It’s time to add race to the tax discussion.
I used to believe in the redistributive power of federal income tax. At first glance, income tax is progressive. This means that people with higher incomes pay more of their income in taxes than those with lower incomes, which should reduce socio-economic inequalities. After joining the team at a small credit union in Oakland, California and offering free tax assistance to low-income families, I became much more critical of our inadequate tax system.
Almost everyone filing taxes cares about the answer to the same question, “Do I owe money or can I get a tax refund?” My clients were no different. As I helped these families with the obscure arithmetic of tax credits and deductions, I realized that our tax laws are not just too complicated. It’s also racist.
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Here are some traits that will minimize a wealthy taxpayer’s tax liability: being married and about to retire, paying for college education, owning a home, donating to charity, and holding capital assets – stock shares, investing in companies or land, etc.
Here are some traits that will minimize a lower-income taxpayer’s tax liability: being married or having a head of household and about to retire, paying for college education, having employer-provided health insurance, and qualifying for tax credits like the Earned Income Tax Credit ( EITC).
In both cases, colored people are given the short end of the stick. Marriage rates are relatively low in black households, which often cite financial instability as the main reason for not marrying. Black and Latin American Americans are less likely than their white counterparts to accumulate wealth through tax-free retirement plans or unrealized capital gains. They are also less likely to report health insurance and tuition than white Americans, largely because they face higher poverty and unemployment rates.
To top it off, while the EITC is effective in helping certain groups of low-income taxpayers, and particularly black working mothers, most of the EITC recipients are white. In other words, the tax code does not take into account racial discrimination in the areas of housing, employment, education, retirement or health care. When it benefits employed, well-educated, and insured individuals, it benefits whites most. Our supposedly progressive income tax system is not as progressive or racially neutral as it seems.
Federal income tax is one of many problematic parts of US tax policy. Scientists recently pointed out that federal income tax rates are generally falling, but state consumption and property taxes have increased. Excise and property taxes particularly affect families with low and middle incomes. Since taxes are applied uniformly across all income groups, they fall most heavily on the lowest income group.
Indeed, property taxes perpetuate the racial wealth gap in particular. Statistics show that local officials often add value to property owned by colored people, especially blacks and Latin Americans. Mispricing occurs because the price of white property often rises faster than others. While market values are sensitive to neighborhood characteristics, valuation values are relatively stiff. As a result, paint property owners are typically taxed at disproportionately high rates.
The property case is interesting because it exemplifies how intricately structured racism is in US public policy. The racial wealth gap is primarily part of the legacy of slavery, Jim Crow and other racist social institutions. Coupled with urban segregation, the racist tendency in real estate valuation acts as a barrier to home ownership by black Americans.
Despite high property taxes, people of color can still decide to buy a house. You could apply for a mortgage interest tax deduction through their federal income tax report. However, those who qualify for mortgage interest tax breaks are almost exclusively higher-income whites. Instead, lower-income people of color could keep paying rent until they save enough money to buy a house. However, tenants are not entitled to any particular federal tax break. This means that the population group that deserves the most home ownership subsidies – tenants who are disproportionately poor colored people – is systematically excluded from home-buying incentives.
Fortunately, this covert exacerbation of racial inequalities can be stopped. Instead of increasing the racial barriers to economic opportunity, the government could use taxes to promote equality. Trump’s 2017 Tax Cut Act lowered corporate taxation and increased the share of the tax burden for lower-income households, which increased income and racial inequalities. A new tax reform could do the opposite – take an evidence-based approach to tax policy to respond to problematic tax trends.
Taking into account data on how taxes affect people of color would redirect the tax system. For example, policymakers could expand the scope of targeted tax credits like the EITC, monitor racist tendencies in property valuations, and give progressive federal taxes a greater role than non-progressive state taxes.
With that in mind, Joe Biden’s tax plan is rather limited. The new president has promised to restore tax justice by increasing corporate and top tax rates, eliminating tax breaks for dividends and capital gains, and possibly creating some sort of wage tax for the super-rich. Radically progressive as this plan may be, it doesn’t really address the racist effects of the tax code.
Would the redistribution of wealth to the poorest Americans inevitably benefit low-income black people? Certainly. Would this sensitize the legislature to racist prejudice when making decisions? More sensitive to racial differences in terms of housing, employment, health insurance, or retirement provision? Unlikely.
The IRS itself is promoting more targeted efforts to promote fairer and racially inclusive tax administration. I participated in the Volunteer Income Tax Assistance initiative, which offers low-income families free tax preparation. One could also join a low-income taxpayer clinic, where lawyers represent low-income applicants in tax disputes pro bono. Volunteers in these two programs are trained to help taxpayers from different cultural and linguistic backgrounds. That said, the programs are actually designed to support color communities. In my opinion, they are a step in the right direction. However, our unequal tax system urgently needs major reform.
A new tax season is just around the corner. It should be remembered that fairer and more transparent taxation policies could be in sight if we press for it.
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