marriages, same-sex married couples had to "settle on an appropriate tax classification for transactions that occur[ed] within the couple." (170) But the proper application of the tax law to same-sex married couples was, at best, uncertain. (171) As they navigated the uncertainty, however, gay couples nonetheless needed to classify their transactions correctly. If they got it wrong, same-sex married couples could have faced significant civil and criminal penalties. (172)

    Not treating married same-sex taxpayers as spouses for tax purposes also violated the norm of horizontal equity. Horizontal equity demands that similarly situated taxpayers pay similar amounts of tax. (173) While horizontal equity is not the sole criterion of a fair tax system, its presence remains a constant across several formulations of a just tax system. (174) Notwithstanding the importance of horizontal equity in a just tax system, however, under DOMA, a same-sex married couple faced a different tax bill than an opposite-sex married couple with precisely the same income, deductions, and credits. (175) And the lack of horizontal equity was more egregious for the fact that it had no tax-based justification. As a result, the tax law's refusal to recognize same-sex marriage, with its violation of horizontal equity, resulted in an unfair tax system.

    In addition to the various examples of unfairness to gay taxpayers caused by the tax law's refusal to recognize same-sex marriage, this refusal can potentially lead to bad tax results. The tax law generally assumes that taxpayers will act selfishly, and uses that selfishness in part to police bad behavior by taxpayers. (176) In most arm's-length transactions, both parties attempt to negotiate the best deal for themselves. Usually, though, the best result for one party differs from--and, to some extent, conflicts with--the best result for the other. (177) As such, the parties' ultimate agreement requires some compromise and, rather than resulting in collusion that permits the parties to evade taxes, approximates the true value of their deal. In certain relationships, including familial relationships, the tax law relaxes this assumption of selfishness, and, as such, may ignore transactions that lack economic reality. (178)

    Because the tax law did not recognize same-sex couples' marriages as marriage for tax purposes, however, the tax law assumed that gay taxpayers would act selfishly. Where, instead, they acted altruistically, they could structure transactions in an abusive manner to take advantage of the tax law's assumption of selfishness. (179) Imagine, for example, that a taxpayer purchased a share of stock for $10. The value of the stock subsequently falls to $5. If the taxpayer sells the stock, she can deduct her $5 loss. (180) On the other hand, if she is unwilling to sell (because, for example, she believes the stock will appreciate), then she cannot deduct the loss. (181)

    If, however, she could sell the stock to someone with whom she shared her economic life, she could realize and deduct the loss while preserving control over the stock and its potential appreciation. The tax law recognizes that people in certain relationships, including spouses, could act in such an opportunistic (and altruistic) manner. To prevent these artificial deductions, the tax law disallows the deduction of losses on sales between spouses. (182)

    Finally, the federal government's refusal to recognize same-sex marriages recognized under state law violated the Constitution. (183) The current constitutional regime leaves to the states the right to define marriage. (184) Though defenders of DOMA argued that it did not limit state definitions of marriage, but only served to create a single federal definition of marriage, (185) the Supreme Court held "that DOMA [was] unconstitutional as a deprivation of the liberty of the person protected by the Fifth Amendment of the Constitution." (186)

  2. Polygamists and Tax Evasion

    The arguments in favor of the tax law's recognizing same-sex marriage would also press for its recognition of legalized polygamous marriage. Without such recognition, polygamists would face uncertainty, the tax law would violate horizontal equity, other bad tax results could follow, and the tax law's response could arguably violate the Constitution.

    Still, the possibility exists that polygamists differ fundamentally from other taxpayers in such a way that they deserve to be treated differently. (187) One way in which polygamous marriage differs significantly from same-sex marriage in relation to tax is that nobody accuses same-sex couples of systemically evading taxes. (188) Critics of polygamy, on the other hand, cite tax evasion among the litany of evils perpetrated by polygamists. (189) If polygamists approach taxes in a way fundamentally different from other Americans, that would provide some justification for treating polygamous taxpayers differently, perhaps trumping the general fairness considerations.

    Do polygamists evade taxes more than other Americans? No study has explored polygamists' tax compliance. Without such empirical evidence of how polygamists compare with non-polygamists in their payment of taxes, we cannot answer the question definitively. We can, however, look at the specific accusations of tax evasion leveled against polygamists and evaluate the strength of these accusations' connection to polygamy itself.

    In general, individual U.S. taxpayers pay the taxes they owe. The I.R.S. estimates that, in 2001, it collected over 86 percent of the taxes that should have been paid. (190) But this high level of compliance is not evenly distributed; instead, compliance rates vary widely, depending on the type of income a taxpayer earns. Taxpayers declare and pay taxes on about 99 percent of their wages and other income subject to significant information reporting and withholding requirements. (191) On the other hand, taxpayers only declare and pay taxes on about half of their business income, which often consists of cash not subject to reporting or withholding rules. (192) And I.R.S. statistics indicate that taxpayers only reported and paid taxes on 28 percent of their farm income. (193)

    Although critics of polygamy do not have data on whether and how polygamists evade taxes, they do provide anecdotal examples. For example, on July 24, 2008, the Senate Judiciary Committee held a hearing entitled, "Crimes Associated with Polygamy: The Need for a Coordinated State and Federal Response." (194) In his introduction to the hearing, Senator Harry Reid explained that witnesses at the hearing would "describe a web of criminal conduct that includes welfare fraud, tax evasion, massive corruption and strong-arm tactics to maintain what they think is the status quo." (195) In the hearings, witnesses alleged that the Fundamentalist Church of Jesus Christ of Jesus Christ of Latter-Day Saints ("FLDS"), one of the largest Mormon polygamous communities, believed in "bleeding the beast," meaning "F.L.D.S. members should avoid paying taxes at all costs and should also apply for every possible type of government assistance that is available, whether they are eligible or not." (196)

    Polygamists allegedly avoid paying taxes in two ways: they claim credits and deductions to which they are not entitled and they fail to report some or all of the income they earn. For example, in the Senate Judiciary Committee hearing, one witness testified that "[i]t was standard procedure for 'spiritual wives' [i.e., plural wives not legally married to their husband] to list themselves as the 'head of household' on their income tax returns for the benefit of the tax credit." (197) This accusation is problematic, however, for one major reason: these plural wives probably qualify to file as heads of households. Filing as a "head of household" entitles a tax filer to "take advantage of special tax rates." (198) A taxpayer qualifies for these special tax rates...

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