FORUM ON MARRIED WOMEN AND THE INCOME TAX: MARRIAGE PENALTIES AND MARRIAGE BONUSES OF THE 105 H CONGRESS
PANEL I: OBSERVING MONEY, MARRIAGE AND TAXATIO

Schwartz, Amy Ellen

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WHOSE MONEY IS IT?

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NYLS Journal of Human Rights Volume 16 Issue 1 SYMPOSIUM: WOMEN, EQUITY AND FEDERAL TAX POLICY: OPEN QUESTIONS Article 7 1999 WHOSE MONEY IS IT? Amy Ellen Schwartz Follow this and additional works at: https://digitalcommons.nyls.edu/journal_of_human_rights  Part of the Law Commons Recommended Citation Schwartz, Amy Ellen (1999) "WHOSE MONEY IS IT?," NYLS Journal of Human Rights: Vol. 16 : Iss. 1 , Article 7. Available at: https://digitalcommons.nyls.edu/journal_of_human_rights/vol16/iss1/7 This Article is brought to you for free and open access by DigitalCommons@NYLS. It has been accepted for inclusion in NYLS Journal of Human Rights by an authorized editor of DigitalCommons@NYLS. 1999] MONEY, MARRIAGE & TAXATION 135WHOSE MONEY IS IT?Professor Amy Ellen SchwartzPROF. SCHWARTZ: I hope that it is a provocative question.I want to talk about this question because answering it is fundamentalto making equitable, efficient tax policy. More specifically, myquestion is: how do we apportion household earnings among thevarious household members into taxable incomes and associated taxunits? Put simply, that is, "Whose money is it?"This is not a new question. In fact, it is an old question thatwas debated and discussed in great depth for years, revolving aroundthe issue of income splitting between married couples in the days ofseparate filing.20 In those days, married couples with a single earnersought to allocate, through a private contract, a portion of the singleearner's income - typically the husband - to the non-earner spouse- typically the wife - in order to take advantage of the lower ratesfaced by the non-earner.21 In 1930, the Supreme Court held in Lucasv. Earl that taxpayers could not split their income in this way for taxpurposes. 22 However, in a decision later that year, Poe v. Seaborn,they allowed famiiies residing in. states with community property lawsto report split income. 23  Then, in 1948, Congress reformed theFederal Income Tax, extending this option to all taxpayers in allstates.24Now, an important part of the discussion in those daysrevolved around the question of who "owned" the income. In Taxing20 See Amy C. Christian, The Joint Return Rate Structure: Identifying andAddressing the Gendered Nature of the Tax Law, 13 J.L. & POL. 241, 255-56, 282-87(1997) (explaining the mechanics of income-shifting).21 See id. at 254-57; see also Lucas v. Earl, 281 U.S. 111, 113-14 (1930)(involving a husband and wife who entered into such a contract).22 281 U.S. at 114-15 (holding that because the husband earned the income,he could not impute by contract any portion thereof to his wife for tax purposes).23 282 U.S. 101 (1930) (distinguishing this case from Lucas v. Earl, 281 U.S.111).24 Revenue Act of 1948, Pub. L. No. 80-471, tit. I1, pt. I, 62 Stat. 110, 114-N.Y.L. SCH. J. HUM. RTS.Women, Ed McCaffrey quotes California's then Representative,Bertrand Gearhart, as saying:We tax the individual's income. If, in your state, youwant to insist that that income belongs to the husbandand that the wife has no interest in it at all, logically heshould pay the tax on it. In our state, the State ofCalifornia, the husband never was regarded and is nottreated as the owner of all of that income. From theinstant that it is earned, according to the law of thestate, it became and was the property of thecommunity partnership. The wife owns half, thehusband owns half.25At the same time, others argued that since a married coupleacts as a single economic unit, it should be taxed as a single economicunit.26 Although I doubt that the protagonists in these debates hadanticipated it, economists have spent some significant effort in the last50 years investigating the validity of two of the underlying claimsmade. 27 The first is that married couples act as a single economic unit- that is, as if it is all "our" money. The second is that marriedcouples act as if income earned by a family is half his and half hers.These are not, in fact, the same things.Economic theory has offered essentially two views of themarried couple as economic agents. The traditional commonpreference models' view is that families pool all their resources andmake consumption decisions as if they were maximizing a singleobjective function. This is consistent with the it's-all-ours story. Theimplication of the pooling of resources in a family is that familyexpenditure decisions should not depend on who earns the money andmarried couples should be taxed as a single unit.The alternative models regard joint family decisions as25 See EDWARD J. MCCAFFREY, TAXING WOMEN 53 (1997).26 See Marjorie E. Komhauser, Theory Versus Reality: The PartnershipModel of Marriage in Family and Income Tax Law, 69 TEMP. L. REv. 1413, 1436-37(1996) (explaining the rationale behind taxing married couples as a single economic unit).27 See id. at 1431-50 (stating that spouses should be taxed separately); seealso Christian, supra note 20, at 265-79 (comparing the effects of income splitting andincome aggregation).[Vol. XVI1361999] MONEY, MARRIAGE & TAXATIONgrowing out of bargaining between husbands and wives. These arehusbands and wives who sometimes have divergent interests that areframed by social institutions and norms governing marriage anddivorce and, most importantly, are influenced by their individualeconomic circumstances. This means that these models predict thatfamily expenditure decisions may depend on who earns it and whocontrols the money. This carries the implication that husbands andwives should be treated as distinct economic units for tax purposes.It turns out that it is quite difficult to empirically distinguishbetween these models. I could talk a long time about that but I won't.Instead, what I will talk about is that there seems to be mountingevidence that family consumption decisions do depend upon thedistribution of earnings between the husband and the wife. In somepretty conclusive evidence, Lundberg, Pollack and Wales show thatwhen the United Kingdom began remitting.their substantial childbenefit allowance directly to mothers rather than as supplements tofathers' paychecks, spending on children's clothing rose by an averageof £50 and spending on mothers' clothing rose by an average of £40for an average two-child family receiving a child allowance of about£500.28 The point is, simply, that switching to direct payments to themother from payments to the father caused significant changes inwhat the money was spent on.More generally and looking at a broader range of evidence,spending on a wide range of goods and services changes as the shareof income earned by the wife increases. As an example, when thisoccurs, spending on restaurant meals and childcare increases;spending on alcohol and tobacco decreases. 29 The implication for taxpolicy is that while the evidence may not be fully conclusive, there issignificant evidence that husbands and wives do not ignore the sourceof the income in making economic decisions. That means that it maybe inappropriate to view them as a single economic unit.There is another issue that we need to address. Our treatment28 See Shelly J. Lundberg et al., Do Husbands and Wives Pool TheirResources? Evidence from U.K. Child Benefit, 32 J. HuM. REs. 463 (1997).29 Cf Peter D. Brandon, Income-Pooling Arrangements, EconomicConstraints, and Married Mothers' Child Care Choices, J. FAM. ISSUES, May 1, 1999 at350 (reporting that a wife's abilities to participate in childcare payments is key to choiceof childcare).137N.Y.L. SCH. J. HUM. RTS.of the household is inconsistent in light of the many different types ofhousehold structures we have today in the United States. Thedifferential treatment of couples depending on their marital statusraises serious issues about equity between married and unmarriedcouples. This only scratches the surface of the problem. In fact, ourtax treatment of families leads to some bizarre inconsistencies.Consider the following story: a man and a woman areinvolved in a long-term relationship, building together a complicated1990's family. The family involves her children from a previousmarriage, children she has adopted on her own, and children they haveadopted together. Finally, the man and woman split up. The oldest ofthese children, now 19, chooses to live with the father. At this point,the nineteen-year-old is in college and the father substantiallysupports her. Thus, he claims her as a dependent on his tax return.She files her own tax return reporting her own modest income, payingtaxes at a lower marginal tax rate, which induces little disincentive towork. It sounds like a happy story. Now, what if I tell you that theirnames are Woody Allen and Soon Yi Previn. Now it's complicated.We have three ways of viewing these two for tax purposes. First, theycan file as I have just described. Second, they can be required to fileseparately as unrelated individuals. Since they are not married, theydo not have to file jointly and there is no need to file - no marriagepenalty. Finally, they may get married, in which case we tax them asa married couple filing jointly and they face a potentially significantmarriage penalty. Now, I do not mean to make too much of thisexample and, certainly, not to make fun of Mr. Allen and Ms. Previn.Still, I hope it illustrates the difficulties we face in forging equitabletaxation when we employ a tax system that levies taxes differentiallybased upon the intimate personal relationships between people.Finally, I should note that this discussion has completelyignored the claim that children have to the earnings of their parents.The substantial experience we have in this country with divorce andchild support payments indicates that children, in some sense, ownsome of the earnings of their parents. Divorced fathers are routinelyrequired to pay some of their earnings to support their children. 30 As30 Cf 59 Am. JUR. 2d, Parent and Child §59 (1987) (requiring adjudicationand contribution of child support; further mandating that no father can release himself138 [Vol. XVI19991 MONEY, MARRIAGE & TAXATIONsuch, equitable taxation turns on the question "how much money didan individual have claim to" or "whose money is it?" We may findourselves moving towards a system of separate filing, perhaps, evensomething like the French system. In France, income earned by allhousehold members is pooled for tax purposes. It is then dividedamong all family members. In the French system, children arecounted as half an adult. Recent work by Lazear and Michael, basedon United States data, has suggested that we use a weight of .4 for achild. But these are details.3 1Most tax policy research related to the family moves fairlyquickly from the observation that the family income can be earned byvarious family members, to a discussion of problems posed bypursuing the inconsistent goals of marriage neutrality, progressivetaxation, and horizontal equity across families with equal income.Thus we discuss the marriage tax, labor supply, household structureand formation and so on. At the same time, our principles of incometaxation suggest that we tax folks based on their ability to pay. In thecase of the income tax, forming an estimate of ability-to-pay mustbegin with a definition of individual income and that turns on adefinition of what is the economic unit that is appropriate for taxation.I would like to suggest that measuring and allocating income acrosshousehold members - whether the household is defined by marriage,cohabitation, or blood relations - is an important and complicatedtask that must be accomplished first in order to create an equitable andefficient system of income taxation.PROF. THOMAS: Thank you, Amy.Just one comment on the Allen/Previn household, I wonder ifthey would be a bonus couple rather than a penalty couple? I think,she would be lucky if they were a penalty couple.32from an obligation to support merely by giving child away).31 See EDWARD P. LAZEAR & ROBERT T. MICHAEL, ALLOCATION OF INCOMEWITHIN THE HOUSEHOLD 147-48 (1988) (observing that an adult spends $100 on himselffor every $40 he spends on a child, indicating an income allocation ratio of $100 to $40,or I to .4, suggesting that .4 represent a child for income tax purposes).32 If both spouses earn at least one-third of their combined income, they arelikely to incur a marriage penalty. Thus if one spouse had an adjusted gross income of$1million in a given year, the other spouse would have to have at least $500,000 inadjusted gross income for the couple to experience the marriage penalty effect. If onespouse contributes less than one-third of aggregate income, filing a joint return generally139

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