Tax and the Single Man

There is no question: The tax laws of the United States are the result of a fiendish conspiracy among the AMA, the NAACP and the ADA, using the powerful medium of CBS and with potent, behind-the-scenes backing from HUAC. To anyone with a decent respect for bachelorhood, these initials stand for, respectively, the American Marriage Association, the National Association for the Advancement of Connubial Profit, the Abolish Divorce Association, a newly formed group named Chastise Bachelors and Spinsters and, finally, a powerful but covert organization called Housewives United Against Cohabitation. For the fact is that the tax laws of the United States of America discriminate flagrantly and massively against unmarried citizens. For example, if you are a $12,000-a-year bachelor with a taxable income of $10,000, you are paying $502 more in taxes each year than the bridegroom in the apartment down the hall. The fact that your newly married neighbor has just acquired a dependent, allowing him to claim another $600 exemption, accounts for $132 of that amount in his 22-percent tax bracket. But almost three quarters of his tax saving--$370--is the result of a myth, embodied in Section 2 of the Internal Revenue Code, which permits any married couple in the United States to pretend, in computing their taxes, that half their income is earned by the wife. She may be as indolent as Scarlett O'Hara, but in the eyes of the friendly tax collector, she is responsible for half the family income.

This is an expensive myth for the bachelor. Section 2 grants the more affluent married couples of the United States a tax subsidy estimated at close to ten billion dollars a year. In other words, Congress' decision to tax wealthier married couples more lightly than single taxpayers deprives the United States Treasury of that much money each year, and the sum must be made up in higher taxes paid by single taxpayers and others who may not enjoy the blessings of Section 2. It is, in effect, a double penalty.

Congress is probably unaware that its decision to subsidize marriage to the tune of ten billion dollars places America in exclusive and (from Congress' point of view) unpalatable company in the family of nations. Only six other countries tax their unmarried citizens more heavily than their married couples. Of the six, five are totalitarian dictatorships: Russia, three of her satellites and Spain. Only the Netherlands, among democracies, places a tax penalty on being single.

How does the myth of Section 2 operate to save the $12,000-a-year newlywed $370 a year in taxes? While he was blissfully unwed, the tax on his $10,000 taxable income amounted to $2190--$910 on the first $5000 and $1280 on the second $5000 (since, under the American system of graduated income-tax rates, the tax bite rises as income increases).

But once connubially joined, he and his wife may file a joint tax return. This has the effect of dividing his $10,000 taxable income into two $5000 parcels, marked his and hers. The tax on each of these parcels is the same: $910; adding them together, the total tax on the $10,000 taxable income is now $1820, instead of his former tax of $2190. Saving: $370. This, together with the $132 saving from the additional personal exemption, means added annual "take-home pay" of $502, or $9.65 a week. This is the equivalent of a $14-a-week raise; for in order to receive an additional $9.65 after taxes, the bachelor's before-tax raise would have to amount to a little over $14 ($14.19, to be exact). This would amount to an annual pay increase of $738. If a married man needs to add allure to his thoughts about his wife (or if his eye begins to wander and his mind turns to thoughts of leaving her), he can figure up her capital value. In the case of the $12,000 chap, his wife may be considered an asset worth $16,075; in the sense that this much cash would be required, in a four-percent savings account, to net him an added $643 in before-taxes income, which, in turn, is what he would need in order to realize the after-tax saving of $502 that his wife represents.

Because the tax rate climbs more steeply in the upper ranges, the tax blessings of marriage (and, conversely, the financial penalties of bachelorhood or divorce) increase dramatically as one ascends the ladder of success. At $30,000 of taxable income, marriage represents about $67 in added weekly take-home pay (and one's wife assumes a capital value of $148,450). At $100,000 of taxable income, Uncle Sam confers a bonus for marriage of $205 a week--over $10,000 a year--in added after-tax spending money, and the capital value of one's wife becomes $711,525. At $200,000 of taxable income, one is living with a million-dollar asset--$1,243,150 --for in the 70-percent tax bracket into which one would have ascended, that is the amount of cash needed to yield the additional $49,726 of before-tax income that, in turn, would be required to net the extra $287 a week of added pocket money deriving from marriage.

These tax blessings that descend upon a happy couple the instant they are pronounced man and wife have frequently been called Uncle Sam's dowry. But the financial aspects of marriage, American style, differ in one crucial respect from the European version. The Continental dowry is a one-time affair, whereas kindly, munificent Uncle Sam renews his gift annually, in ever more generous amounts as the prosperity of the couple increases.

Some pious souls have charged that Section 2 and its income-splitting myth are an essential bulwark of marriage and that its repeal would encourage cohabitation, concubinage and other moral atrocities. But the facts indicate that the institution of matrimony does not lean on such a frail reed. This is because Section 2 not only discriminates against single taxpayers, it also discriminates cruelly among various married couples--heaping generous but little-needed benefits upon the affluent, while largely or wholly excluding the majority of young newlyweds who most need tax relief to support the added expenses of married life. They are excluded because the splitting of a couple's income results in tax savings only when it helps bring heavily taxed high-bracket dollars down into lower tax brackets. But if all of a couple's income is either nontaxable (because of personal exemptions and deductions) or in the lowest tax bracket anyway, splitting it in half saves little or nothing. This is true for every family of four with an annual income of less than $3400, which includes roughly one fifth of all joint-return filers. For a family of four with an income of $5400--about one third of all joint-return files--Section 2 adds just about 80 cents a week on the family grocery budget. Despite the absence of tax incentives, great numbers of these people still marry, giving the lie to the argument that marriage needs tax support to keep it from dying out altogether.

The tax benefits from income splitting also represent a ludicrous distortion of the real costs of married life, which begin to be felt far more acutely with the advent of offspring. For a bachelor with a taxable income of $25,000, the taking of a bride brings a tax saving of $2726, whereas the arrival of each child wins a tax abatement only about one tenth as large ($208). At the $100,000 level, the comparative savings are even more absurd: $10,310 at the time of the wedding and only $372 for each child.

Even the doubling of the personal exemption that accompanies matrimony discriminates unfairly against the unmarried taxpayer, since it seems to assume that connubial life is twice as expensive as single existence. The costs of both, however, have been minutely studied, revealing that, on the average, couples live on a budget about one third larger than that of a bachelor--not twice as large, as the tax laws assume.

One factor in this less-than-reasonable cost differential is that a married man is usually spared the bachelor's expense of paying a maid to do the housework. Thus, if the bride renders maid service that used to cost the bachelor $30 a week, she is, in effect, earning the maid's former salary. But the kindly Internal Revenue Service does not count these "earnings" as part of the couple's income.

Bachelors and bachelor girls who tend toward acute paranoia may imagine that this conspiracy against them is the conscious policy decision of Congressmen and Senators, 94 percent of whom are married. But those made anxious by such a thought may be soothed in the knowledge that the discriminatory Section 2 and its income-splitting feature, like so many other examples of tax legislation, was dictated by political convenience rather than by deliberate policy.

Ironically enough, the deed was done in the name of ending tax discrimination. Prior to 1948, married couples in eight states were blissfully and exclusively enjoying the tax advantages of income splitting, because under the community-property laws in their states, half of each couple's property legally belonged to the wife. The legislatures of other states, pained at seeing their residents discriminated against in their Federal income taxes, began enacting their own community-property laws. Congressional action was necessary to prevent an epidemic.

Conveniently enough; the 1948 community-property uproar happened to (continued on page 96) Tax and the Single Man (continued from page 86) coincide with a political stalemate in Congress. The Republicans, in the majority for the first time in 16 years, had promised substantial tax reductions for middle- and upper-bracket taxpayers; but their first two attempts, in 1947, had so blatantly favored the rich that President Truman had successfully vetoed them. The community-property problem provided the magic answer, for its solution--spreading the blessings of income splitting to married couples in all states--not only conferred far handsomer tax blessings on the affluent than the earlier, less subtle G.O.P. measures; it also carried the eminently respectable label of a "tax reform."

And so Congress ended one discrimination, in the way two groups of states taxed married couples; but in so doing, it created a new and far more serious discrimination: between the married and the unmarried in all states. While this new law worked to the great disadvantage of bachelors, there could be little doubt as to who profited most from it: 97 percent of the benefits went to the top five percent of the married taxpayers; while at the bottom of the economic pyramid, 80 percent of all married couples were completely denied the benefits of income splitting. So lopsided were its effects that Couple A, with 20 times the income of Couple B. could enjoy 319 times as much tax benefit.

Congress was so eager to seize upon this "tax-reform" solution to its political deadlock that income splitting was adopted with virtually no debate. But it soon became clear that Congress, in the process, had unwittingly discriminated against a large group of taxpayers: the single people who were obliged to support expensively dependent relatives and whose living costs were clearly equal to those of bridegrooms. And so, in 1951, Congress sought to right the wrong, by conferring half the benefits of income splitting on so-called heads of households--unmarried taxpayers who support their parents or whose dependent relatives live with them.

Some observe irreverently that a sponging relative is a vastly greater expense than an eager new bride and that Congress was niggardly in bestowing only half the blessings of marital income splitting upon heads of households. But there is an even more fundamental objection: Like the marital provision, the head-of-household tax concession confers the greatest benefits on the wealthiest taxpayers, while withholding benefits from the most sorely pressed, low-bracket taxpayers. Moreover, no income-splitting tax concession whatever is granted to the bachelor obliged to support his aged aunt (or any relative other than a parent) in, say, a nursing home, rather than in his own apartment.

Income splitting is the grossest of the tax discriminations against single persons, but there are other tax advantages that accrue to the married. A minor one is that the tax-deductible expenses of two persons are combined on one tax return. If, for example, both members of the marital combo invest in the stock market, the wife's capital losses may serve to offset the husband's capital gains--or vice versa. And if a bachelor's medical deductions fall just shy of the three-percent-of-income floor for deductibility, when he takes a bride, all of her medical deductions are deductible. Married couples also have the privilege of conferring on any favored friend or relative tax-free gifts up to $6000 per year, contrasted with a paltry $3000 tax-free-gift privilege for bachelors and single girls--a tax concession that is bound to bring cries of joy from fully four ten-thousandths of one percent of all who read these words.

Moreover, any unmarried man who feels his demise is close at hand should lose no time in securing a wife. He can leave half his worldly goods to her free of any estate tax; whereas, if he remains a bachelor, there is no one--not even his sainted mother--to whom he can make such a tax-free bequest. Even though the funds he lovingly leaves to his wife become subject to an estate tax upon her demise, the effect in death, as in life, is to split his hypothetical estate of $10,000,000 into two $5,000,000 parcels--half taxable at the husband's death and half at his wife's. The tax saving, in this instance, is $1,000,000. Moreover, if the wife had not been able to receive that $5,000,000 tax-free at the time of her husband's death, an added tax of $3,500,000 would have gone to the U.S. Treasury; but under the kindly estate-tax laws, that $3,500,000 is permitted to remain in the wife's mattress (or in her investment portfolio) as long as she lives. Assuming she survives her husband for ten years and earns only a paltry four percent on her money, this delay alone comes to be worth at least about $1,400,000.

Also nestled in the tax laws is a cluster of blessings that attach to the happy state of home ownership. While home ownership does not automatically accompany marriage and while it is certainly not barred to bachelors, the fact is that for most bachelors, it's not worth the effort. The homeowner sacrifices his freedom of mobility. This is a great deal for a bachelor to give up, but the married man--at least in the eyes of the bachelor--has already lost it and has little left to lose. Married persons receive 93 percent of Federal Housing Authority home mortgages.

To understand the tax advantages of home ownership, consider, for a moment, the example of two gentlemen, A and B, renting apartments at $200 a month, or $2400 a year. Suppose that at the same instant, each of them comes into a modest inheritance of $25,000. A, a bachelor who is happy in his in-town pad and does not need or want the bother of owning a home in the suburbs, invests his $25,000 conservatively in the stock market and realizes a four-percent return, or $1000. This, of course, is added to his taxable income and, in his tax bracket, he must pay an additional $320 in taxes.

B, a new bridegroom whose union will soon bear issue, invests his $25,000 in the purchase of a handsome $50,000 house and moves out of his apartment. His return on his $25,000 lies in no longer having to pay $2400 a year in rent. True, as a homeowner, after the various tax write-offs he's entitled to, he still has to pay about $1700 a year on the mortgage; but compared with the $2400 rent he had been paying, he is still $700 ahead. Although A earned $1000, he had to claim this amount as income and paid $320 tax, for a net income of $680. But B's $700 appeared nowhere on his tax return.

This anomaly may become clearer by imagining that B's company sends him abroad for a year and he rents out his house while he is away. The rental income he receives while he is gone is clearly an income return on his investment--and, indeed, he must pay taxes on it. But the minute he moves back into the house--the same structure, worth precisely the same amount and capable of commanding the same rent--the dollar yield from this valuable piece of property vanishes, as far as the tax collectors are concerned.

But the generosity--or, more accurately, the schizophrenia--of the tax collectors extends even further. Consider, again, the example of B renting out his house for a year; clearly, his mortgage-interest and real-estate-tax expenses are outlays necessary to maintain the house and realize his rental income and, as such, are quite naturally tax-deductible, as all business expenses are. When he moves back into his house and the Government stops treating his home as an income-yielding investment, it would be logical for the IRS to cease treating mortgage-interest and property-tax outlays as deductible expenses. But, as is so often the case, the ways of the Government are not logical; these deductions are part and parcel of the tax perquisites of a homeowner. He's allowed the deductions as if his home were an investment. Heads, he wins; tails, the tax collectors and the Government--and other taxpayers--lose.

These deductions are sizable, both on an individual and on a national basis. (continued on page 179) Tax and the Single Man (continued from page 96)For taxpayer B, for example, with $10,000 of taxable income, his mortgage interest means a tax deduction of $1500 and a tax saving of about $330 a year; and his real-estate taxes represent a further $700 deduction and a $154 tax saving. This is why his actual cost of maintaining the house is so low. Taxpayer A, who still rents an apartment, is also paying for taxes and mortgage interest on his apartment building--these are part of the $2400 rental payments he makes each year. But he gets no tax deduction for his outlay. That happy privilege goes to the owner of the building.

On a national basis, the discrimination between renters and homeowners is massive. In 1960, homeowners enjoyed a tax-free net return on their investments totaling an estimated 6.8 billion dollars. The cost to the Treasury (meaning the cost to the nonhomeowners who had to pay higher taxes as a result): 1.2 billion dollars. In addition, in 1960, homeowners were able to take property-tax deductions on 6.6 billion dollars of mortgage interest and 5.9 billion dollars of property taxes. Cost to the Treasury (i.e., to non-home-owning taxpayers): 2 billion dollars. So, all told, the tax advantages of home ownership carry a 3.2-billion-dollar price tag, all of which must be made-up by other taxpayers.

There have been some attempts, of late, in Congress and elsewhere, to ease the discriminatory treatment of unmarried taxpayers. Essentially, there are two ways to lessen or eliminate a tax discrimination. One is to end the preference enjoyed by the favored group. But this involves the risk of political retaliation by those who have grown accustomed to the benefits of discrimination. So Congress has traditionally shunned this method, preferring, instead, the more painless method of broadening the favored treatment to include those to whom it is presently denied.

The current legislative efforts on behalf of the unmarried are no exception. They are reflected in measures introduced last year by Democratic Senator Eugene McCarthy and 12 of his Senate colleagues and by Republican Congressman Theodore Kupferman in the House of Representatives. But even these proposals fall far short of what most bachelors would consider an equitable solution, since they would simply extend the tax privileges of heads of households to all single persons over the age of 35, including the divorced, the legally separated and the widowed. The eligibility requirement is debatable, but far from arduous: All that an over-35 unmarried person must do is "maintain his own household as his home."

According to Senator McCarthy, this legislation would benefit about 18,000,000 people--of whom 13,000,000 are women. Since married taxpayers would continue to enjoy their advantages, the McCarthy-Kupferman legislation would be entirely painless--except, perhaps, for those entrusted with trying to balance the Federal budget. To them would fall the unhappy task of finding a way to make up for the estimated $300,000,000 that the McCarthy-Kupferman measures would cost the U.S. Treasury. Assuming no other tax legislation, the burden would fall most heavily on single persons under 35--though they, in turn, would get their reward, when they crossed the magic age barrier.

In their compassionate concern for the plight of the over-35 unmarrieds, the sponsors of this legislation omit any mention in their press releases to constituents of this $300,000,000 price tag. This group is deserving of tax relief, reasons Congressman Kupferman, because it is usually the burden of supporting a dependent relative, during the prime marrying years, that keeps a person from snagging a mate--or getting snagged--prior to reaching 35. By the time this financial obligation is reduced or terminated, the single person has often, in the Congressman's tactful words, "reached the age at which his or her marriage prospects are not encouraging." Even so, says Representative Kupferman, such a person usually maintains living accommodations similar to either a head of household or a childless married couple, who enjoy, respectively, either half or all of the tax rewards of income splitting. Moreover, Kupferman says, the demands on over-35 unmarrieds "to provide for their future financial security are, in many cases, more pressing than in the case of other individuals who receive more favorable tax treatment." Ergo, he says, spread the tax blessing.

Senator McCarthy paints an even more public-spirited picture of the unmarried taxpayers over 35. "Often at this age," he says, "they are expected to--and do--make special contributions for the support of relatives and for social and civil welfare." Moreover, they are generally required, "because of their occupation, their place in society, or simply for the sake of decency and convenience in living." to maintain a household of their own; and the expenses thus imposed upon them by society should be acknowledged in our tax laws.

To help garner support for Congressman Kupferman's bill, an organization has been formed that should at least win the hearts of those who admire imaginative or farfetched acronyms. It is called SIT-UP--which stands for Single Individuals' Tax Unification Program.

In bold-face capital letters, its literature implores unmarried taxpayers: "Just Don't Sit there--Sit-up Right Now!" Sitting up consists of signing and circulating petitions to the House Ways and Means Committee (where all tax measures must originate) requesting that group to give Kupferman's bill "immediate consideration and approval and submission to the House of Representatives for approval." Thus far, Sit-up's co-founder, Roy Morser, says, 20,000 persons have "sat up" and signed petitions to the House Ways and Means Committee. To date, the Committee has yet to respond.

In the shadow of an impending Presidential election, the U.S. Treasury Department has also been thunderingly silent about this bill. The chances are slim, however, that the Treasury will agree with Congressman Kupferman's characterization of the measure as a "tax-reform bill," since it would further weaken a tax system that is already so riddled with special exemptions, exclusions and deductions that over half of all personal income escapes taxation entirely--and much of the remaining half is taxed at preferential rates.

To a tax expert such as Joseph A. Pechman of the prestigious Brookings Institution in Washington, the discrimination against single taxpayers is a serious matter; but so is the progressive "erosion" of the tax system. Pechman's solution to the single-versus-married-taxpayer problem is just the opposite to that of Congress: He proposes that instead of extending the unwarranted benefits of income splitting to more people, the discrimination should be ended by eliminating the principal tax favor--income splitting--now enjoyed by married people. (Pechman qualifies as an objective commentator, being a married man himself; in fact, he once told a Congressional committee that his views on marital income splitting not only did not represent the views of his employer but did not necessarily reflect those of his wife.)

Pechman's proposal would, if enacted, add a whopping ten billion dollars to Federal revenues--more than President Johnson was seeking with his 1967 ten-percent-surtax proposal. (Incidentally, if the tax surcharge eventually goes through, it will simply increase the discrimination against single taxpayers.)

The Pechman suggestion often provokes the outcry that it would merely revive the pre-1948 interstate discrimination and set off another epidemic of state community-property laws. But Pechman, an ingenious fellow, has devised a formula that circumvents this problem and equalizes taxation not only of the single and the married but also of the married in the two different groups of states. Under Pechman's plan, couples filing joint returns would pay the same rates as single persons; and those filing separate returns (as the community-property residents did prior to 1948, in order to get the benefits of income splitting) would be subject to a separate rate schedule whose net effect would be to permit the income splitting required of married couples in community-property states--but then to turn around and take away the tax advantages.

Such a move would eliminate the principal discrimination against single taxpayers, but would retain the lesser inequity of doubling the personal exemption at marriage. Pechman and others believe that the $600 personal exemption for the single person is outrageously and anachronistically low. It has remained unchanged for 20 years, during which the cost of living has increased 35 percent. Thus, in terms of what it will buy, the $600 exemption, enacted in 1948, has shrunk to only $444. But increasing the personal exemption across the board makes heavy inroads into Federal revenues (an $800 exemption would cost 5.5 billion dollars), a step unfavorably regarded at a time of heavy war and defense spending. Its chances of enactment are slim.

This account of the several tax discriminations against the unmarried may prompt those who prefer bachelorhood to conclude that there is no way for them to beat the tax game other than to sacrifice their most deeply held principles and plunge into matrimony.

It is true that to enjoy the tax comforts of income splitting, one must resort to the rash extreme of marriage. Taking a mistress will not do the trick; in fact, in almost all jurisdictions in which extramarital cohabitation is illegal, it will not even qualify the generous male for an extra $600 exemption. Still, even the most dedicated bachelor can take comfort in the knowledge that the ways of perfectly legal tax avoidance are not only devious, they are, thanks to Congress' generosity, many. If there exists a bachelor with enough means to be suffering from high taxes who has not already availed himself of the services of a tax attorney or a tax accountant, let him run, not walk, to the nearest expert. Let him be guided through the tax joys of oil investments (which permitted one oil tycoon to enjoy over $2,000,000 of income each year for 14 years and never pay a penny in taxes), or of putting his money into tax-free state and local bonds (which put auto heiress Mrs. Horace Dodge in a position to enjoy over $1,500,000 of income annually, without even having to file a tax return), or of having part of his salary paid in stock options (which put IBM's Thomas Watson in a position to realize a $1,882,000 profit, taxable at no more than 25 percent, for a tax saving of close to $1,000,000). Or, perhaps, if this bachelor is wealthy enough and influential enough and knows the right tax lawyer-lobbyist, he might even have a special provision of the tax law written for him (as movie magnate Louis B. Mayer did, for a tax saving of roughly $2,000,000).

While from time to time a few of the joyous paths of tax avoidance have been closed off or narrowed, over the years Congress has shown a far greater preference for broadening the avenues of escape or for opening up new ones.

In the case of income splitting, the chances are that when Congress does get around to dealing with this gross discrimination against single taxpayers, it will not be Pechman's preference-removing stratagem that will get the nod but something along the lines of the benefit-spreading tack taken by Senator McCarthy and Congressman Kupferman, though, ideally, spreading the benefits to all single people, not just to those over 35. It really comes down to a matter of simple political arithmetic: The voters among the married couples, basking in the warmth of income splitting, outnumber by four to one the single folks who stand naked and shivering under the icy blasts of the normal tax rates. In terms of practical politics, there is only one way the unmarried can be relieved of the discriminations they endure: Bring them in out of the cold.