How to improve the tax code is the subject of much debate. Proponents often call for increasing fairness and simplicity, for example, but people define those concepts in different ways. Policymakers focus on what types of income are taxed and at what rate; whether to tax some people less than others based on such factors as marital status, presence of children, and homeownership; and how much revenue needs to be raised through the system.
The tax code is fraught with tensions and tradeoffs, and efforts to satisfy one principle of tax policy can violate another. The so-called marriage penalty offers a case in point. A married couple is generally treated as one tax unit who must pay tax on their total taxable income. The marriage tax penalty is said to exist when the tax liability of a married couple is greater than the sum of the tax liabilities the spouses would have incurred were they not married. It is impossible to eliminate the marriage tax penalties within the existing tax structure without violating other desirable features of the tax system.
INCOME TAX REFORM: Policy
Tax reform should focus on raising sufficient revenue and making the tax system more equitable and efficient. Reforms should:
- increase the system’s capacity for raising adequate revenue, including broadening the tax base;
- maintain ability to pay as the standard of tax equity—tax reform should result in a distribution of tax burdens that is no less progressive than the current-law distribution of burdens under the individual and corporate income taxes;
- avoid negative impacts on important social goals such as retirement savings and health insurance coverage;
- reduce distortions in the tax code;
- reduce the administrative record-keeping burden on American taxpayers;
- be evidence-based with respect to economic development effects;
- encourage American competitiveness and job creation; and
- provide appropriate transition relief.
Any further efforts to address marriage penalties should be targeted to two-earner couples and structured to avoid increasing marriage bonuses.
Enhancing progressivity at the state level
States should increase the progressive nature of their income tax systems by exempting from state tax rolls people with income below the poverty line and by adjusting personal exemptions, standard deductions, credits, tax rates, and brackets and indexing them for inflation.
Treatment of taxes paid to other states
States with income taxes should allow credits for taxes paid by their residents to other states so that no taxpayer is subject to double taxation.