To craft a family-centered theory of taxation, I begin with several assumptions regarding the imposition of taxes.
First, taxation is inevitable, the life blood of all forms of governance. In this age, we cannot choose to ignore taxation. Our only option is to craft it as wisely as possible.
Second, taxation has powerful social effects independent of any measure’s ability to raise money for support of the state. Policy architects must be aware of their own social ideologies and build on and around the predictable incentives and effects, aware that there is no possibility of a “neutral” tax relative to social structures and conventions. (Note 1)
Third, taxation must be confined to the economy denoted by money and markets. We need recognize that there are two economies that always co-exist: the market economy, where exchanges take place through the medium of official tender and where competition and the quest for efficiency drive decisions; and the home economy, where exchanges occur through the altruistic blending of wealth and services among family members, usually independent of monetary calculation. It is through these latter acts and exchanges ranging from child care, meal preparation, and home repair to carpentry, gardening, and food preservation that the institutional life of a family takes form. As the home economy grows relative to the market economy, the family’s claims on the individual relative to other institutions grow as well. Even in the wake of industrialization, these actions and exchanges represent economic activity of considerable value.
Working with U.S. data in the mid-1970’s, Scott Burns calculated its overall worth to be at least 50 percent of the official Gross National Product. (Note 2) Working with a more sophisticated model and Australian figures from 1992, economist Duncan Ironmonger calculated a “Gross Household Product” almost equal to Australia’s “Gross Market Product,” roughly $350 billion each. (Note 3)
Experience also shows that taxation policy has a direct effect on the degree of household commitment to the two economies. Sociologists Janet and Larry Hunt have shown that the net effect of higher marginal tax rates is to encourage the substitution of home production for market production: with a one-point increase in marginal tax rates, the average woman will work thirty-nine fewer hours annually in the market economy, and devote twenty-nine more hours to home production, as the family defends its living standard (and shelters income from taxation) by turning toward home. (Note 4) On this same question, Harvey Rosen has emphasized that “married women do in fact seem to react to tax rates in the ‘rational’ manner of standard economic theory.” (Note 5) Unexpectedly, this turn to home production by “women in families with higher after-tax cash income contributes more to their families’ economic well-being than that of women in lower after-tax income families.” (Note 6)
Accordingly, wise and just policy recognizes and defends the boundary between these two economies. Viewed in a broader context, the taxation of market labor, market-oriented capital, and corporate income can be positively viewed as tariffs on market transactions, protecting the base of the home economy. (Note 7) This assumption also dictates that the efficiency of state tax collection should give precedence to the preservation of this vital boundary between the two economies.
And fourth, the rules of taxation need clean, easily verifiable definitions and lines of accountability. For example, relative to the taxation of households, the existence of a legal marriage is unambiguous in meaning and easily verified through documentation. The cohabitation of unmarried adults, in contrast, bears no equivalent paper trail, nor consistent set of legal obligations. To offer another example, the money value of market transactions is calculated with relative ease, while the gains from home production rarely carry an easily calculated or verifiable value. (Note 8)
As the basis of theory, I need also offer certain assumptions regarding the family.
To begin with, I hold that the family is a natural and universal human institution, the primal social bond, rooted both in human biology and cultural conventions. (Note 9) Men and women as incomplete beings are drawn to each other for coexistence and reproduction. Indeed, the family can be defined in all corners of the globe and in all times as a man and a woman bonded in a socially-approved covenant of marriage, to bear, raise, and protect children, to provide mutual protection and support, to create a small domestic economy, and to maintain continuity with the generations. (Note 10) Families, not individuals, form the natural social units of society. As a corollary, family households and not individuals become the proper taxable units. Attempts to tax individuals exclusive of their position within families will normally create distortions that harm the family itself. (Note 11)
Of equal importance, we need acknowledge the enormous and irreplaceable gifts that stable families give to society. The accumulated evidence from the fields of sociology, psychology, medicine, and criminology shows intact families based on marriage to be far superior to other entities as nurturers of the young and as guarantors of adult well-being. Children reared in such families are significantly and usually dramatically less likely to be victims of physical and mental abuse, (Note 12) to attempt suicide (Note 13), to use illegal, mind-altering drugs (Note 14), and to commit other destructive or criminal acts. (Note 15) The children growing up with their natural parents in married-couple households are much healthier in mind and body than children reared in other settings (Note 16) and much more likely to display cognitive advance and to succeed in school. (Note 17)
Married adults, women and men, also lay claim to significantly better health than their never-married or divorced counterparts, and the married are much less likely to commit suicide. (Note 18)
Population growth through the birth of children within married-couple families also generates social progress and long term economic growth. (Note 19) In an era where every modern nation has either a zero-growth or (more commonly) a negative total fertility rate, the birth of additional children should be welcomed and encouraged by a tax system. Family advocates of a more social democratic bent might also argue for this as a means of redistributing income across citizens’ lifespans: the “tax relief” granted when they raise children is compensated for by the payment of higher taxes both before and after the children are present. I would emphasize that tax preferences for dependent children be they exemptions, deductions, or credits are the least intrusive way to adjust market income for the “market failure” regarding children. Competitive wage markets simply pay no attention to the number of dependents a worker might have. While many nations have adopted state child allowances as a response, these tend to draw governments into family life, welfare, and decision making. In contrast, universal tax exemptions, deductions, or credits require no investigations, means-testing, or payment schemes, beyond proof of a child’s existence. In short, they have the same potential beneficial effects of child allowances, without the consequence of excessive state intrusion.
In the normative absence of stable, two-natural-parent families, the social welfare, criminological, and economic burden on the state becomes unsustainable. We can conclude that tax preferences in favor of marriage and the birth of children to married couples, as well as tax penalties on divorce and non-marital cohabitation, bear a compelling social logic.
Finally, and for the same reasons, state or tax driven distortions of the natural family economy deserve compensation. Most obviously, families deserve relief from the state’s prior socialization of their children. Mandatory school attendance laws, child labor statutes, and state old-age pensions funded through taxation all represent, from the perspective of the family, the socializing of children’s time and insurance value. One consequence of these governmental interventions into family life has been a sharply diminished birthrate, further weakening the family household. This “demographic contradiction” inherent to the modern welfare state has long been apparent to observers. (Note 20) An appropriate form of compensation would be massive tax relief targeted on families with dependent children, and increasing with family size.
How might these assumptions be applied in practice? Specifics would include:
* Home labor and home production must be free of taxation. The altruistic, non-monetized exchange of goods and services among family members should never be subject to extraction for state ends. Policymakers should also avoid the indirect taxation of home production, such as tax benefits designed to encourage the movement of individuals from home to market labor.
* Household capital deserves favored treatment, as well. Ideally, capital-gains and property taxes should be restricted to market capital. Land and homes on and in which families reside should not be subject to tax, nor should capital goods directly employed by family members. Indeed, a strong case from a family perspective could be made to replace existing property taxes with a value-added tax (VAT). This would stimulate higher levels of home production, encourage the accumulation of capital by families, and strengthen the economic foundation of the home. (Note 21)
A pure “flat” income tax, without deductions or exemptions related to family size and marital status, is hostile to the interests of the family, particularly in the encouragement it gives to market labor over home labor. However, if a single, flat tax rate is offset by large household per-capita deductions or credits, a substantial share of the damage disappears.
* Progressive income tax rates can work to the family’s advantage, if progressivity is offset by at least two measures: generous per-capita deductions for family members (such as 20 percent of median family income); and income splitting, where a marriage is treated as a partnership, with each spouse holding a claim to exactly one-half of the couple’s joint or community income. Within progressive rates, the effects of these measures are: to shift a greater proportion of the tax burden onto single and childless persons; to transform a marriage and the presence of children into the average household’s best tax shelters; to encourage marriage and the birth of children; (Note 22) and to discourage divorce.
Note 1: On this point, see: B. Bittker, “Federal Income Taxation and the Family,” Stanford Law Review 27 (July 1975): 1395-1396.
Note 2: S. Burns, The Household Economy: Its Shape, Origins, & Future (Boston: Beacon Press, 1977).
Note 3: D. Ironmonger, “The Domestic Economy: $340 Billion of G.H.P.,” in B. Muehlenberg, ed., The Family: There Is No Other Way (Melbourne: The Australian Family Association, 1996): 132-146.
Note 4: J.G. Hunt and L. Hunt, “The Dualities of Career and Families: New Integrations or New Polarizations?” Social Problems 29 (June 1982): 499-510.
Note 5: H. Rosen, “Tax Illusion and the Labor Supply of Married Women,” The Review of Economics and Statistics 58 (1976): 170.
Note 6: H.K. Bryant and C. Zick, “Household Production, Taxes, and Family Income Distribution,” Human Ecology Forum 15 (1985): 12-14.
Note 7: A. Sandmo, “Tax Distortions and Household Production,” Oxford Economic Papers 42 (1990): 89-90.
Note 8: A compelling case against efforts to measure “imputed income” from home production is found in: M.J. McIntyre and O. Oldman, “Treatment of the Family,” in J. Pechman, ed., Comprehensive Income Taxation (Washington, DC: The Brookings Institution, 1977): 205-239.
Note 9: On this argument, see: C.O. Lovejoy, “The Origin of Man,” Science 211 (23 Jan. 1981); P. Guillame and F. LePlay, Le Reform Sociale, Vol. I, Bk. 3 (Tours: A. Mame et fils, 1887), chaps. 24-30; C. Zimmerman and M. Frampton, Family and Society: A Study of the Sociology of Reconstruction (New York: D. Van Nostrand, 1935); P. Sorokin, The Crisis of Our Age (New York: E.P. Dutton, 1941); R. Nisbet, Twilight of Authority (New York: Basic Books, 1976); and G.P. Murdock, Social Structure (New York: Free Press, 1949).
Note 10: This definition comes from The World Congress of Families, which convened in Prague, The Czech Republic, March 19-22, 1997.
Note 11: This general orientation was ably summarized in the 1966 Report of Canada’s Royal Commission on Taxation: “We believe firmly that the family is today, as it has been for many centuries, the basic economic unit in societyà.[T]he married couple itself adopts the economic concept of the family as the economic unit from the outset.” See: Report of the Royal Commission of Taxation (Carter Commission, 1966); cited in Bittker, “Federal Income Taxation and the Family,” p. 1393.
Note 12: M. Daly and M. Wilson, “Child Abuse and Other Risks of Not Living with Both Parents,” Ethology and Sociobiology 6 (1985): 197-209; S.M. Smith, R. Hanson, and S. Noble, “Social Aspects of the Battered Baby Syndrome,” in Child Abuse: Commission and Omission, eds. J.V. Cook and P.T. Bowles (Toronto: Butterworths, 1980): 205-225.
Note 13: S. Stack, “The Effect of Domestic/Religious Individualism on Suicide, 1954-1978,” Journal of Marriage and Family 45 (May 1985): 431-447; G.F.G. Moens, et al, “Epidemiological Aspects of Suicide Among the Young in Selected European Countries,” Journal of Epidemiology and Community Health 42 (1988): 279-285; and S. Stack, “The Effects of Suicide in Denmark, 1961-1980,” The Sociological Quarterly 31 (1990): 361-368.
Note 14: I. Chein, D.C. Gerard, R.S. Lee, and E. Rosenfeld, The Road to H: Narcotics, Delinquency and Social Policy (New York: Basic Books, 1964); D.B. Kandel, “Drug and Drinking Behavior Among Youth,” Annual Review of Sociology 6 (1980): 235-285; and J.S. Brook, M. Whiteman, and A.S. Gordon, “Stages of Drug Use in Adolescence: Personality, Peer, and Family Correlates,” Developmental Psychology 19 (1983): 269-288.
Note 15: M.A. Pirog-Good, “Teenage Paternity, Child Support, and Crime,” Social Science Quarterly 69 (1988): 527-547; J. Figueira-McDonough, “Residence, Dropping Out, and Delinquency Rates,” Deviant Behavior 14 (1993): 109-132; R.A. Knight and R.A. Prentby, “The Developmental Antecedents and Adult Adaptations of Rapist Subtypes,” Criminal Justice and Behavior 14 (1987): 403-426; P. Marquis, “Family Disfunction as a Risk Factor in the Development of Antisocial Behavior,” Psychological Reports 71 (1992): 468-470; and A.J. Beck and S.A. Kline, “Survey of Youth in Custody, 1987,” U.S. Department of Justice, Bureau of Justice Statistics, Special Report (Washington, DC: U.S. Department of Justice, 1988).
Note 16: J.C. Kleinman and S.S. Kessel, “Racial Differences in Low Birth Weight,” New England Journal of Medicine 317 (1987): 749-753; P.A. Davison, “Family Structure and Children’s Health and Well-being: Data from the 1988 National Health Interview Survey on Child Health,” Paper presented at the Annual Meeting of the Population Association of America, Toronto, 1990; and F. Saucier and A. Ambert, “Parental Marital Status and Adolescents’ Health-Risk Behavior,” Adolescence 18 (1983): 403-411.
Note 17: R.B. Zajonc, “Family Configuration and Intelligence,” Science 192 (1976): 227-236; J.W. Santrock, “Relation of Type and Onset of Father Absence to Cognitive Development,” Child Development 43 (1972): 457-469; H.B. Biller, Paternal Deprivation: Family, School, Sexuality and Society (Lexington, MA: Lexington Books, 1974); and V. Marjoribanks, “Environment, Social Class, and Mental Abilities,” Journal of Educational Psychology 63 (1972): 103-109.
Note 18: Y. Hu and N. Goldman, “Mortality Differentials by Marital Status: An International Comparison,” Demography 27 (1990): 233-250; E.S. Kisker and N. Goldman, “Perils of Single Life and Benefits of Marriage,” Social Biology 34 (1990): 135-152; O. Anson, “Living Arrangements and Women’s Health,” Social Science and Medicine 26 (1988): 201-208; and A. Rosengren, H. Wedal, and L. Wilhelmsen, “Marital Status and Mortality in Middle-aged Swedish Men,” American Journal of Epidemiology 129 (1989): 54-63.
Note 19: A. Sauvy, General Theory of Population (New York: Basic Books, 1969); and Julian Simon, The Economics of Population Growth (Princeton, NJ: Princeton University Press, 1979).
Note 20: See: G. Myrdal, Population: A Problem for Democracy (Cambridge, MA: Harvard University Press, 1940): 197-200; and, more recently: C.F. Hohm, et al, “A Reappraisal of the Social Security-Fertility Hypothesis: A Bi-Directional Approach,” The Social Science Journal 23 (Dec. 1986): 149-168.
Note 21: While deploring the result, Boskin documents the powerful effect of this potential change in: M.J. Boskin, “Efficiency Aspects of the Differential Tax Treatment of Market and Household Economic Activity,” Journal of Public Economics 4 (1975): 17.
Note 22: On this point, see: L.A. Whittington, “Taxes and the Family: The Impact of the Tax Exemption for Dependents on Marital Fertility,” Demography 29 (May 1992): 215-226.