Dorothy Brown thought tax law was color blind.
But decades of research has proven otherwise. Brown, who is now a law professor at Emory University, has written a book that explains how racism is built into the US tax system and contributes to the wealth gap for blacks.
"What people say is, 'Well, tax laws can't discriminate because there's nothing in tax law that says blacks pay more, whites pay less." And that's true, "Brown said in an interview.
But if you look at how certain provisions were incorporated into the tax code, there is a racist story that has favored white Americans in general.
"Our tax laws were designed with white Americans in mind," she writes. "Therefore, no solution proposed by neither the right nor the left – better jobs, increased home ownership and better access to higher education – will be effective without significant and fundamental tax reform."
In the past, I have selected a personal finance book for the Color of Money Book Club every month. Last year when the pandemic escalated, I suspended the feature to focus on providing much-needed information about stimulus payments and the disruption in the way the money was delivered to millions of Americans. While I won't be resuming monthly book club picks, I will occasionally review consumer finance books.
In my first selection for this year, I recommend Brown's book "The Whiteness of Wealth: How The Tax System Impoverishes Black Americans – And How We Can Fix It".
While the Internal Revenue Service doesn't ask about a taxpayer's race or ethnicity, research shows that systemic racism – home ownership, employment, and education – affects the taxes people pay and don't pay.
In an interactive guide through the 1040 form, researchers from the bipartisan Center for Tax Policy also explained in a 2020 report the different ways in which tax legislation contributes to racial inequalities. Here is how.
The overwhelming capital gains tax rates benefit wealthier white families. Workplace retirement plans like 401 (k) create more wealth for white workers because black and Hispanic workers are less likely to have access to this tax-efficient benefit. Although they could invest in retirement themselves, studies show that workplace plans, often with an employer contribution, increase participation.
And who has benefited greatly from the mortgage interest deduction and how are home sales taxed?
"Federal tax subsidies make things better for most white Americans, who have benefited from the market and government for more than half a century, and worse for most black Americans, who have already been penalized by the market and the government," Brown writes . "While white homebuyers no longer have a monopoly on receiving FHA subsidies, they still benefit from the anti-black preferences that exist in the real estate market."
A married couple applying together can deduct up to $ 750,000 in mortgage interest on a qualifying home loan. Then there are the tax breaks people get when they sell their houses. Up to $ 250,000 (or $ 500,000 for married couples) in capital gains from the sale of primary homes can be tax-free if the taxpayer meets certain conditions.
This is where inequality comes in. Housing discrimination has deterred many black families from owning homes. Home ownership rates for blacks are still pale compared to white homeowners. In the first quarter of 2021, home ownership by non-Hispanic whites was nearly 74%, according to the Census Bureau. For blacks it was 45%.
"Between 1934 and 1962, 98% of FHA-insured loans went to white families, which is an important foundation for building wealth for future generations," said a 2020 report by the Urban Institute.
The bias in the tax system gives many white sellers greater tax breaks, and this is due to the differences in home valuations for black homeowners. Studies show that property values begin to decline when the presence of blacks in the neighborhood exceeds 10%, writes Brown.
While we talk about the inequality of values and assessments at home, Brown knows what I'm going to ask next.
There are whites who argue that the difference in appreciation has nothing to do with race but with crime rate, I say.
“They say that without knowing how racist it is,” she says. “OK, so now you're saying that every black man is a criminal. That's your defense as to why it's not about race. "Really?" So research says that many white Americans don't want to live with too many black Americans. "
Starting in July, an expanded child tax credit will begin with monthly payments to families. Biden has proposed increasing capital gains tax. Brown's analysis is an important addition to the discussion of tax policy closing the racial wealth gap.
Brown wants the IRS to publish tax data by race to easily expose discriminatory tax policies. She advocates a progressive income tax system without exclusions. All income would be taxable. Americans would only receive a living allowance that would reduce or eliminate income taxes for people who earn less than a living wage based on their geographic area.
This book offers a strong historical context and concludes with bold recommendations that would meet incredible opposition.
But as the saying goes, go big or go home.