Today I attended an interesting talk by a colleague, on the tax consequences of the clash between state and federal law. Her particular interest was a current problem—same sex couples who were recognized as married, or the equivalent for purposes of taxation, by the state they lived in, but not by the IRS. Her description of the historical background to the problem, the past interaction between state law and federal taxation, suggested to me an interesting but unrelated idea—the possibility of using a past legal anomaly as a natural experiment to determine the supply elasticity of marriage.
Federal tax law, now and in the past, bases its definition of what income belongs to which taxpayer on state law. In a community property state, back before the invention of the joint return, half of a couple's income was attributed to the husband, half to the wife. In states that did not recognize community property, on the other hand, the husband was taxed on his income, the wife on hers.
When tax rates become significantly graduated in response to the need to pay for WWI, that meant that high income single-earner couples paid substantially lower taxes in community property states. One possible response was for such couples to move to community property states, and apparently some did. Another would be for a high income bachelor living in a community property state to get married, thus shifting half his income to his wife's lower rate.
Which get us to my natural experiment. The situation I have described lasted for twenty years or so, easily long enough for individuals to observe it and respond. Was one response an increase in the fraction of high income men living in community property states who were married, relative to the fraction in non-community property states? If so, the size of the effect would give us a measure of the elasticity of supply of marriage—how the number of people who get married responds to financial incentives to do so.
It should be a good project for a PhD thesis, assuming the necessary data—marriage rates by income group and by state—exist.
1 comment:
High income people have always had ways to game the tax collector, and more recently, the social service providers. For example, the self-employed could always simply add a spouse to the payroll. Migration, or relocating as a response to shopping jurisdictions would be a pretty radical response to an easily corrected "marriage penalty." I would suspect that tax rates in general have a much larger affect.
OTOH, I would suspect that migration to non-community property states would be a common strategy used by a high income spouse whose marriage was faltering.
There's a lot to sort out in theses decisions -- and I don't put much weight on the publicly stated reasons expressed by same sex couples. They've actually got a lot more options to game the system than those in traditional marriages.
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