OneMarried While Black
Most Americans believe that getting married means paying lower taxes. And one thing my parents could have used was a tax cut. When Mommy and Daddy got married in 1956, they didn’t have money for a fancy wedding reception or a honeymoon; my mother made the potato salad they served to their guests, and they wouldn’t take a vacation together until decades later. Money was so tight that after a couple of months of paying $25 per week for their own apartment, they moved into the spare room in my paternal grandmother’s—Grandma Bertha’s—apartment. (You can imagine how much fun that was for a couple of newlyweds.) And they stayed there after my sister and I were born, because they simply didn’t have the resources to leave.
Like most couples, my parents started filing their tax returns jointly the year after they got married. When I was young they used a tax preparer, but later they happily handed over the responsibility to me. Even with all that education, I assumed that filing jointly was the best thing for my parents, since filing separately was likely to result in fewer tax breaks. Nearly 95 percent of all married couples file jointly, and those who don’t typically choose to file separately to avoid liability for a spouse’s potential tax problems. (A well-known example is the late senator John McCain, and his wife, Cindy, who inherited ownership of the third-largest Anheuser-Busch distributor in the country. Before they got married, they signed a prenuptial agreement that included a requirement that they would file separate tax returns.)
Conventional wisdom assumes the tax subsidy for marriage benefits all married Americans equally, and doesn’t give much consideration to its effects across race and income groups. When I saw that my parents’ two incomes added up to a higher tax bill than had they remained single and filed individually, I started to question the conventional wisdom—and found that while in theory the provision should affect everyone equally, regardless of race, in practice it has a disproportionately detrimental impact on black couples. How a tax provision used by almost all married couples—the joint return—came to harm black families and their ability to build intergenerational wealth tells us much about American tax policy, its history, and its intentions.
Meet Henry and Charlotte Seaborn, the rich, white society couple whose lawsuit led the Supreme Court to establish the joint tax return in 1948. Henry and Charlotte were married in 1902, before we even had a progressive income tax system. As noted in the introduction, when that system was enacted in 1913, taxpayers were required to file as individuals. That meant the same rate schedule applied whether you were married or single. There were different exemption amounts for individuals and married couples—$3,000 versus $4,000, on the grounds that it cost less to maintain one household for two people, than two separate households—which had the potential to provide a small tax cut when you got married. In 1913, however, only 1 percent of Americans had income high enough to have to pay taxes. By 1930, exemption amounts had been lowered, requiring around 5 percent of Americans to file tax returns, including Henry and Charlotte, respectively the vice president of the Skinner & Eddy shipbuilding company and his socialite stay-at-home spouse.
According to court records, in 1927 Henry had taxable income of just under $38,500 (about $500,000 today, adjusted for inflation). More than half of that income came from investments. (That’s a whole other piece of tax policy, but we’ll get to that in chapter 5.) The exemption amount, which had been $20,000 in 1913, had been lowered to $2,000 in 1917—which meant not only did Henry have to pay taxes, but he had to pay a lot in taxes. By 1927, the Seaborns were fed up. They decided to use their considerable resources to reduce their tax bills—and succeeded, with a little help from the United States Supreme Court. The Seaborns lived in Washington, a “community property” state, which gave Charlotte equal legal ownership of whatever income her husband received during their marriage. When they filed their taxes for 1927, Charlotte put half of Henry’s income (and expenses) on her tax return, and Henry did the same. The married exemption was $3,500 that year, and the Seaborns each decided to take half of it—$1,750 each.
Here’s how this worked, in practice—and for simplicity, let’s count only Henry’s wage income, not his investments. So Henry has income of $15,000, and Charlotte has none. If he’d obeyed the law, as a married taxpayer filing a joint return, he would subtract the personal exemption of $3,500 and have taxable income of $11,500. That would result in a $370 tax bill—roughly $5,400 in today’s dollars. His marginal tax rate was 6 percent—the highest rate his last dollars of income were taxed at.
Henry, however, chose not to obey the law, and allocated half his income to Charlotte for tax purposes. Each spouse thus reported net income of $7,500—and because there was no option for a person with no income, like Charlotte, to file a return, the Seaborns invented one, and deducted half of the married exemption from each income. That would put their taxable income at $5,750 each, with a resulting tax bill of $112.50 for each Seaborn. Under this scenario, their highest marginal tax rate was only 3 percent.
Henry and Charlotte might have been charged with tax fraud, but their “ingenuity” was rewarded. When the IRS initially audited the Seaborns’ tax returns and rejected them, arguing that all of the income (and expenses) should have been included on Henry’s tax return because he was the sole wage earner and sole owner of the investments, Henry paid the extra taxes ($703.01, roughly $10,000 today) and then sued for a refund so that he could take his case to federal district court. With the help of Donworth, Todd & Holman (the precursor of Perkins Coie LLP, currently the largest law firm in the Pacific Northwest), the Seaborns won—first at the district court, and then, after another appeal from the IRS, at the Supreme Court. They were able to split Henry’s income, using their wealth to get a permanent tax cut that would enable them to accumulate even more wealth.
In doing so, the Seaborns not only set a precedent for helping rich couples in community property states pay less tax but also made other wealthy Americans aware of the potential to change the laws in their favor. Initially, only couples in community property states, like Washington, could benefit from marital income splitting; in most states, income earned during the marriage belonged to the spouse who earned it. Before Poe v. Seaborn, the 5 percenters who lived in separate property states had tried to find another way of reducing their tax burden, splitting their income by entering into contracts where the sole wage earner (the husband) transferred a half interest in his income and other property to his wife. That case, too, had gone all the way to the Supreme Court; unlike in Poe v. Seaborn, the rich white married couple lost. The Supreme Court reasoned that in separate property states, “he who earns” the income is the one who will be taxed on it.
The Supreme Court thus created a situation where married couples with identical income and expenses but who lived in different states would pay different federal income tax bills. However, this was a violation of the horizontal equity principle underpinning the progressive tax system—and still only the 5 percent wealthiest Americans were paying in. They were determined to make a change.
One approach was for husbands and wives to form family partnerships and “split” their incomes equally. Family partnerships mimicked small businesses, such as two-person law firms or retail stores; these are classified as “pass-through” entities in which each individual partner pays taxes on their share of the income. (The spousal approach ignored the fact that no legitimate business partnership agreement would be formed solely to award half of the income from the earner to the nonearner.) When family partnerships weren’t challenged by the IRS, the couple got the same result as the Seaborns, and a lower tax bill. When they were challenged, sometimes the taxpayer won and sometimes they lost. This approach was case by case, expensive, and unpredictable.
Copyright © 2021 by Dorothy A. Brown. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.