It’s time to add race into the tax conversation.
I used to believe in the redistributive power of the federal income tax. On its face, income taxation is progressive. This means that higher-income earners pay a larger portion of their income in taxes than lower-income earners, which should decrease socioeconomic inequalities. However, after joining the team of a small credit union in Oakland, California, and offering free tax help to low-income families, I became much more critical of our inadequate tax system.
Nearly everyone who files taxes cares about the answer to the same question: “Do I owe money, or do I get a tax refund?” My clients were no different. Aiding these families with the obscure arithmetic of tax credits and deductions, I realized that our tax code is not just overly complicated; it’s also racist.
Here are some characteristics that minimize the tax liability of a wealthy taxpayer: being married and close to retirement, paying for higher education, owning a house, donating to charity and holding capital assets — shares of stock, investments in business or land, etc.
Here are some characteristics that minimize the tax liability of a lower-income taxpayer: being married or head of household and close to retirement, paying for higher education, having employer-provided health insurance and qualifying for tax credits like the Earned Income Tax Credit (EITC).
In either case, people of color get the short end of the stick. Marital rates are relatively low in Black households, who often cite financial instability as the main reason not to get married. Black and Latinx Americans are less likely to accumulate wealth through tax-free retirement savings or unrealized capital gains than their white counterparts. They are also less likely to report health insurance coverage and university tuition payments than white Americans, largely because they face higher poverty and unemployment rates.
To top it all off, although the EITC does effectively support specific groups of low-income taxpayers, and especially Black working mothers, the largest share of EITC recipients are white. In other words, the tax code doesn’t factor in racial discrimination in housing, employment, education, retirement or health care. In benefiting employed, highly educated, insured individuals, it effectively benefits white people the most. Our allegedly progressive income tax system is not as progressive, or as race-neutral, as it seems.
The federal income tax is one of many problematic pieces of U.S. taxation policy. Scholars have recently pointed out that while federal income tax rates are generally decreasing, state consumption and property taxes have increased. Consumption and property taxes particularly affect low- and middle-income families. Because the taxes are applied uniformly across income groups, they fall heaviest on the bottom earning group.
In fact, property taxes notably perpetuate the racial wealth gap. Statistics show that local officials often inflate the estimated value of property owned by people of color, particularly Black and Latinx people. Misvaluations take place because the price of white-owned properties often appreciate faster than others. While market values are sensitive to neighborhood characteristics, assessment values are relatively stiff. As a result, property owners of color tend to be taxed at disproportionately high rates.
The case of property ownership is interesting because it exemplifies how intricately woven structural racism is in U.S. public policy. The racial wealth gap is — first and foremost — part of the legacy of slavery, Jim Crow and other racist social institutions. Along with urban segregation, racial bias in valuation of property acts as a barrier to home ownership for Black Americans.
Despite high property taxes, people of color may still choose to purchase a house. They 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 white and higher-income. Instead, lower-earning people of color could continue paying rent until they save enough money for a house. Yet renters do not qualify for any specific federal tax break. That is to say, the demographic that arguably deserves subsidies for home ownership the most — renters, who are disproportionately poor people of color — is systematically excluded from incentives to buy a home.
Luckily, this covert exacerbation of racial inequalities can be stopped. Rather than amplifying racial barriers to economic opportunity, the government could use taxation to promote equality. Trump’s 2017 tax cut law lowered corporate taxation and raised the proportion of the tax burden placed on lower-income households, which widened income and racial disparities. A new tax reform could do the opposite — adopt an evidence-based approach to tax policy in order to respond to problematic trends in taxation.
Taking into account data about how taxes affect people of color would redirect the tax system. For example, policymakers could broaden the scope of targeted tax credits like the EITC, monitor racial bias in the valuation of property and give a greater role to federal progressive taxes than to state non-progressive taxes.
In this sense, Joe Biden’s tax plan is rather limited. The new president’s promised to restore tax equity by hiking the corporate and top marginal income tax rates, while eliminating tax breaks on dividends and capital gains and possibly creating some sort of payroll tax for the super-rich. As radically progressive as this plan may seem, it does not truly address the racial implications of the tax code.
Would redistribution of wealth to the poorest Americans inevitably benefit low-income people of color? Certainly. Would it make legislators more aware of racial bias in decision-making? More sensitive to racial disparities in housing, employment, health insurance or retirement savings? Unlikely.
The IRS itself sponsors better targeted efforts to promote a more equitable and racially inclusive tax administration. I participated in the Volunteer Income Tax Assistance initiative, which offers free tax preparation to low-income families. One could also join a Low-Income Taxpayer Clinic, where lawyers represent low-income filers in tax disputes pro bono. Volunteers in these two programs are trained to help taxpayers of diverse cultural and linguistic backgrounds. Meaning, the programs are actually designed to support communities of color. They are, in my opinion, a step in the right direction. However, our inequitable tax system is badly in need of full reform.
A new tax season is about to begin. Let it be a reminder that a fairer and more transparent taxation policy could be on the horizon, if we push for it.