Racist U.S. Tax Systems
Awareness of “systemic racism” especially regarding Black individuals has heightened since the beginning of 2020. The disproportionate vulnerability of people of color because of the racial wealth gap, among other related race-based factors, including discrimination in employment, housing, and education, to the COVID-19 pandemic, has been substantiated with dramatic numbers in state after state. The Black Lives Matter protests have shifted the national conversation from a few bad apple cops to racism as “a system of advantage and disadvantage based on race.”
In this “systemic racism” frame and with an understanding of the pre-existing condition of racial wealth disparities, the “anti-tax” shift of the U.S. tax system from more to less progressive comes into focus as a current manifestation of relentless racism. Beginning in the early 1980s, our tax systems have become less progressive. “Anti-tax” fervor took root with caps on property taxes in California in 1978 and the Reagan tax cuts in the early 1980s, and it has steadily flourished. Congress has decreased wealth taxes along with top marginal income tax rates. State and local governments have reduced reliance on income and property taxes, replacing them with increased sales and other consumption taxes.
The “anti-tax” movement and economic inequality go hand in hand. Leading economists identify decreased progressivity in the tax system as an important cause of rising economic inequality. High-income earners who are taxed at lower rates are able to add more to their wealth every year compared to low-income earners. “Anti-tax,” it turns out, is less about taking the burden of taxation off of everyone and more about shifting that burden away from wealthy taxpayers who can, for example, choose to domicile in states that raise revenues through (regressive) sales rather than (progressive) income taxes.
Decreased progressivity and economic inequality in tax systems are racialized. Specifically, they generate racialized outcomes, which distort access to economic opportunities. Neither education nor hard work can overcome the racial wealth gap. Unemployed white households hold more wealth than fully employed Black households, and the average wealth of college-educated Black households is less than that of high school drop-out white households. Tax policies exacerbate this racial wealth gap by shifting tax burdens from those who are privileged with wealth (white taxpayers) to those who are systemically impoverished (Black taxpayers).
These tax effects are racialized in origin as well as in effect. Sociologist Manuel Pastor has documented how the “anti-tax” movement in California was a reaction to changing demographics—a rise in the Latinx population—as well as to soaring real estate values. Reagan’s racialized “welfare queen” rhetoric invited white voters to dismiss and discard the social safety net that a robustly progressive tax regime had supported. More recently, scholars have connected severe tax cuts in Kansas, which decimated the public schools, to rhetoric that marginalizes people of color.
Racial wealth disparities today arise in part from disadvantage imposed historically on Black people. Such disadvantage, the result of invidious discrimination, is often the focus of examinations of racialized outcomes. The experience of white people is taken as the norm, which highlights ways in which Black people and other people of color have been left behind. Yet, it is essential to also recognize that, throughout the same history during which the government was inhibiting the creation of Black wealth, the government was actively supporting and subsidizing the creation of white wealth. The resulting white advantage makes a substantial contribution to racial wealth disparities, and the current structure of the U.S. tax system as a whole perpetuates, and even exacerbates, these disparities. The U.S. tax system has become yet another government institution that creates and sustains white advantage.
Broad-based white wealth-building—and investment by the federal government in that wealth-building—have been a national mission since the mid-1800s. The creation of America’s middle class did not happen by accident. The Homestead Acts of the 1860s opened up the West, which federal military action had cleared of its original indigenous occupants, to settlers. These settlers were overwhelmingly white. During the New Deal of the 1930s, Social Security retirement benefits provided a safety net for white working-class seniors. Farmworkers and domestics, overwhelmingly people of color, were specifically excluded. The New Deal also included protections for labor organizing, which enabled collective action on the part of unions. Unions, however, discriminated on the basis of race. The 1930s also introduced the federally guaranteed, 30-year, fixed-rate mortgage with a down payment that was only a percentage of the cost of a new home. Nevertheless, redlining ensured that investment went to white neighborhoods rather than mixed or neighborhoods of color. Following World War II, the GI Bill provided a subsidized college education to returning veterans. Black vets were often restricted to segregated schools, of which there were too few to accommodate their demand.
Though this list of ways in which the U.S. government has invested in white citizens is not exhaustive, it makes clear that white wealth-building has long been a collective priority backed by government policies and resources. White advantage in the form of household wealth is significantly greater than Black household wealth, which did not occur by accident. Moreover, it cannot be remedied without broad-based anti-racist relief.
Today, wealth for most families takes the form of home equity. In addition, financial wealth in the form of pensions protects families from acute costs associated with aging, and health insurance protects them from catastrophic medical expenses. Further, investment in education—K–12 and post-secondary—creates the human capital that protects and creates wealth in today’s knowledge economy.
Substantial federal tax expenditures—tax expenditures that have increased since 1980—subsidize this wealth-building. Tax expenditures, carve-outs to taxes that would otherwise be owed and thus losses of revenue to the government, benefit targeted individuals who engage in government-endorsed activity. Tax expenditures support home equity, pensions, medical insurance, K–12 education, and college.
These tax expenditures undermine progressivity and exacerbate racial wealth disparities. The benefit of tax deductions increases as a taxpayer’s household income increases, thereby providing the most significant benefits to taxpayers who are employed full time, who own their own homes, who can afford to buy homes in neighborhoods with high-quality schools, and who can afford to save and invest. These taxpayers are disproportionately white. The indirect nature of these tax expenditures obscures what is effectively government welfare for wealthy white taxpayers. The tax system today is the stealth equivalent of historical whites-only wealth-building.
White wealth advantage is also inherent in the realization-based system. Higher-income taxpayers have greater capacity to invest in stocks, bonds, and real estate, the increased value of which is not subject to tax until a “realization event” occurs. These “unrealized capital gains” make up a large portion of the wealth gap. In 2018, 69 percent of unrealized capital gains were held by the top 1 percent of income earners. Wealthy families can hold onto these assets indefinitely without income taxation, creating the erroneous impression that tax systems are more progressive because the economic income from unrealized capital gains is neither included in income nor taxed. Wealthy taxpayers’ actual income is greater, but the tax liability remains the same. Their historically low effective tax rate is thus even lower than reported.
Regressive State and Local Tax Systems Exacerbate Inequality
State and local tax systems have emerged in recent decades as significant drivers of wealth inequality. This inequality is due in part to a historical shift from taxes on wealth (most progressive) to taxes on income (less progressive) and more recently to taxes on consumption (regressive). Nearly every state and local government collects more taxes from poor families than from high-income families relative to their incomes, and more taxes are generally collected from middle-income families than high-income families.
Many major state taxes were implemented in the first half of the twentieth century, a period when Black southerners were barred from voting and when urban areas were underrepresented in many states’ legislatures. And most state tax codes remain regressive today, resulting in low- and middle-income families paying a larger share of their income in taxes than wealthy families. One of the primary reasons for such inequality is states’ heavy reliance on sales and other consumption taxes, which often disproportionately burden low-income families who spend more of their income on consumables than on saving or investments.
This inequality is exacerbated by the doubling of most states’ sales tax rates since 1970, with little if any change in the top income tax rates. As states and localities have jumped on the “anti-tax” bandwagon, they have increasingly cut or avoided raising taxes (particularly, income taxes) while at the same time needing to make up for lost revenue. To compensate for reductions in these forgone taxes, many states and localities have increased reliance on user fees, resulting in even greater regressivity than reported in most tax studies.
Taxes on personal and business property, which are significant revenue sources, generally tend to be less regressive than consumption taxes and fees in their overall effect. However, the increased shift in wealth from home ownership to less-taxed financial investments is racialized as well due to the low average financial wealth of Black households compared to white households. A more troubling reality is the racialized administration of property taxes. A recent analysis of over a decade of tax assessment and sales data for homes across the country revealed that Black families pay significantly more in real property taxes each year than their white counterparts. Property tax assessments in virtually every state increased in areas with greater numbers of Black and Latinx residents. Racism as a system of advantage and disadvantage based on race has proven to be a hardy American practice. It is essential to identify practices and policies that perpetuate racial disparities even, or especially, when those practices and policies do not declare themselves to be racist.
Anti-racist Tax System Action Items
A history of unequal opportunities and access to education, housing, employment, and other resources based on race has led to racialized wealth inequality. The shifts in federal and state tax policy over the last decades make an essential contribution to solidifying this racialized wealth inequality. While there is no single solution for curing the inequities inherent in our tax systems, history offers guidance on strategies for mitigating rather than exacerbating the effects of racialized wealth creation opportunities. Looking back to the 1970s when wealth and income inequality were lower, more progressive income taxes and more effective wealth transfer taxes were in place. This tax structure supported the collective and redistributive goals of raising revenue to fund governmental functions and priorities that benefited the community as a whole. Public expenditures such as investment in education, neighborhood revitalization, and public transit address racial inequities in communities of color.
A reevaluation of federal, state, and local tax expenditures is imperative. Most provide “upside-down tax breaks” that disproportionately benefit white households by subsidizing home ownership, college education, and retirement savings. Another alternative is to strengthen the wealth-equalizing potential of tax laws that are already in place by raising capital gains tax rates, taxing unrealized capital gains at death, and increasing gift taxes.
Refundable tax credits can also mitigate regressive taxes, such as payroll taxes and consumption taxes. The refundable Earned Income Tax Credit (EITC) and partially refundable Child Tax Credit (CTC) lift more children and their families out of poverty than any other government program. Because of discrimination, Black households are disproportionately represented among lower-income households with children. A significant body of research demonstrates that the EITC incentivizes employment especially for single mothers and results in better educational, health, and well-being outcomes in the short and long runs for children and adults. The EITC increased 2019 household incomes of 9 million women of color, who disproportionately benefit from the credit because of long-term systemic racism in employment and related opportunities. Moreover, these credits target stimulus spending in financially challenged communities that exponentially generates jobs and tax revenues.
To enhance its current anti-racist effects, the EITC can be improved to further reduce poverty and mitigate economic inequality for communities of color. The EITC for “childless” workers is modest and phases out at thresholds below poverty levels. Indeed, single low-income workers, who are disproportionately workers of color, are the only group that are taxed into poverty. Expanding the EITC across the board and especially for childless workers could relieve this issue.
EITCs and the CTC would reach even more households of color if these credits did not require a Social Security number (SSN) for everyone listed on a tax return. If Congress eliminated this racialized requirement for the EITC and only required workers to have an SSN authorizing work, more working families of color would benefit. Similarly, the CTC should not depend on a qualifying child having an SSN. Given the increasingly racialized immigration system, this change would benefit 1 million children and their working families who are disproportionately households of color. Tragically, our youngest children suffer the highest rates of poverty as compared to any other age group, with 45 percent of children under five living in low-income households. Given that these children’s minds and bodies are still developing, there is no better investment than in their health, safety, education, and well-being. The EITC and CTC should be increased for children ages birth through five.
State and local governments collect approximately one-third of the country’s taxes and comprise almost one-half of all domestic public sector spending, including over 90 percent of elementary and secondary education funding and nearly all public college and university funding. These governments are powerfully positioned to expand opportunity and increase equality based on race. States must acknowledge that the effect of “anti-tax” shifts from progressive taxes on income and wealth transfers to regressive taxes on consumption is to shift rather than reduce taxes. These shifts have undoubtedly contributed to increased and racialized wealth inequality. A return to progressive income taxes, increased rates on capital gains, and consequential wealth taxes are critical steps for anti-racist tax systems. State and local governments should limit property taxes and provide refundable credits on other taxes based on household income and wealth.
The foregoing suggestions are but a handful of the steps that are necessary to begin to combat more than 400 years of economic disadvantage for Black households. The racialized inequities perpetuated by the current tax system and the continuing discriminatory effects of federal, state, and local governmental tax policy must be acknowledged and then affirmatively eliminated. We must name systemic racial inequity for what it is as an essential step in moving toward true racial equity. This goal can only be accomplished if together we make the conscious choice to take anti-racist actions in our daily lives. We must rebuild our institutions, systems, and businesses using an anti-racist framework. #BlackTaxpayersMatter is a simple but profound anti-racist statement. We encourage everyone to take anti-racist actions to make this simple hashtag true by acknowledging and recognizing white advantage and Black disadvantage—and by working to interrupt explicit and implicit racism in our tax system.
An expanded version of this article originally appeared in Tax Notes Federal, Aug. 3, 2020.