The unit of taxation

While having a quick look of “Failbook” I found this enlightening status update:


This is one of the reasons why taxing on the basis of a “family” unit instead of an “individual” unit doesn’t make sense to me.  By setting up an arbitrary idea of what a family is you ensure that people arrange their affairs to take advantage of that, and you ensure that people that are either unwilling or unable to enter these arrangements struggle.

People pool resources and work together by forming a family unit if they want to.  Lets just stick to taxing people as individuals, and let individuals in society make the decision on what type of family unit to set up given this equal treatment – after all it is the individuals that make choices.

8 replies
  1. Greg
    Greg says:

    Isn’t the problem that tax is based on the individual, but benefits (incl. WFF, student allowance) tend to be based on the family? If everything (not just tax) was determined on one or the other, it would probably work out much the same.

  2. Simeon Pilgrim
    Simeon Pilgrim says:

    I’ve just moved to the US, and I love the joint tax filing rules. My wife is not working so can look after the children, so we have a single income, but we are working as a team to make the best next-tax payers we can. It makes sense to discount the creation of future tax payers. I’ll be sad when I have to return to NZ and pay higher individual taxes. Plus “most” people are in families, thus it’s populist.

  3. Robbie
    Robbie says:

    I’ve always thought there was a pretty reasoned case for family-based taxation.
    I think we’re dismissing an idea here because there are implementation problems, rather than because it’s a bad idea generally. There are problems at the margins with any tax system, or indeed any government policy. It’s not enough to say that there are problems, or incentives to rort the system, we need to look at whether the policy makes sense and then whether the implementation problems are sufficiently large to make it impractical to implement.

    Just because we treat individuals as the basic taxation unit, doesn’t mean that it’s right. Moreover there’s a strong argument that the family is really the basis of human financial interactions – we’d offer family members loans that we wouldn’t otherwise, much gifting goes on, especially inter-generationally. Naturally the breadth and extent of this varies within and among cultures. Let’s be honest, we recognise this at the moment anyway. Look at WFF, partner income testing for benefits, parental income tests for student allowances.

    Just because the family is an economic unit doesn’t necessarily mean it should be the tax unit. There’s only a case for change if the recognition of individuals for tax creates outcomes that are inequitable if we accept the family as the economic unit. I suggest it does.

    The idea behind proportional taxation is that we tax individuals relative to their ability to pay (rather than the services consumed). Progressive taxation implicitly recognises that there are a common set of necessities that everyone requires (food, shelter, clothes, medicines) and ever expanding sets of items which are naturally discretionary. Therefore we say that those earning more should pay proportionately more. Well and good.

    However when you have two individuals coming together to raise a family, two problems occur. First, their non-discretionary spending rises with more mouths to feed. This violates our principles of fairness by having people with families ending with less discretionary income. Here I’m explicitly saying that children are different from a boat or luxury car. They’re part of normal human existence rather than a discretionary item (in the same way we don’t say that people are just choosing to eat enough to survive, or live in a house rather than on the street).

    This problem is further compounded by the progressive system applying to parents individually. Incentives exist for both parents to work part time to earn half the family income each, rather than each specialising in childcare and work. I think this is important because the incentive is non-trivial and affects arrangements that go to the core of how a family operates.

    Given this, would it be so bad to say to treat a family differently. The government would be acknowledging that most people want to partner up with others, and that raising a family is a normal and natural part of citizens’ lives. Maybe not for everyone, but for many.

    The concrete policy options would be to allow tax credits for children, perhaps based on age. This would be similar to WFF. Another option is to allow couples to pay tax as a unit, blending their incomes together and paying tax at their combined marginal rate.

    This does cause a series of problems. People may choose to enter into relationships (however they are defined by the legislation) to evade tax. Possibly true, but if it is tied into relationship property issues, the idea of commingling assets may act as a disincentive. For those without significant assets the incentive does exist. But a more natural economic incentive already exists to couple up as living together is generally cheaper and easier than living alone. I doubt the policy would distort this much.

    I’m reluctant to comment on the example mentioned. Stating something that isn’t true is just fraud. So nothing stops you from saying you aren’t in a relationship when you aren’t. But then nothing stops you from claiming charitable donations you didn’t make, fictitious expenses as a small business owner, or just under reporting your income. End of the day our tax system is based on trust.

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