«Jacob Goldin and Zachary Liscow* February 2016 Abstract: Under current law, unmarried taxpayers with children can take advantage of the head of ...»
Beyond Head of Household:
Rethinking the Taxation of Single Parents
Jacob Goldin and Zachary Liscow*
Abstract: Under current law, unmarried taxpayers with children can take
advantage of the head of household filing status (HHFS) to reduce their federal
income taxes. We argue that the design of the filing status is largely obsolete, geared
toward alleviating a “marriage penalty” in the tax code that is much less important
than when the filing status was first established. At the same time, the growth in the fraction of Americans raising children outside of traditional two-parent households has dramatically raised the cost of the filing status to the fisc.
In this article, we highlight two features of the design of HHFS that undermine its goal of providing support to single parent households. First, because it is designed as a filing status, HHFS provides a larger tax break to high-income taxpayers than to low-income ones: in 2013 HHFS saved qualifying taxpayers in the 25th percentile of the income distribution under $100 a year compared to almost $2,000 a year for qualifying taxpayer in the 75th income percentile. Second, the tax savings provided by HHFS bear no relation to the number of children a taxpayer supports, even though taxpayers supporting more children are likely to have less ability to pay. We propose reforming HHFS by replacing it with an expanded child tax credit for single parents and estimate that a revenue neutral reform along these lines would support a refundable tax credit of approximately $384 per child for households headed by single parents.
Email: email@example.com; firstname.lastname@example.org. Draft: Comments welcome. We thank * Anne Alstott, Conor Clarke, Adam Cole, Daniel Feenberg, Jed Glickstein, Daniel Halperin, Yair Listokin, Austin Nichols, and participants at the National Tax Association Annual Meeting for helpful conversations and suggestions.
Table of Contents I. Introduction
II. The Origins of the Head of Household Filing Status
III. Basic Features of the Head of Household Filing Status
B. Tax Benefits from the Filing Status
C. Other Family Tax Benefits
1. The Child Tax Credit
2. The Earned Income Tax Credit
3. Dependent Deductions
IV. Descriptive Statistics
B. Who Files as Head of Household
C. Aggregate Cost
D. Distribution of HHFS Benefits by Income
V. Normative Framework
VI. Shortcomings of the Head of Household Filing Status
A. Vertical Equity
B. Horizontal Equity
C. Simplicity and Administration
VII. The Single Parent Child Tax Credit
A. Mechanics of the sCTC
B. Policy Simulation
Since 1951, unmarried taxpayers with qualifying dependents—usually children—have been able to claim the head of household filing status (HHFS) and take advantage of its beneficial rate schedule.1 The filing status was enacted to reduce the burden on single parents at a time when the tax code created a “marriage bonus.” Today it continues to exist (largely unchanged) even though more couples face a taxinduced “marriage penalty” than a marriage bonus.2 Throughout its long history, HHFS has managed to fly beneath the radar of most tax scholars and policymakers.3 That neglect is unfortunate: as its original purpose has eroded, HHFS has quietly grown in size and expense as more children are raised outside of traditional two-parent households. In 2011, more than 13.5 Section 1(b) of the Internal Revenue Code establishes the head of household filing status, which establishes a separate rate schedule for certain households defined in Section 2(b). Unless otherwise noted, all cited statute sections refer to the Internal Revenue Code.
2 For recent discussions of marriage penalties and bonuses across the income distribution, see Emily Y. Lin & Patricia K. Tong, Marriage and Taxes: What Can We Learn from Tax Returns Filed by Cohabiting Couples?, 65 NAT'L TAX J. 807 (2012); Lawrence Zelenak, For Better and Worse: The Differing Income Tax Treatments of Marriage at Difference Income Levels, 93 NC L. REV. 783 (2015).
3 There are several important exceptions. Deborah Schenk proposed reforms to HHFS as part of a broader simplification of the tax treatment of family status. Deborah H. Schenk, Simplification for Individual Taxpayers: Problems and Proposals, 45 TAX L. REV. 121 (1989). Because it is not classified as a tax expenditure, the budgetary costs of HHFS are infrequently estimated. The most recent estimate we could find, using 1999 data, concluded that its budgetary cost was $3.9 billion in 2001 dollars. David Ellwood & Jeff Liebman, The Middle-Class Parent Penalty: Child Benefits in the U.S. Tax Code, 15 TAX POLICY AND THE ECONOMY 1, 8 (2001). More recently, the Tax Policy Center has considered the distribution of benefits from HHFS along with other provisions across the income distribution, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3986, but these estimates do not isolate the benefits stemming from HHFS as opposed to other provisions of the tax code. The Urban Institute also discusses the income distribution of all child-related benefits.
http://blog.metrotrends.org/2013/05/child-benefits-tax-code-current-system-sense. See also Elaine Maag, Simplicity: Considerations in Designing a Unified Child Tax Credit, 63 NAT’L TAX J. 765, 770 (2010) (containing simulations of the distributional consequences of various child-related benefits).
million people filed their taxes as head of household4 compared to just 1 million that did so in 1960.5 And as HHFS has become more important over time, a number of problems in its design have grown more pronounced as well. In this article, we argue that the current design of HHFS undermines its ability to relieve the tax burden on single parent households. In its place, we propose an expanded child tax credit for single parents and argue that this reform would improve tax policy along a number of dimensions.
Because the head of household filing status has been the focus of so little attention by academics, our first goal is primarily descriptive. Drawing on a sample of federal income tax returns, we investigate the aggregate cost of the filing status to the fisc. We estimate that eliminating HHFS would have resulted in $10.4 billion more in revenues in 2006, a vast increase from its 1960 cost of $256 million (in 2006 dollars).
After documenting the magnitude of HHFS’s budgetary cost, we turn to the distribution of its benefits. Although the conventional wisdom is that HHFS is primarily a tax benefit for low income families, we highlight an important sense in which the opposite is true. Because the tax benefit is designed as a filing status, high income taxpayers who file as head of household are guaranteed a larger tax reduction than low income taxpayers who do so. We investigate the magnitude of this disparity as well as whether it has changed over time. The results are striking: in 2013, a From http://www.irs.gov/uac/SOI-Tax-Stats---Individual-Statistical-Tables-by-Filing
household earning in the 25th percentile of the income distribution saved $83 annually by filing as head of household. In contrast, the annual tax savings from HHFS were $1,914 for a household earning in the 75th percentile of the income distribution.6 Motivated by its regressive design, the erosion of its original purpose, and its unusual position within the tax code as an entirely different rate schedule, we propose eliminating the head of household filing status and replacing it with an expanded child tax credit for single parents. Under current law, taxpayers with children can receive up to a $1,000 tax reduction per child under the Child Tax Credit (CTC).7 Under our proposed reform, the Single-Parent Child Tax Credit (sCTC) would scale up the size of the tax benefit for single-parent households. The two main arguments in favor of the reform are simple. First, if the tax code is going to provide additional tax relief to single parents, the amount of that relief should not be greater for higher income taxpayers. Second, the amount of relief for single parents should be linked to the number of children they support, but under current law a household receives the same tax benefit from HHFS whether it supports one, two, three, or more children.
Using the tax return data, we estimate that the cost savings from eliminating HHFS would accommodate a refundable single-parent child tax credit of $384 per child per year (approximately 40 percent of the existing child tax credit). In addition to avoiding the regressive features of the current HHFS, the tax benefit provided by the See Section IV for the sources of data and calculations leading to these numbers.
sCTC would be linked to the number of children the taxpayer supports, which we argue is more consistent with the goals of sensible tax policy.8 This paper proceeds as follows. Section II describes the history of HHFS.
Section III describes its operation today. Section IV investigates the budgetary cost and the distribution of its benefits, including how those quantities have changed over time. Section V lays out a normative framework for evaluating the design of HHFS, and Section VI uses that framework to critique existing policy. Section VII describes our proposed reform, the sCTC, and investigates the consequences of replacing HHFS with it. Section VIII concludes.
II. The Origins of the Head of Household Filing Status The head of household filing status was established with the Revenue Act of
1951.9 The origins of the filing status were in the 1930 Supreme Court case Poe v.
Seaborn.10 At that point in U.S. history—and from the beginning of the income tax in 1913 until 1948—each individual was taxed separately on his or her own income regardless of marital status.11 Seaborn held that each member of a marriage was taxable on one-half of community income, even if the income in question had been As described below, the reform would actually reverse current policy, which provides a smaller child tax credit to some single than married taxpayers with the same income, because the tax credit’s phase-out begins earlier for single taxpayers than for married ones.
9 Arthur H. Goodman, Observations on the Revenue Act of 1951, 20 FORDHAM L. REV. 273, 274providing a description and critique of the adoption of the filing status).
10 282 U.S. 101 (1930).
11 For additional description, see Boris Bittker, Federal Income Taxation and the Family, 27 STAN. L. REV. 1389, 1399-1416 (1975) and Druker v. Commissioner, 687 F.2d 46 (2d. Cir. 1982, J.
Friendly), cert. denied 461 U.S. 957 (1983) (holding it constitutional to apply higher rates to married taxpayers filing separately than the rates the taxpayers would have faced had they been single).
earned solely by the other spouse. This decision advantaged married couples in community property states over married couples in other states—because the tax code is progressive, income-splitting reduces a couple’s total tax liability. Many states that lacked community property regimes when Seaborn was decided responded to the decision by introducing community property, so that their residents could benefit from income-splitting. Although a subsequent Supreme Court decision12 held that elective community property regimes did not qualify couples for income-splitting, the movement toward community property was slowed rather than stopped.
In 1948, Congress responded to the controversy and confusion in this area by allowing all married couples to split their income, regardless of where they lived. In particular, the Revenue Act of 1948 allowed all couples to split their income equally so that each taxpayer was treated as single—in effect, setting the tax on married couples equal to twice what a single taxpayer would owe if he or she had earned onehalf of the married couple’s income. Under the progressive income tax schedule then in place, created a substantial “marriage bonus” for many federal taxpayers.
The Revenue Act of 1951 addressed this large marriage bonus by creating the head of household filing status.13 The idea was to give approximately half of the income-splitting benefit gained by married taxpayers to single taxpayers who maintained a household for their dependents.
Subsequently, however, the initial rationale for HHFS was eliminated in the Tax Reform Act of 1969, which replaced the “marriage bonus” with a “marriage penalty” for many taxpayers It did this by increasing the number of filing statuses from two to four (married filing jointly, head of households, single, and married filing separately),14 and by designing the corresponding rate schedules so that the tax liability of someone filing as single would never exceed 120 percent of the tax liability of a married couple with the same total income filing a joint return. In making these changes, the 1969 Act created a marriage penalty for those—often households with two earners—who would have owed less in taxes had they been unmarried. Despite the elimination of most marriage bonuses from 1969 onwards, HHFS remains an important feature of the modern tax code.
III. Basic Features of the Head of Household Filing Status A. Eligibility Eligibility for HHFS is set out in section 2(b) of the Internal Revenue Code. In general, a taxpayer may claim HHFS if he or she is unmarried and lives with a child or other relative in a home that the taxpayer maintains.15 Eligibility for claiming HHFS can be broken down into four requirements.
First, the taxpayer must be unmarried.16 As with other parts of the tax code, in some cases a taxpayer is considered to be unmarried if he or she meets the other
§ 2(b)(1). A taxpayer may also claim HHFS by maintaining the household of a parent, even if the parent does not live with the taxpayer. See § 2(b)(1)(B).
16 § 2(b)(2)(A).