NCPA - National Center for Policy Analysis


August 14, 2007

Despite recent plummets in bankruptcy numbers, scholars on the left argue that the drop is temporary and that rising bankruptcies will result from new stresses on American households, says Todd J. Zywicki, professor of law at George Mason University. 

The left blames new expenses that strain the family budget, such as rising health-care costs and higher mortgage payments for increasingly expensive homes, leaving less discretionary income available to save and to meet other household expenses, and forcing mothers into the workforce.  What they fail to mention, however is the role of taxes:

  • Overall, the typical family in the 2000s pays substantially more in taxes than the combined expenses of their mortgage, automobile and health insurance than in earlier periods.
  • And the change in the tax obligation between the two periods is substantially greater than the change in mortgage, automobile expenses and health-insurance costs combined.

This suggests that the most important change in the balance sheets of middle-class households over the past three decades is a dramatically higher tax burden caused by the progressive nature of the American tax system, says Zywicki:

  • In turn it follows that the most effective way of alleviating the household budget crunch would be to adopt lower and flatter tax rates that would reduce the government's take.
  • Another possibility would eliminate the "secondary earner bias" in the tax system, which causes all of the wife's income to effectively be taxed at a much higher marginal tax rate than the husband's.

Lower and flatter marginal tax rates generally are not advocated by those who dominate the American legal academy today, says Zywicki.  But for those who want to consider serious strategies for preventing bankruptcies, less money in Uncle Sam's pockets may mean more money in ours.

Source: Todd J. Zywicki, "The Two-Income Tax Trap," Wall Street Journal, August 14, 2007.

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