The Taxation of Families: How Gendered Tax Policies Affect Income Inequality

This blog is based on an article by Manuel Schechtl. Click here to read the Open Access article.

Rising inequality has become a major feature of public debates. In light of the current economic and social crisis, many scholars have called for the state to intervene by increasing transfers or cutting taxes. However, welfare states do not only shape redistribution by setting the tax rate and deciding on the amount of benefits. The design of tax breaks and the definition of the tax unit are equally important. For instance, different family types may be treated differently because tax systems provide family type-dependent benefits, including preferential tax schedules, marriage benefits or child allowances. 

These policies of tax design, however, may promote familialization through strengthening individual dependency on the family (for instance, joint taxation) or encourage de-familialization by enhancing individual autonomy (for instance, single-parent allowances). In addition, these policies might thwart the redistributional goals of social policy. It is therefore pivotal to examine family related tax benefits when interested in income inequality between family types. 

In the paper, I examine income inequality between the six most prevalent family types (single, single parent, married without children, married with children, unmarried without children, unmarried with children) of non-retired households before and after income taxation across countries. To this end, I draw on harmonized income, transfer and taxation data from 30 countries in the Luxembourg Income Study (LIS) and estimate between-family-type income inequality before and after fiscal intervention. In order to assess how welfare states’ tax policies structure income inequality between family types, I identify family-related tax policies and evaluate their impact. 

Tax policies

First, countries differ in the income tax filing unit, which most commonly is the individual or the married couple. The joint filing of married couples assumes that income and consumption are shared within the couple and, in effect, means that the individual income tax rate is dependent on the spouse’s earnings. Therefore, joint filing has been criticized as a strong familialization policy that leads to persistent gender inequalities. In contrast, applying individual filing means that all individuals are treated separately regardless of their marital status when assessing the income tax. This is usually understood as a de-familialization policy in the tax code, because it assumes independence of individuals within households. 

Second, income splitting aggregates the spouse’s income and calculates the tax burden on the combined income. This is therefore a particularly strong version of joint filing. In most countries, married couples benefit from income splitting if they have unequal incomes (e.g. US and Germany). This therefore leads to strong incentives for a weak labour market attachment of secondary earners with significant implications for gender inequality and individual autonomy. 

Although most welfare states apply individual filing, this does not mean that the tax rates of spouses are entirely independent from each other, nor does it mean that family-oriented mechanisms are absent in the tax code. Many countries without joint filing at least offer some kind of special dependent spouse allowances for the breadwinner. This mechanism diminishes the taxable income of the main earner if his or her spouse has no or low income and hence promotes the dependencies of non-earner or stay-at-home spouses. Consequently, these tax characteristics are best described as familialization tax policies.

These family-related aspects in the tax code should influence inequality between types of families. In particular, married couples and couples with children are expected to benefit from familialization policies when compared to other family types. Usually these family types have higher equivalized household incomes than unmarried or single people or single parents. In general, high tax levels and tax progressivity should reduce income inequality between these family types. However, if family-related aspects in the tax code systematically benefit those family types that have a higher mean income (e.g. married couples) compared to those with a lower mean income (e.g. single parents), then the reduction in income inequality between these family types may be lower than expected. 

Findings

My findings indicate that income splitting and joint filing are negatively associated with the reduction in income inequality between types of families. This confirms the expectation of familialization policies thwarting the redistributional goals of social policy. Estimates for dependent spouse allowance are, however, inconclusive. 

Joint filing and income splitting could particularly benefit married couples and therefore leas to less redistribution. Interestingly, the study shows that income splitting is indeed associated with lower reduction of inequality between married couples and all other households while results for joint filing are less clear. This hints to the fact that unmarried couples in many countries can file jointly. Income splitting, hence, is exclusively designed for benefiting married couples.

The social and political implications are manifold. In the light of the pandemic and escalating public debt, it is debatable whether these tax expenditures are desirable. For the public budget, these tax benefits essentially represent a loss of revenue. In fact, the lost tax revenue could be used for social transfers to the poor rather than implicitly benefiting married couples in the upper income strata. 

Focusing on (de-)familialization tax policies with different consequences for inequality, this study emphasizes the role of family tax policy as a form of social policy.


About the author

Manuel Schechtl is a Research Assistant at Humboldt University.

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