Racial and ethnic inequalities exist in almost all social systems. And when it comes to how Americans typically create wealth, US federal income tax can help widen those disparities.
The code was designed with the intention of being largely advanced. The less you earn, the less you will be taxed. In other words: if you can pay more, you should be taxed more.
At the same time, certain economic and wealth-building activities such as home ownership, retirement planning and investments are rewarded. But it is white Americans who are disproportionately benefiting from tax breaks for these things, Emory University tax law professor Dorothy Brown told lawmakers on the Senate Finance Committee this week.
And even when black Americans engage in the same activities, they often don't get the tax breaks, said Brown, who is also the author of The Whiteness of Wealth: How the Tax System Impoverishes Black Americans – and How We Can Fix It.
Because of this, she believes U.S. tax law will help maintain the racial wealth gap, where the typical white family has eight times the wealth of the typical black family, according to a 2019 Federal Reserve analysis.
Here are just a few of the ways she suggests this.
Subsidize home ownership
Take just one of the tax breaks associated with home ownership. When people sell their homes, any increase in their home value is tax-free up to $ 250,000 ($ 500,000 for married couples).
It's a tax break that was introduced in the 1950s when discriminatory lending practices made it very difficult for black Americans to get a mortgage while white Americans had cheap, fixed-rate, and government-insured home loans, Brown noted.
In addition, she said, research shows that the greatest appreciation for homes is in predominantly white neighborhoods and that black homeowners are more likely to sell their homes at a loss. A new study published this week found that homes in black neighborhoods are undervalued by an average of $ 46,000.
And, as Brown pointed out, tax laws do not allow taxpayers to deduct capital losses on a home.
"So home ownership tax subsidies create white tax winners and black tax losers," Brown told lawmakers. "The federal government should stop subsidizing a racist home market."
Tax breaks for savings, investments and inheritances
Another tax-subsidized area of wealth creation is retirement planning and investments in the workplace.
White Americans are more likely than Black Americans to work for an employer that offers a tax-privileged retirement plan, such as B. a 401 (k). Typically, an employee's contribution is tax deductible and grows deferred for tax, along with the employer's match, until the money is withdrawn in retirement.
If withdrawn before the age of 59, it is subject to income tax and a 10% early withdrawal penalty. And Brown noted that research suggests that black workers are more likely than other racial and ethnic groups to withdraw early. So they end up paying more taxes on their savings and less retirement savings at the end.
When it comes to equity investments outside of a retirement plan, the tax rate on capital gains on investments held for more than a year is typically lower than the tax rate on earned income. And investors can use their capital losses to offset their gains.
Additionally, wealthy investors can afford to schedule their stock sales for maximum tax benefits, Brown said. Or they can choose not to sell their shares at all, but instead leave them to their heirs. In this case, all profits that have accrued during the life of the investor are passed on to these heirs tax-free.
Polls show that black Americans are less likely to be invested in the stock market than white Americans. And since taxes are regularly withheld from their paychecks, they don't have the benefit of deciding when and how much tax to pay on those profits as investors time their tax bite on stock investments, Brown said.
And black Americans usually don't inherit nearly as much as white Americans when their parents die. Let alonegettax-free profits from long-term investments.
Brown recommended that lawmakers make changes to the tax code to address these inequalities.
"Our tax laws need a major overhaul to put racial justice first," she said.
But Mihir Desai, Professor of Finance and Law at Harvard, spoke at the same hearing, Legislators warned that closing the tax system that penalizes a racial group based on a number of provisions may be an incomplete assessment, also because it underestimates other provisions of the Code that disproportionately favor the same group. For example, reimbursable loans for households with lower incomes, of which minorities are disproportionately represented.
"It is important to consider the entirety of the tax system when assessing the racist impact of the system," Desai said. "It would be unwise to extrapolate from an analysis of savings preferences to the entire tax system."
Brown contends that in order to fully appreciate the extent of racial disparity in the tax system, the IRS should start reporting tax return data based on race, which it currently does not.
And she recommended, "Any future Congressional proposal for tax reform should include a racial statement."