Friday, March 1, 2013

PROPOSALS FOR INCOME AND SOCIAL SECURITY TAX AND BENEFITS REFORM FOR PEER MARRIEDS:



Now that the elections are over, the tax laws have been revised a bit, and we are into the the 2013 year, it is worth looking anew at some ideas for removing the discrimination against 2-earner/2-parent families.  Here's the first of two blog posts I'll write on this. The first looks at income and Social Security tax and reform.  The second will look at federal health care tax and benefits reform.

BACKGROUND:  The current federal income and Social Security tax and benefits system is built around and provides funded and unfunded subsidies to a family structure of a sole breadwinner and nonearning primary care parent and substantial tax incentives to sole breadwinners themselves within these families to reinforce this structure. 

Here's a chart that illustrates the problem:




This chart, prepared by the Tax Foundation, applies 2013 federal income and payroll tax law to marriages based on whether the family has one or two earners and based on the gross income of the family.  It assumes all wage income (no income from property or capital), no itemized deductions and no children.
The white section in the middle at the bottom was added with the Bush Tax Cuts.  Prior to these cuts, this section would have been red.
At any point along the horizontal axis, the more the family moves away from equal earnings spread over two earners (from the bottom to the top of the chart), the more the lower earner has to pay higher marginal rates and the higher earner pays lower marginal rates (sometimes called a "marriage bonus").  This is an accelerating incentive to consolidate family earnings in a sole breadwinner and unpaid work and responsibility in a nonearning parent.
This chart does not plot benefits received in Social Security and Medicare.  These benefits also skew toward single earner (or sole breadwinner) households; generally speaking, the closer a family is to equal two-earner (the more it is in the red or the white), the more it subsidizes a family at the same level of gross household income on the horizontal axis in the green zone.  
The subsidies from the red and the white areas to the green area are sometimes referred to as the "marriage bonuses", or tax subsidies that sole breadwinners receive (the stay-at-home parents actually receive a "marriage penalty" themselves, as I explain below).  The Tax Policy Center has noted that much of the federal debt run up since 2001 in the George W. Bush Presidency derived from his tax cuts increasing these unfunded subsidies to sole breadwinners.

These subsidies derived from the fiction of earned "income splitting" have been in place to one degree or another since 1948, however, and they have stayed in place in the Obama Administration. They actually have become exacerbated in the Obama Administration because the paradoxical effect of progressive taxation on increasing these problems rather than reducing them, as is discussed more below.

Here's a calculator, prepared by the Tax Policy Center, which measures the income tax effect (not the payroll tax effect as well as is illustrated above) of choosing to be married versus being single, and which may help you evaluate your own personal situation if you would like to learn more.   Marriage Penalty Calculator (w/o payroll taxes)  (The calculator does not address the issue of subsidy to sole breadwinners and accelerating pressure to set your family up in that manner.)

One thing to keep in mind with payroll taxes: it may appear on first glance that because the employer pays a portion of the payroll tax, the employee's marital situation is irrelevant to that portion.  This is not the actual economic effect when one looks more closely, as most employers reduce salaries or wages of employees by the payroll tax amount paid by the employer.   This means that, while as a matter of administrative responsibility payroll taxes are paid by both the employer and the employee, in actual economic effect they are paid entirely by the employee.

This is an issue that particularly directly affects Colorado because (a) it has a high percentage of 2-earner/2-parent families and singles and exports approximately $0.22 of every federal tax dollar paid to states that do not have a high percentage of this type of family and (b) the civil unions law that became effective in 2013 may mean heterosexual couples in civil unions present legal challenges to the federal joint taxation system, with a good argument that they are entitled to individuate their earnings and expenses for tax purposes.  This won't help them with the problem of having to subsidize patriarchal families with "marriage bonuses" or with the problem of their paying surplus payroll taxes and reduced benefits, but it may help them with basic marriage penalties and the problem of regressive taxation (discussed in more detail below) which is both unfair and economically unproductive and inefficient, as it skews the economic decision-making of the family.  Further, for those who are concerned about the child development support issues I'll describe in the next post, the skewing runs in conflict to what children need.

Below I'll look at these problems first in the income tax system and then in the payroll tax and Social Security benefits system and in the process suggest a few solutions. 

1.   PROBLEM IN INCOME TAX SYSTEM:  The marriage penalties illustrated above, which are particularly discriminatory in the red zones, are themselves reason enough to reform mandatory joint taxation of married couples.  But there's also a problem of regressive taxation that merits a closer look.  The current federal taxation of married couple's earnings and expenses on an artificially amalgamated basis (a policy instituted in 1948)  (a) require the lower earner to pay tax at the higher earner's marginal rate and (b) allow expenses personally paid by one earner to be used as credits or deductions against the other (often the higher) earner's income.  These forms of regressive taxation are made even more acute, paradoxically, by the recent increased progressivity in the tax code.   It is mathematically impossible to have a tax system that is (a) neutral as to family structure, (b) progressive, and (c) taxes equally earning families the same; the simplest way to repair this is to remove fictions of joint earning and expenses in families.  Also, the current taxation on a fictional joint earnings basis (a) would not be allowed in a business partnership return under the "substantial economic effect" rule, and (b) fall behind OECD best practices (in 2011, only 11 of 34 countries had joint taxation of married couples' earnings (and many of these make adjustments to remove fictions in the return that the US does not)).       

PROPOSED SOLUTION:  Make federal income taxation of married couples a system of joint filing but individual taxation on individual earnings and expense and joint taxation only on income from property or capital actually jointly owned and managed and joint expenses.  Create a child-centric return for unmarried couples applying for child-related welfare such as the EITC.


2.   PROBLEM IN PAYROLL TAX SYSTEM:   Two-earner married couples often pay more Social Security taxes than a comparably earning sole breadwinner family because of (a) the progressivity in benefits, (b) the lack of a property-capital-earner tax to support the progressivity and (c) the cap on earnings subject to tax. [1]   Further, 2-earner married couples and singles receive reduced benefits.   They (a) do not receive the spousal benefit in Social Security, and (b) forfeit the survivor benefit (to the extent the benefit is less than or equal to an earner's own benefit, in the case of 2-earner marrieds, and altogether in the case of single people).   A chart I included in this post illustrates this in more detail.  Also, because benefits are progressive, a very low earning dependent spouse of a sole breadwinner receives higher benefits relative to taxes paid by that spouse than a more equal earning spouse relative to taxes paid.  In addition, in a general sense across the economy, Social Security benefits are progressive and high wage earners are required to subsidize low wage earners in benefits but capital and property-based earners are not required to pay anything.  This creates a triangulated moral hazard problem in which conflict and political polarization between high wage workers and low wage workers is exacerbated by repressed conflict both high and low wage earners have with untaxed "free-rider" capital and property-based earners.  An example of how a private company could seek rents through this system is to: (a) hire many low wage workers so as to take advantage of the progressive benefits scheme to shift costs to high wage workers (which the company does not employ or employs in very small numbers), (b) preference men either directly or indirectly, by creating long shifts that are incompatible with sharing parenting responsibility so as take advantage of the sole breadwinner subsidies.   Since the owners of the company pay no taxes to support either of the subsidies in (a) or (b), they can effectively shift costs of their employee's retirement to high wage workers, particularly high wage workers who are single or in two-earner marriages, and to debt borrowed from future generations.  The employees do not protest because they do not feel the cost of this as much as if there were not the progressive benefits and sole breadwinner subsidies.  Walmart is considered a possible example of this phenomenon.


While payroll taxes are administratively paid by both the employer and the employee, in actual economic effect they are usually paid entirely by the employee, as most employers reduce salaries or wages of employees by the payroll tax amount paid by the employer.

PROPOSED SOLUTION A (FOR PARENTAL LEAVE):  Allow each of two payroll tax paying coparents (whether single or married) a paid leave benefit (modeled on and associated with FMLA, which applies to certain workers) on the birth/adoption of a child.  If such benefits are made progressive in the manner of Social Security generally, assess a capital/property earner tax to cover the progressivity. 

PROPOSED SOLUTION B (FOR MAKING RETIREE FAMILIES WHOLE):  Eliminate the spousal benefit and split Social Security checks between sole breadwinner married couples (currently, each sole breadwinner receives a check for 2/3 and the spouse 1/3 of the sole breadwinner/spousal benefit, although the benefit can increase into more portions if there is more than one 10-year dependent spouse).  Reduce the retirement benefit of a sole breadwinner so that there are sufficient benefit resources for a survivor benefit without having to draw from the accounts of 2-earner married couples and singles or generating deficits.   The deficit-based spousal and other retirement benefits to sole breadwinners could be phased out at one or more generational transition points, such as the beginning of the Baby Boomer generation (people born after 1946), people born after 1953[2], or the end of the Baby Boom generation (people born after 1963)[3].

PROPOSED SOLUTION C (FOR ELIMINATING DISPARATE BENEFITS FOR SAME PAYROLL  TAX PAID AND TRIANGULATED MORAL HAZARD PROBLEM): Either (a) eliminate the progressivity in Social Security benefits and make it a more conventional insurance program with flat benefits, or (b) add a capital/property-earner based tax to compensate low wage workers' progressive retirement benefits and family leave.

ASPECT OF SOLUTION REQUIRING ATTENTION:   The Family Medical Leave Act (FMLA) (which allows a 12-week unpaid leave)  does not apply to everyone and the leave benefit, if associated with FMLA, would need to apply to all 2-payroll taxpayer coparents, even those who don't qualify for FMLA.

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Any thoughts?   Would love to hear suggestions in the comments.





[1] Medicare has traditionally had these same issues, however, the new capital/property earner Medicare tax added by the ACA may alleviate this issue somewhat.  The fact that sole breadwinner/nonearning parent families pay only one set of Medicare taxes and receive two sets of benefits may be encouraging this type of family set-up, even when it is not in the child's interest, however.
[2] And who reached age 18 after Reed v. Reed (S. Ct. 1971) (the first Supreme Court decision that the Equal Protection Clause prohibited discrimination on the basis of sex in a family economic matter) and after paternity became provable and disprovable in 1970.
[3] And who reached age 18 after Kirchberg v. Feenstra (S. Ct. 1981) (invalidating the last state "head-and-master" marriage law, a community property law in Lousiana).


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