TAILIEUCHUNG - Ten Principles of Economics - Part 26

Ten Principles of Economics - Part 26. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 259 We can fix the problem for John and Joan by raising the income exclusion from 10 000 to 20 000 for married couples. But this change would create another problem. In this case Sam and Sally would pay a tax after getting married of only 20 000 which is 2 500 less than they paid when they were single. Eliminating the marriage tax for John and Joan would create a marriage subsidy for Sam and Sally. In practice the . tax code is an uneasy compromise that includes a combination of marriage taxes and marriage subsidies. According to a study by the Congressional Budget Office 42 percent of married couples pay a marriage tax averaging percent of their income while 51 percent of married couples pay lower taxes by virtue of being wed averaging percent of their income. Whether a couple is better off from a tax standpoint being married or shacked up depends on how earnings are split between the two partners. If a man and woman have similar incomes like John and Joan their wedding will most likely raise their tax bill. But a marriage subsidy is likely if one partner earns much more than the other and especially if only one of them has earnings like Sam and Sally . This problem lias nosimplesolution. To seewhy yydesigning anincome tax with the following four properties Two married couples with the same total income should pay the same tax. When two people get married their total tax bill should not change. A person or family with no income should pay no taxes. High-income taxpayers should pay a higher fraction of their incomes than low-income taxpayers. All four of these properties are appealing yet it is impossible to satisfy all of them simultaneously. Any income tax thatsatisflo sthe fir st threcmustviolate the fourth. The only income tax that satisfies the first three properties is a proportional tax. Some economists have advocated abolishing the marriage penalty by making individuals rather than the family the taxpaying

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