On Friday, the government submitted its proposal for the introduction of individual taxation for consultation. However, with its latest estimates of the extent of the marriage penalty and marriage bonus, the federal government has again shaken a core assumption behind the reform.
Life is full of conflicting goals. This also applies to politics. The debate about family taxation provides a prime example. In Sunday school, criticism of the “marriage penalty” for direct federal taxes is part of the inventory on the political stage, but so far there have been no majorities for a reform on the workdays – because every reform variant discussed buys the hoped-for advantages with new disadvantages. Reason: Frequently mentioned demands such as the tax system being neutral in terms of marital status, taxation according to economic ability, the highest possible work incentives and the lowest possible administrative effort cannot all be fully met at the same time.
Parliament and two popular initiatives are calling for reforms. In principle, the majority in Parliament wants to introduce individual taxation and has commissioned the Federal Council to introduce a concrete legislative project. With individual taxation, the marriage penalty would be off the table. Another advantage relates to the labor market: Due to the tax relief for second earners, a higher employment rate, especially for women, can be expected.
But individual taxation would come with various disadvantages: it contradicts the reality of marriage as an economic community; it also contradicts the aforementioned labor market logic with “second earners” and “first earners”; Couples with a 50/50 percentage income distribution would be clearly favored over couples with a 90/10 distribution and over single earner couples. The matter also brings additional administrative work with about 1.7 million additional tax returns per year; and if legally the individual and no longer the married couple is to be the decisive factor for the state, the state would have to abolish, among other things, the widow’s pension and reduce the health insurance premium for the husband of the income millionaire who works as a househusband.
Certain disadvantages of individual taxation can be mitigated by new twists – mostly at the price of new disadvantages. The Federal Council has now fulfilled Parliament’s mandate and on Friday one concrete legislative proposal for the introduction of individual taxation sent for consultation. Separate tax returns for spouses are planned for the Confederation and also for the cantons. In principle, tax deductions for children and household would be divided equally between the parents.
To cushion the consequences of the system change, the Federal Council envisages accompanying measures for the direct federal tax. So he wants to increase the child deduction from 6,500 to 9,000 francs – to compensate for the fact that the relief effect of the child deduction for married couples is reduced by the transition to individual taxation. In addition, people in households with only one adult should now be able to make a household deduction of CHF 6,000 – to compensate for the fact that, unlike couples living together, they cannot split the household costs between two adults.
Splitting the child deduction in half means that one half of the deduction does not provide any relief for couples with a very low or no second income – in contrast to couples with two high incomes. The Federal Council is proposing two variants here. In variant 1, he would accept this effect without countermeasures. In variant 2, he proposes a deduction for married couples with a low or no second income. Without children, this deduction can amount to up to 14,500 francs. It increases with each child and decreases as the second income increases.
Tighter tax progression
In principle, the financial consequences of such a reform and the distribution effects on the various income brackets can be controlled by correcting the tariffs. The Federal Council is striving for a reform which, without taking changes in behavior into account, will result in fiscal losses in direct federal taxes of around CHF 1 billion per year.
In a first calculation step, the federal government accepted a tightening of tax progression so that the benefits from the reform are not distributed too one-sidedly among high income earners. Specifically, the marginal tax rates would fall slightly for low and middle incomes and rise for higher incomes. In the second calculation step, the federal government then adjusts this basic structure of the tax rate to the targeted goal of the financial consequences.
According to the calculations for the direct federal tax, in the proposed variant with fiscal losses of one billion francs per year, around 53 percent of taxpayers would fare better in both reform variants, and 10 to 12 percent would fare worse. In all income brackets with taxable income, there would be more taxpayers with relief than those with an additional burden. The per capita figures are rather modest – with relief for many of those subject to a two to three-digit franc amount per year. Despite the tariff corrections, in both variants the higher income brackets at the federal level would not only be relieved in absolute terms, but also in percentage terms. The consequences for the cantonal tax burden depend on the measures taken by the cantons.
An increase in gainful employment is to be expected, above all due to the reduction in the marginal tax burden for second earners. The federal government expects the direct federal tax reform to have a positive employment effect of the equivalent of almost 3,000 to almost 12,000 full-time jobs; Extrapolated to all levels of government, this could mean an effect of 10,000 to almost 50,000 full-time jobs. Such employment effects are likely to reduce the fiscal losses in the medium term, but will hardly eliminate them completely.
More bonuses than penalties
Of the explanatory report of the Department of Finance contains a surprising punch line. The Federal Tax Administration came under fire after admitting in 2018 that its earlier estimate of the marriage penalty and marriage bonus was wrong. According to the then updated estimate, there were many more married couples with a marriage penalty than with a marriage bonus – the previous estimate had said the opposite. According to an updated federal estimate from 2019, around 700,000 married couples are significantly disadvantaged compared to cohabiting couples when it comes to direct federal taxes, and around 380,000 married couples are clearly advantaged.
And now the picture suddenly looks different again. The latest estimate from the tax administration, based on data for 2018, now says that around 610,000 married couples have a significant tax disadvantage compared to cohabiting couples, and around 670,000 married couples have tax privileges. The postscript should not be missing: “The estimates are subject to considerable uncertainties.” However, according to the status of the current conjectures, there will be no marriage penalty in the direct federal tax on balance.