Households and the fiscal system

Social Philosophy and Policy

Volumn 23, Issue 2, 2006, Pages 185-209

  Shaviro, Daniel N ^a  

^a NEW YORK UNIVERSITY   (United States)

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EID: 33745655228     PISSN: 02650525     EISSN: 14716437     Source Type: Journal    
DOI: 10.1017/S0265052506060225     Document Type: Review

References (62)

1. Classic articles from the 1970s that note the long-standing lack of political stasis and theoretical consensus include Boris I. Bittker, "Federal Income Taxation and the Family," Stanford Law Review 27 (1975): 1389-1463;
2. Michael J. McItyre and Oliver Oldman, "Taxation of the Family in a Comprehensive and Simplified Income Tax," Harvard Law Revieiv 90 (1977): 1573-1630.
3. Among the very numerous more recent treatments of the subject are Louis Kaplow, "Optimal Distribution and the Family," Scandinavian Journal of Economics 98, no. 1 (1996): 75-92;
4. Edward J. McCaffery, Taxing Women (Chicago: University of Chicago Press, 1996); and
5. Lawrence Zelenak, "Doing Something about Marriage Penalties: A Guide for the Perplexed," Tax Law Review 54 (2000): 1-76
6. See, e.g., Grace Ganz Blumberg, "Sexism in the Code: A Comparative Study of Working Wive and Mothers," Buffalo Law Review 21 (1980): 49-98;
7. Marjorie E. Komhauser, "Love, Money, and the IRS: Family, Income-Sharing, and the Joint Income Tax Return," Hastings Law Journal 45 (1993): 63-111;
8. Nancy C. Staudt, "Taxing Housework," Georgetown Law Journal 84 (1996): 1571-1647;
9. McCaffery, Taxing Women;
10. and Anne L. Alstott, No Exit: What Parents Owe Their Children and What Society Owes Parents (Oxford: Oxford University Press, 2004).
11. Henry Simons, Personal Income Taxation (Chicago: University of Chicago Press, 1938), 50. The adoption of an income tax in various Western European countries in the late nineteenth century, and in the United States in 1913, prompted extensive scholarly discussion of what "income" (typically assumed to be a desirable tax base on poorly specified grounds relating to the "ability to pay" concept) really meant. Simons championed the term's generalization to cover the market value of all consumption and changes in net worth, even in the absence of an observed market transaction such as a sale of appreciated property. The Haig-Simons income ideal held a dominant position in U.S. legal tax scholarship from at least the 1950s through the 1980s, although more recently it has increasingly been challenged by support for consumption taxation.
12. Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice (Oxford: Oxford University Press, 2002), 6.
13. Mclntyre and Oldman, "Taxation of the Family," 1576.
14. Boris I. Bittker, "A 'Comprehensive Tax Base' as a Goal of Income Tax Reform," Harvard law Review 80 (1967): 974.
15. Bittker, "Federal Income Taxation and the Family."
16. See, e.g., McCaffery, Taxing Women. I have also examined these issues in earlier work.
17. See Daniel N. Shaviro, Making Sense of Social Security Reform (Chicago: University of Chicago Press, 2000), 65-66 and 72-73;
18. and Daniel N. Shaviro, Who Should Pay for Medicare? (Chicago: University of Chicago Press, 2004), 69-71, 128-30, and 134-35.
19. See Kaplow, "Optimal Distribution and the Family";
20. Kaplow, "Families, Tax Treatment of," in Joseph Cordes et al., Encyclopedia of Taxation and Tax Policy (Washington, DC: Urban Institute Press, 1999);
21. and Louis Kaplow, "Taxation," in A. Mitchell Polinsky and Steven Shavell, eds., Handbook of Law and Economics (forthcoming).
22. But see Louis Kaplow and Steven Shavell, fairness Versus Welfare (Cambridge, MA: Harvard University Press, 2002), arguing for welfarism.
23. The form of utilitarianism that I apply is hedonic rather than preference-based, and thus permits overriding people's observed preferences if we have sufficient grounds for believing that they are making mistakes from the standpoint of their own welfare. (Their preferences would, however, typically serve as powerful empirical evidence regarding what best serves their welfare.) In addition, I assume a utilitarian aim of maximizing total rather than average welfare. I concede that there are grave difficulties with the view that people's mental states can generally (even assuming full information) be given cardinal or even ordinal welfare rankings, reflecting the diversity of our psychological sensations and experiences.
24. See Shaviro, Making Sense of Social Security Reform, 44-58, for a broader discussion of social insurance.
25. See John Rawls, A Theory of Justice (Cambridge, MA: The Belknap Press of Harvard University Press, 1971).
26. John Harsanyi, "Cardinal Utility in Welfare Economics and in the Theory of RiskTaking," Journal of Political Economy 61 (1953): 434.
27. To be sure, positing a veil of ignorance is an extra step relative to simply valuing everyone's welfare equally in the world we actually observe, a step requiring justification and potentially raising such questions about its "thickness" as what degree of risk aversion people should be deemed to have if they do not know who they are. From a utilitarian standpoint, however, the veil of ignorance is merely a way of expressing morally required indifference between oneself and other people. Treating 14 oneself as equally likely to be A or B is a way of treating A's and B's welfare as equally important, rather than importing selfish bias if one knows that in fact one is A. See Journal of Political Economy, ibid., 453;
28. and Shaviro, Making Sense of Social Security Reform, 52.
29. As I discuss later with respect to having children, a social insurance rationale potentially applies even to risks within one's control, but this may greatly raise the stakes regarding moral hazard issues.
30. See Shaviro, Making Sense of Social Security Reform, 51.
31. A transfer system such as Medicaid further reflects a view that medical needs are distributionally important independent of income.
32. More precisely, this reason for giving the money to A would apply without regard to the parties' relative well-being levels. This is not to deny that one's overall distributional decision might reflect both this reason for giving money to A and information about the parties' relative well-being levels.
33. This example ignores the possibility of inducing people with higher life expectancies to work longer or save a larger proportion of their lifetime earnings for retirement. It also does not take account of moral hazard, which could take the form of under-saving given one's above-average life expectancy because one knows that the retirement system will make up the difference.
34. Robert Nozick, Anarch/, State, and Utopia (New York: Basic Books, 1974), 41. This objection will not arise here, as I will be emphasizing differences in people's preferences and circumstances that do not raise issues of differing intensity as to their overall sets of preferences. The second common criticism pertains to expensive tastes, or the concern, first raised by Kenneth Arrow, and developed most notably by Ronald Dworkin, that it is unfair to favor individuals by reason of their having freely chosen tastes that are unusually expensive to satisfy.
35. See Kenneth J. Arrow, "Some Ordinalist-Utilitarian Notes on Rawls's Theory of Justice," Journal of Philosophy 70 (1973): 245;
36. Ronald Dworkin, "What Is Equality? Part 2: Equality of Resources," Philosophy and Public Affairs 10, no. 3 (1981): 283. Anne Alstott, writing about households with children from the standpoint of liberal egalitarianism, treats this as an objection that needs to be met on nonutilitarian grounds that relate to parents' responsibility for their choices and to effects on children's development.
37. Alstott, No Exit, 61-66.
38. Kernhauser, "Love, Money, and the IRS," 92.
39. Bittker, "Federal Income Taxation and the Family," 1391.
40. An example of using household information without joint filing is the federal income tax treatment of minor children, who must file their own returns if they have sufficient income, but may be claimed by their parents as dependents and also may be taxed on certain unearned income at the parents' marginal rate. A proposed example of using household information along with separate filing is McCaffery's proposal that spouses file separate returns but with a "more generous rate schedule, or greater deductions, for the lesserearning spouse." McCaffery, Taxing Women, 277.
41. In some past literature, relevant pooling and allocation have been defined more narrowly. For example, Kornhauser, "Love, Money, and the IRS," 97, argues that viewing households as economic units requires "assum[ing] that the family is a monolithic, homogeneous group in which all members share the same tastes and resources, including income, equally.... True pooling presumes equality, if not in contributions to the pool, then at least in free access to the pool."
42. Given the practice of polygamy at various times and places in world history, and indeed its apparent survival in portions of Utah (see Jon Krakauer, Under the Banner of Heaven: A Story of Violent Faith [New York: Doubleday, 2003]), a more universal definition would have to permit extension of this definition beyond the case of two individuals who form a couple.
43. See Kornhauser, "Love, Money, and the IRS," 67.
44. See, e.g., Bittker, "Federal Income Taxation and the Family," 1422-25.
45. See Kaplow, "Optimal Distribution and the Family," 80-81.
46. See Internal Revenue Code section 152, defining dependents for federal income tax purposes relating to the allowance of deductions for personal exemptions, for an example of a rule addressing children's and other relatives' household status.
47. Intrafamily asset transfers for this purpose became sufficiently prominent that Congress in 1996 enacted a new law creating criminal penalties in cases where the transfers were designed to circumvent the Medicaid asset limit. See 42 U.S.C. sections 1396a and 1396p; and Helen Hershkoff and Stephen Loffredo, The Rights of the Poor (Carbondale, IL: Southern Illinois University Press, 1997), 184.
48. Bittker, "Federal Income Taxation and the Family," 1395.
49. On the importance of this principle, compare "Federal Income Taxation and the Family", ibid., 1438, describing proposals to abandon it as "nothing less than astonishing," with
50. McCaffery, Taxing Women, 25: "Taxing equalearning couples equally is terribly unfair, because in fact it leads to massive discrimination against women."
51. See Kaplow, "Optimal Distribution and the Family," 78-80, for a similar view of the significance of unequal sharing within a household.
52. As Bittker famously pointed out, marketplace responses to a non-neutral tax rule may eliminate the inequity problem, leaving only inefficiency. See Boris I. Bittker, "Equity, Efficiency, and Income Tax Theory: Do Misallocations Drive Out Inequities?" San Diego Law Review 16 (1979): 735-48.
53. A further important issue is the effect of taxation on decisions to marry, involving encouragement of forming a one-earner couple and discouragement of forming a two-earner couple.
54. See Michael J. Boskin and Eytan Sheshanski, "Optimal Tax Treatment of the Family: Married Couples," Journal of Public Economics 20 (1983): 281-97;
55. and Michael J. Boskin and Douglas J. Puffert, "Social Security and the American Family," in Lawrence H. Summers, ed., Tax Policy and the Economy, Vol. 1 (Cambridge, MA: MIT Press, 1987).
56. See McCaffery, Taxing Women, 179-82, and sources cited therein. This is especially true for couples with children, because nonmarket work in the home is such an important form of household economic production.
57. See Taxing Women, ibid., 170-75. "Compensated elasticity" refers to that which is measured holding income constant, so as to focus on substitution effects, or responses to incentives at the margin, as opposed to people's changing preferences as income changes.
58. Internal Revenue Code section 21 provides a fairly limited childcare credit for twoearner married couples and heads of households with children, which I ignore in the text for ease of exposition.
59. See McCaffery, Taxing Women, 240-64;
60. and Alstott, No Exit.
61. See Charles M. Tiebout, "A Pure Theory of Local Expenditures," Journal of Political Economy 64 (1956): 416.
62. See C. Eugene Steuerle, "Can the Progressivity of Tax Changes Be Measured in Isolation?" Tax Notes 100 (2003): 1187-88. As Steuerle notes, however, higher-income households get greater college education subsidies than lower-income households.