Community property laws let wealthy couples split income and pay lower taxes

Evidence

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. … An alternative approach was directed toward state legislatures. The goal was to get lawmakers to pass bills to convert their states from separate property to community property. In 1939, Oklahoma, concerned about the exodus of its wealthy oil barons to the neighboring community property state of Texas, tried to create a community property “opt-in” law. Only those couples who wished to have community property rules apply to them would be treated as if they were living in a community property state. The Supreme Court held in 1944 that this opt-in approach was not a true community property regime, hence no tax break for those spouses. The following year, the Oklahoma legislature adopted a true community property regime, which was upheld by the Supreme Court. Now the Oklahoma 5 percenters could get a tax break just like the Seaborns! — Dorothy A. Brown, The Whiteness of Wealth, 88

Categorization

• XREF: This early history of income splitting is the seed of the modern joint-filing marriage bonus, connecting to the reader’s earlier understanding of how the tax code’s facial neutrality conceals racialized outcomes. — connects to: Wealthy interests financed a staged lawsuit against the income tax — Lawrence M. Friedman, A History of American Law, 3223
• SHARE: Send to a tax-law acquaintance: state-location determined federal tax bills pre-income-splitting, a horizontal-equity breach.