Spotlight: Tax Policy, Marriage, and the Family

Family North Carolina Magazine—Sep/Oct 2006

By Erik Root

What do tax policies have to do with the family? Plenty. Consider the taxes that many families pay in the state of North Carolina: sales taxes, gas taxes, property taxes, vehicle taxes, estate taxes, and personal income taxes. People forget that we also pay taxes (and/or regulatory fees) on our phone and television cable. And let’s not overlook the taxes we pay the federal government in terms of income taxes, and social security taxes (both a product of the Federal Insurance Contributions Act tax, or FICA). Employees pay half of the FICA bill while employers pay the other half. The self-employed pay both.

With all of these taxes it should not be a surprise that the tax burden on families in North Carolina is great. The recently concluded 2006 “Short Session” of the General Assembly saw a 10 percent increase in state spending.[1] Over the last 20 years the state budget has grown by 250%.[2] According to Americans for Tax Reform, “this year, the average American will work 44.6 days to pay for state and local spending resulting in the second consecutive increase in as many years.”[3] North Carolinians have to work approximately 48 days in order to pay their share of state and local spending. To that end, North Carolina recently ranked the highest of the southeastern states in the amount the state increased taxes per capita.[4] Additionally, the state and local tax burden in North Carolina generally costs citizens 10 percent of their income—one of the highest burdens in the southeast.[5]

Original Intentions
We should not assume that the government ought not tax its citizens. Publius noted in the Federalist Papers that “States should possess an independent and uncontrollable authority to raise their own revenues for the supply of their own wants.”[6] The power of taxation is an “essential function” of the government.[7] The Founders understood that taxation encourages and discourages certain behaviors. For example, in general, a consumption tax carries with it a security against excess.[8] However, the intention was not to levy taxes for just any reason, but for the “safety and welfare” of the people as well as to secure liberty (equality) and happiness.[9] We get the sense, then, that government’s use of the taxing power was not only meant to be vast and broad, but also limited, as it was to be directed to certain objects. Taxes are the means of a certain end—the safety and happiness of the people.

Furthermore, taxes should be distributed equally. James Madison wrote:

A just security to property is not afforded by that government, under which unequal taxes oppress one species of property and reward another species: where arbitrary taxes invade the domestic sanctuaries of the rich, and excessive taxes grind the faces of the poor; where the keenness and competitions of want are deemed an insufficient spur to labor, and taxes are again applied, by an unfeeling policy, as another spur; in violation of that sacred property, which Heaven, in decreeing man to earn his bread by the sweat of his brow, kindly reserved to him, in the small repose that could be spared from the supply of his necessities.[10]

Madison reflects on the great truth—one that is no less spoken of in the Bible’s Golden Rule—that out of our human equality comes a morality that should guide our economic policies. Because we are equal, it is wrong to make unequal laws. In terms of taxation, public monies should be acquired equally. This means, in terms of families, that every person has as much right as any other to keep that which he has earned by his labor.

The Marriage Penalty
Some will protest that taxes are not that burdensome given that tax credits and other deductions are available to individuals, families, and even businesses. For many, the way that our tax system operates is that we are taxed and then receive a refund at the end of the fiscal year depending on the standard deduction and various refunds. On its face, it is inefficient to give the government one’s hard-earned money to keep, only to receive a portion of it back at the end of the year without interest. Would it not be better for a family to keep their money to do with it what they want? Suppose a family was able to keep the money that they otherwise would have sent to the government. Even if they placed it in a basic savings account, they would have more money. Consider another issue that is inauspicious to the family under the current tax system.

Within the last few years, both the state and federal government have attempted to eliminate the marriage penalty. Essentially, the penalty is an aspect of the tax code whereby higher taxes are required for a married couple than of two single individuals. According to the Congressional Budget Office:

Differences in income tax liabilities caused by marital status are embodied in a number of tax code provisions, beginning with separate rate schedules for married couples and single individuals. The most important other differences are those in the standard deduction and the earned income tax credit (EITC). Those factors cause most two-earner couples in which husband and wife have roughly equal incomes to pay more tax than they would if they could file individual tax returns, incurring what has become known as a ‘marriage penalty.’[11]

Though on the federal level, the marriage penalty is in the process of being phased out, those changes have yet to be made permanent. In North Carolina, the marriage penalty was purportedly “eliminated.”[12] However, this is not necessarily true. It was eliminated for lower and middle class families. The penalty continues to exist, albeit for more affluent wage earners. Let’s say that one person in a marriage earns $50,000/year and the other earns $55,000/year. Under the current rate schedule, if each filed as a single they would pay a combined $1,530 plus 7% of the amount over $12,750 (or $7,095). However, if they filed as a married couple, their amount owed would jump to $6,787.50 plus 7.75% of the amount over $100,000 (or $7,175). In this scenario, the married couple is penalized $80 simply for being married and filing jointly. The marriage penalty increases as the couple’s income increases.

Low taxes coupled with simple tax laws are more likely than not to benefit families in all income ranges.[13] Currently, the income tax in North Carolina raises roughly 55% of all revenues. This fact has an effect on working families as this progressive tax punishes success. The more one makes, the more one pays in an unequal sense—the tax rate increases as one’s earnings increase (this is called the marginal tax rate). The income tax has the added disincentive of discouraging saving and investment.[14] In other words, because North Carolinians pay a significant portion of the tax revenues out of their income, there is little money left over to save and/or invest. The lower the tax rate, the more productive families will be, and the more likely they will save and invest their money. More productivity renders increased earned income, and that can translate into, depending on the choices individuals make, more jobs for North Carolina: those with more income may choose to either buy more goods and/or start or expand new businesses in the state. Either way, the economic benefits to the family and the state would be unmistakable.

Fertility and North Carolina
We might add that tax policies influence the family in another, perhaps, more surprising way. Recently, Jonathan V. Last of the Weekly Standard wrote that fertility rates may decline partly from excessive taxation, and more specifically from the growth of the welfare state.[15] Of course there are many factors that contribute to the decline in fertility rates—contraception, abortion, divorce, putting off having children for career pursuits, the social acceptance of homosexuality, etc. However, according to Last, “having children is more economically burdensome and less economically rewarding than it has ever been in the course of human history.”[16]

Consider the economies of Europe and the United States. Europe’s fertility is declining, and overall, America’s is rising. According to the Economist, if this trend continues, America’s economy will be twice the size of Europe’s. The balance of global economic power would be decisively in favor of the United States despite the economic conglomerate known as the European Union.[17] However, as Last points out, this result is not assured. Should the affordability of a wife and two or more kids become unaffordable, then the economic advantage may be lost.

Could a low fertility rate threaten the economic advantage within the Union? The total fertility rate in North Carolina is just above replacement (meaning that couples are having enough children to at least replace them). The U.S. Census Bureau noted in 2000 that the rate in the state was 2.04.[18] If Last is correct, and there is a correlation between the economic burden and fertility, then North Carolina’s overall low rate of 2.04 could be due to the high burden placed on the state’s citizens. It is significant to note that the lowest fertility rates are located in the Northeast—in some of the most high tax states in the Union.

Conclusion
It is a well-known maxim that if you want to discourage a behavior you tax it.[19] Viewed this way, the tax code is anything but neutral. While the North Carolina rate does not penalize a married couple where one spouse earns a substantial amount more than the other spouse (of course up to the $100,000 combined limit), the marriage penalty not only stands as an obstacle to marriage, but also may discourage a spouse from entering the workforce.[20]

When considering the effect of taxes, we should remind ourselves that the more money that North Carolina families get to keep, the more money those families will have to meet their fiduciary responsibilities. They will also have more money to save or invest. Since families “provide networks of trust and capital that serve as the foundation for countless entrepreneurial small-business enterprises [that] are crucial to the vitality of the nation’s economy,” we should not only institute policies that encourage marriage and the family, but also pass monetary policies that allow the family unit to thrive.[21] While some have put forth some fairly compelling ideas to monetarily support the family under the current tax code—for example “income splitting”[22]—it would behoove North Carolina’s families to consider a more long-term approach. If a simple, stable, and low tax policy is helpful to material prosperity of families, a single marginal rate might be the most worthwhile for immediate consideration.

A healthy body politic depends on healthy families and proper household management. One way to encourage the proliferation of strong and stable families is to draft policies that do not penalize marriage but encourage family prosperity. Such a tax policy would at least not discriminate against marriage in contrast to the current system, which at least presents a monetary burden.[23]