One of the most glaring problems facing workers today is tax inequity. The preferential treatment of capital gains (income from wealth) over wage income in both federal and state tax codes is a prime example. The wealthy’s income has vastly risen over the past few decades, while workers have fared much worse by comparison. While tax policy alone will not resolve injustice in our economy, fixing the tax code can play a role in redefining how that economic relationship works. No one wants to live in a country where a social worker pays a higher share of their income in taxes than a CEO.
The federal income tax, and state taxes, are littered with special treatment toward certain income. People who earn income through work tend to pay higher tax rates than people who derive income from wealth. The prime examples of this are federal and state tax preferences for capital gains income.
Capital gains are the returns generated on assets like stocks, dividends, art, antiquities, and bonds. These gains can be either realized (sold for money) or unrealized (not yet sold). They can also be short-term (sold within one year) or long-term (sold after many years or passed down after death). If you buy stock and keep it for more than a year, any growth in its value is considered a long-term unrealized capital gain until you sell it. At that point, you must pay a tax on your profit from the sale.
It has long been understood that capital gains income flows overwhelmingly to wealthy families and that tax subsidies for this income disproportionately benefit the rich. Less studied, however, is the distribution of capital gains tax preferences by race and ethnicity. Against this backdrop, the U.S. Treasury Department’s recent analysis of preferential federal rates for long-term capital gains is nothing short of jaw-dropping. While non-Hispanic white families comprise 67 percent of the population, they receive a staggering 92 percent of the tax cuts from this provision. Hispanic families make up 15 percent of the population, by contrast, and yet receive a paltry 3 percent of this tax cut. Black families, at 11 percent of the population, receive a grand total of 2 percent of this tax preference.
While the Treasury analysis did not examine disparities by gender, this divide is surely even worse for women of color given the staggering pay gap they face. Race and gender discrimination combined with a lack of investment in the care economy means that Black and Hispanic women have much lower wages than white women or men of any race. Simply put, this makes it harder for women of color to pursue—and reach—their own version of economic justice, liberation, and freedom.
To be clear, most families derive no meaningful benefit from federal tax preferences for capital gains income. Preferential treatment of income from wealth hurts the average family of any race or ethnic background. Workers of all races and ethnicities would be better served by a system that puts investment income on the same playing field as salaries and wages.