Tax codes that reward traditional families might increase income inequality

May 31, 2021

Outdated tax policies are benefiting traditional families and perpetuating income inequality. (Shutterstock)

Tax codes that offer extra benefits to breadwinners with dependents negatively affect countries' ability to reduce income inequality across family types and could exacerbate existing gender inequality by discouraging secondary earners from labor-market participation, according to new research.

Using data from 30 countries, including the U.S., EU member states and countries in Latin America, as well as estimated income inequality before and after taxes for different family types, a study published May 4 in the Journal of Social Policy explored the impact of income tax policies on income inequality among nonretired family households. Using a multivariate linear regression, Manuel Schechtl, the study's author and a research associate at Humboldt-Universität zu Berlin, found that countries with "familialization" tax policies do less to reduce income inequality between households than places without familialization tax policies.

Familialization policies, according to the study, are those that emphasize individual dependency on the family and enforce familial caretaking responsibilities, such as the ability to jointly file taxes with a spouse; defamilialization policies enhance individual autonomy, such as single-parent allowances. According to Schechtl, prior literature has missed a crucial dimension of how countries redistribute resources horizontally through taxation and income differences between traditional and other family types, focusing more on vertical redistribution, or moving resources from wealthier recipients to those who exhibit greater need. 

"It is clear that tax systems do not treat everyone equally (given progressive taxation), but they may not even treat equal earners equally if one household receives tax relief and another does not," Schechtl wrote in his paper.

The six family structures examined in this paper included households whose members were married without children, married with children, unmarried without children, unmarried with children, single with children, and single with no children.

"Generally speaking, tax expenditures should receive much more scholarly (and public) attention, given the role they play in contemporary welfare systems," Schechtl told The Academic Times. "The literature that does focus on ... 'hidden' elements of welfare provision in the tax code seldomly looks at inequality as an outcome. However, given that inequality is a central dimension of current socioeconomic reasoning, I personally think this is very important."

Some family types are disproportionately benefited or placed at a disadvantage by the tax code's gendered policies, such as joint filing for spouses, relief offered to single parents, and additional benefits for primary earners with dependents. Each country's tax policies pertaining to joint filing, income-splitting between couples and allowances for dependent spouses are implicit indicators of the country's level of familialization, and Schechtl said these familialization policies might exacerbate gender inequality, particularly by discouraging the labor-market participation of secondary earners, who are often female. 

Schechtl found that defamilialization income tax policies improved both income inequality and individual autonomy across family types, although allowances for single parents did not appear to enhance redistribution. Tax codes with more familialization policies, however, were associated with a reduction in the country's capacity to reduce income inequality between family types. The ability for married couples to jointly file taxes, and income-splitting in particular, significantly undermined the country's redistributional ability. 

Findings suggest that tax-induced reductions in income inequality across family types can be cut in half by the practice of joint filing alone; countries with joint filing reduce income inequality between family types nearly 8 percentage points less than countries with individual filing. Income-splitting also impacts a country's ability to redistribute wealth vertically: Countries with income-splitting have about 5 percentage points lower vertical income-inequality reduction.

"If different family types are treated differently due to their family status, then redistribution is not just about the individual's success in the labour market, but his or her embeddedness in family formations as well," Schechtl wrote in the study.

Schechtl said he believes the study can serve as an excellent starting point for future research into tax fairness, equity and inequality pertaining to the "modern family" and its different iterations. 

"Although conservative male-breadwinner couples are no longer the hegemonic family type, they still are the prime beneficiaries from tax policies, which has substantial consequences for inequality, as the paper demonstrates," he said. "I am currently working on similar questions regarding the impact of tax policies on poverty, so there is a lot more to do."

The study, "The taxation of families: How gendered (de)familialization tax policies modify horizontal income inequality," published May 4 in the Journal of Social Policy, was authored by Manuel Schechtl, Humboldt-Universität zu Berlin.

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