A New "I Do": Towards a Marriage-Neutral Income Tax

• Author: Shari Motro
• Position: Assistant Professor of Law, University of Richmond School of Law
• Pages: 03

Shari Motro: Assistant Professor of Law, University of Richmond School of Law. B.A., Yale University; J.D., New York University School of Law. Copyright 2006 Shari Motro. I am thankful to Harry Ballan, Micah Burch, Yair Benjamini, Lawrence Fleischer, Beverly Gage, James Gibson, Mary Heen, Steve Johnson, Corinna Barrett Lain, Jeremy Matz, Anna Pomykala, Alex Raskolnikov, Deborah Schenk, Christopher Smith, Mary Kelly Tate, Dennis Ventry, and Lawrence Zelenak for their helpful comments and suggestions on earlier drafts of this Article. I am also thankful to my Richmond research assistants Naomi Andrews, Katharine Fuegi, and Cuyler Lovett and to my student Andy Tank, whose persistent questions led me to solve a critical piece of this puzzle. A summer research grant from the University of Richmond School of Law helped fund this work.

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I Introduction

The current "married filing jointly" federal income tax schedule effectively treats each spouse as if he or she earns approximately one-half of the couple's combined income. This "income splitting" mechanism translates into a significant advantage for unequal- and one-earner couples by shifting income from higher to lower brackets.¹ For example, a husband and wife who earn $700,000 and $15,000 respectively owe nearly $4,000 less in federal income taxes than an unmarried couple with the same income distribution.² If the wife has no income at all, the spouses' "marriage bonus"-i.e., the difference between their tax liability and that of an unmarried one-earner couple making $700,000-jumps to more than $8,000.³ Some equal-earner couples, on the other hand, suffer a "marriage penalty"-i.e., they pay more in taxes than unmarried couples in the same situation.⁴

Why should marital status matter for tax purposes?

Traditional justifications for the current joint filing system rely on the presumption that husband and wife form an economic unit, jointly owning and controlling all income regardless of who nominally earned it. This presumption is false. In fact, no necessary connection exists between marital status and economic unity. Most states require only minimal spousal sharing, and premarital agreements ensuring that spouses have no rights to each other's income are no longer a rarity. Even if marriage were a reasonably good proxy for income sharing, according to foundational income tax principles, economic unity does not in itself justify income splitting.

As critics like Pamela Gann, Marjorie Kornhauser, Edward McCaffery, and Lawrence Zelenak have demonstrated, the conceptual inconsistencies Page 1513 and the negative effects of marriage-based income-splitting would vanish if Congress instituted a separate filer regime.⁵ However, though mandatory separate filing has many appeals, it is now widely regarded as politically unrealistic.⁶

One explanation for the permanence of the income-splitting joint return is that its main alternative, a pure separate filing regime, would require that husbands and wives account for intra-marital transfers as either "gifts" or "compensation." In the case of economically united spouses, such a requirement is culturally undesirable, administratively unmanageable, and conceptually inaccurate. We are most comfortable viewing spouses who share their income as earning it "by and for" the marital unit rather than as individuals. The revenue we forgo by allowing spouses to split income may therefore be viewed as the price we are willing to pay to live in a society in which spouses need not commodify the flow of goods and services within the marital unit. The deviation from normative tax principles that results from income-splitting joint returns is tolerated in order to support and enable a unique type of relationship-a partnership of equals in which "what's mine is yours, and what's yours is mine."

Taken to its logical conclusion, this justification suggests that the proper criterion for income splitting should be economic unity, not marriage. Thus, I propose that tax law consider individuals' legally binding economic status independent of their marital status, and that only couples committed to sharing all taxable income equally should be treated as such for tax purposes. Rising public awareness of the discriminatory effects of marriage- based benefits,⁷ growing support for the extension of many of these benefits to unmarried couples-gay⁸ and straight⁹-and census findings over the past Page 1514 few decades that indicate a move away from traditional family structures¹⁰provide an opportunity and an imperative to reexamine the assumptions that have undergirded the system of marriage-based joint returns for more than fifty years.

By including economically united unmarried couples in the joint filing system, the economic unity proposal extends income-splitting benefits to unmarried couples in a way that is sensitive to and consistent with the beliefs Page 1515 of a majority of Americans-including many conservatives like President Bush¹¹ who support civil unions, but oppose gay marriage.¹² By excluding economically independent spouses, the proposal also comports with conservative support for stronger marital commitments. Finally, economic unity-based income splitting is consistent with the widely accepted public policy goal of greater gender equality in intimate partnerships.

Part II of this Article critiques the traditional foundations for marriage- based income splitting and describes the current system's harmful effects. Part III suggests a new theoretical foundation for income splitting-the "by and for the couple" justification-and shows why it demands that the current eligibility criterion for income splitting be replaced. Part IV introduces the economic unity proposal. At its core, the proposal amounts to a simple demand for conceptual rigor and transparency. The current system is founded on a sentimentalized ideal of marital unity, replicating and perpetuating the fairytale that has devastated so many dependent spouses. The new "I do" would force the tax system to acknowledge reality, allowing only those truly united to be taxed as one.

II Marriage-Based Income Splitting Is Indefensible

A Traditional Justifications For Income Splitting

The U.S. federal income tax imposes taxes on realized accessions in wealth over which the taxpayer has complete dominion.¹³ Increases in wealth are generally measured by adding the taxpayer's receipts-including wage income, interest, and gains from sales or exchanges-and subtracting (deducting) expenditures made for the purpose of producing income-like compensation paid to employees and the purchase of business-related equipment. Non-business-related expenditures ("personal consumption") and investments-like buying a candy bar and depositing money into a savings account-are generally nondeductible.¹⁴ Page 1516

The tax treatment of transfers between unmarried taxpayers generally (though not always) follows this logic. Transfers between unmarried individuals often fall into one of three categories for tax purposes: compensation for business-related services, compensation for personal services, or gifts. Compensatory transfers are distinguished from gifts for tax purposes if they involve a quid pro quo, i.e., if they are not made out of "'detached and disinterested generosity.'"¹⁵ Compensation for business- related services (everything from photocopying to strategy consulting) is deductible to the payor¹⁶ and must be included by the payee.¹⁷Compensation for personal services (like housekeeping, food preparation, and hairdressing) may not be deducted by the payor¹⁸ and must be included by the payee.¹⁹ Gifts have no income tax consequences to either the donor (they are considered a form of personal consumption²⁰) or donee.²¹

These same categories govern situations in which one taxpayer assigns her income to another-e.g., by directing her employer to pay part of her salary to someone else or by contractually committing to deposit her income into an account owned jointly with another individual.²² In other words, unless the assignment is characterized as compensation or other includable form of income to the payee, it is a gift; the assignor must pay taxes on the income and the assignee need...