Government Report Shows Systemic Racism in the Tax Code

by William Rice

Our rigged tax system not only favors the rich over working families, but white households over Black and Hispanic ones, too. By a lot. That’s what the U.S. Treasury Department found when it did a first-of-its-kind analysis of the relative racial benefits of some of the tax code’s biggest breaks. 

Systemic racism is alive and well in federal tax laws written by Congress. Knowing this adds an important factor to future debates over tax policy—such as Republican plans to extend parts of their 2017 tax law that are due to expire in a few years and mostly benefit the wealthy. 

The Treasury study determined that white households, for instance, get 92% of the federal tax break on income generated from investments, such as corporate stock. Just 3% goes to Hispanic families and 2% to Black families. This hugely disproportionate benefit is because income from investments are taxed at about half the rate as income from wages. The top tax rate on income from investments is just 20%, compared to the top rate on workers’ wages of 37%. 

The average white taxpayer saves about $8 for every $1 Black and Hispanic taxpayers save because the great majority of stock is owned by the richest Americans, who are mostly white: almost 90% of stock is held by the nation’s wealthiest 10%.

It’s this tax break that allows a white billionaire with nothing to do all day but admire his stock portfolio and benefit from the labor of working people to pay a lower tax rate than a Black teacher or a Latino lawyer working long hours. 

The same racial and ethnic bias is true of the deduction for charitable contributions (benefits whites about 5-1 over Black and Hispanic taxpayers), the pass-through business deduction (4-1 over Hispanic taxpayers, 8-1 over Black taxpayers) and mortgage interest deduction (an about 3-1 white advantage over both other groups). [See Chart] 

These tax breaks both reflect and worsen the nation’s destabilizing racial and ethnic wealth gaps. White families on average have incomes two-thirds higher than that of Black families and are eight times wealthier; they make 50% more than Latino families and hold five times the wealth.

Higher incomes and greater wealth mean you’re more likely to have investment income that enjoys the special tax discount; own a business that benefits from the pass-through deduction; have more excess cash to donate to charity; and own a bigger house with a bigger mortgage. You can then invest the tax savings from all these special breaks, further widening the income and wealth gaps, gaining even more from the tax code… and the cycle continues. 

The Treasury researchers did find two tax breaks that helped Black and Hispanic families disproportionately compared to whites: the Child Tax Credit (CTC)—which helps parents take better care of their kids—and the Earned Income Tax Credit, which can make even low-wage work pay. 

Unlike most other parts of government, the Internal Revenue Service does not collect information on the race or ethnicity of the members of the public with which it interacts. That’s outrageous and must change, because it’s only by collecting such data that racial inequities are revealed. ATF and its allies are making it a priority to convince the Biden administration to start such racial-data collection.    

In the meantime, for this study the researchers at Treasury had to make educated guesses based on the surnames, zip codes and other identifying characteristics of taxpayers. Officials say they will continue to refine their methods to get an even clearer picture of the racial impact of tax policy. Good thing, since we’ll need all the information we can get to make smart choices in the tax-and-spending battles to come.