Tags: taxes | divorce | painful | marriage

What If Taxes Could Make Divorce More Painful?

What If Taxes Could Make Divorce More Painful?

By    |   Friday, 10 November 2017 06:42 AM

Conservatives have spent years trying to save marriage -- from redefinition, from collapse. Gay marriage is the biggest headline issue, but social conservatives are uniformly aghast at the prevalence of divorce and the rising levels of extramarital childbearing.

Various remedies have been proposed to reverse these trends, to little effect. Divorce rates have been falling, but that’s likely attributable, at least in part, to the number of people who don’t marry in the first place.

And so far, no one has any very good proposals to persuade people to return en masse to the stable, lifelong unions that characterized earlier eras. The government programs that have been tried -- like a major Bush-era initiative -- produced little in the way of results. 

But hope does not die so easily. If government spending on exhortation has failed, why not look at the other side of the government ledger: the tax code? That appears to be the logic behind one of the less-remarked features of the House GOP tax bill: a change in the tax treatment of alimony payments, which would make divorce more costly and contentious for some affluent couples.

Right now, alimony payments are counted as taxable income to the receiving party, while the person paying the alimony can deduct them. Under the GOP tax bill, by contrast, alimony would generate neither taxable income nor a corresponding deduction.

If you are not well-versed in the arcana of tax policy, this may sound like a trivial alteration. After all, one party is losing a deduction, but the other party doesn’t have to pay any taxes. It should all come out in the wash.

Which is correct -- as long as both parties are in the same tax bracket. On the other hand, if the person paying the alimony is in a higher tax bracket than the person receiving it (frequently true), the deduction they’re getting is worth more than the taxes that their former spouse has to pay. This creates what’s known in the CPA biz as a “tax arbitrage opportunity”: by moving money from a highly taxed pocket to a lower-taxed one, the two halves of a former couple have reduced their total tax bill. So if you eliminate the arbitrage, the IRS will collect more revenue.

Not much revenue, to be sure -- about $8 billion over 10 years. But for some divorced couples, it could be a major blow to the pocketbook.

Is this good policy? There’s a plausible argument that making divorce more expensive could also make it more rare. For example: divorce tends to fall during economic downturns. That’s because divorce is expensive -- not just in attorney’s fees, but in the greater need for child care and the higher cost of supporting two households rather than one. Divorce rebounds, of course, when the economy improves, but it doesn’t necessarily catch up.

People in high-conflict marriages, or marriages where there is a substance problem or an issue with abuse, are probably going to end up on the rocks eventually. Moreover, they probably should. In low-conflict marriages, however, it’s not clear that the divorce makes people any happier, and if they stay together, after five years, many people in unhappy marriages will report that things have turned around. So raising the cost of divorcing could actually promote the long-term welfare of people whose marriages are simply less-than-excellent (though of course, it would also impose even greater hardships on people whose marriages are truly rotten and dangerous).

But that still doesn’t necessarily make this good policy. For one thing, there are those costs to the folks who really are in untenable situations; we should think long and hard before choosing a path whose selling point is that it keeps a bunch of so-so marriages together, if its downside is encouraging people to stay with abusive partners.

For another, as women go further in the workforce, alimony (and different tax brackets) simply aren't as large a factor in divorce as they used to be.

Just as importantly, the current method of accounting for alimony is actually the correct one under the current principles that guide our tax code. Changing that treatment would be a distortion of the way our tax code is supposed to work, and such distortions should not be permitted lightly.

Alimony is, after all, income to the recipient; it is an expense to the person who pays it. The tax code says that income should be taxed -- and in order to keep us from taxing the same bit of income over and over until the entire economy collapses into dust, it also says that whoever provides that income should be allowed an offsetting expense.

I believe in the goodness of marriage, and I hope that American public policy and culture will look for ways to make marriage more attractive and sustainable. But if this sort of tax fiddling is our best idea, then we’d better keep looking.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”

© Copyright 2019 Bloomberg L.P. All Rights Reserved.

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Conservatives have spent years trying to save marriage -- from redefinition, from collapse. Gay marriage is the biggest headline issue, but social conservatives are uniformly aghast at the prevalence of divorce and the rising levels of extramarital childbearing.
taxes, divorce, painful, marriage
Friday, 10 November 2017 06:42 AM
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