Racial Bias in US Tax Code: White People Gain Most From Investor Tax Breaks

The Biden administration’s first-ever analysis of tax return data by race and ethnicity shows a discrepancy in those who gain from lower rates on capital gains and dividends

Signage is displayed outside the Internal Revenue Service (IRS) headquarters in Washington, D.C.
By Ben Steverman
January 20, 2023 | 04:51 PM

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Bloomberg — The US Treasury Department’s first-ever analysis of tax return data by race and ethnicity shows White Americans disproportionately benefiting from a variety of tax breaks, including those aimed at investors.

Non-Hispanic White Americans, who make up two-thirds of US families, receive 92% of the benefit from the lower tax rate on dividends and capital gains, and about the same share for deductions of charitable gifts and pass-through business income, according to the Treasury study, which looks at the impact of several major tax breaks. Some other provisions, like the earned income tax credit and child tax credit, are more evenly distributed.

Internal Revenue Service forms don’t ask taxpayers about their race, gender or ethnicity, making it one of the only federal agencies that doesn’t release detailed demographic data. Scholars and activists have been pushing the government for years to find ways to understand how the tax code may be contributing to the nation’s vast and persistent racial wealth gap.

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Even if “it took a really long time to get here,” the study is “a good first start,” said Georgetown University law professor Dorothy Brown, whose 2021 book, “The Whiteness of Wealth,” urged Treasury to provide more data.

The working paper’s results are preliminary, but initial findings largely confirm academic work by Brown and others, using different data, that White Americans end up benefiting most from special deductions and carve-outs in the code. The conclusions could add to the battles over taxes in the coming years, which are expected to be fierce ahead of the expiration of many provisions in the 2017 overhaul signed by President Donald Trump.

Joe Biden had proposed boosting rates paid by affluent investors and the wealthy — ideas that were left out of the economic package passed by Democrats and signed by the president last year. One House GOP proposal would replace the income tax entirely with a national sales tax.

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The top rate on long-term capital gains and dividends is 20%, compared with 37% for wage and other ordinary income, a break that the Treasury estimates will cost $146 billion this year. Proponents say a lower rate rewards investor risk-taking and stimulates the economy, while critics say it’s unfair to workers.

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The lower rate benefits those able to invest their savings, which skews toward White Americans: For every $1 of wealth that the average White family holds, Black families own 25 cents and Hispanic families hold 23 cents, according to an analysis by the Federal Reserve Bank of St. Louis.

The average White family will net $1,086 this year from the preferential rate, the study finds, versus $131 for Hispanic families and $124 for Black families on average. Black Americans, who account for 11% of US families, get just 2% of the benefit from lower rates on investment income, with even the highest-earning Black people receiving less than similarly well-off Whites.

“It shows that even Black Americans who are in the best position to build wealth are left behind in the tax system,” Brown said.

The earned income tax credit, aimed at helping low- and middle-income families, does give Black and Hispanic Americans a boost, the study finds. Hispanic families, 15% of the population, get 28% of that credit, compared with 19% for Black Americans and 49% for Whites. Hispanic families also receive a disproportionate share, 22%, of the benefits of the child tax credit.

The study makes educated guesses of taxpayers’ race and ethnicity from their names and zip codes listed on tax forms, then assigns probabilities, which it uses to draw conclusions. The method has limitations: It doesn’t yet allow for analysis of smaller racial groups, including Asian and Native Americans, nor enough detail to look closely at the very richest taxpayers.

Treasury “will continue to refine” its methods, according to a blog post on Friday by Lily Batchelder, Treasury’s assistant secretary for tax policy, and Greg Leiserson, deputy assistant secretary for tax analysis. “More work remains to be done to understand the reasons for these disparities and their implications.”

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Scholars are pushing the department to go further, arguing they should verify racial identity by matching with other federal databases in ways that still protect privacy.

“To get reliable results, we’ll want to use more than one method,” said George Washington University law professor Jeremy Bearer-Friend. “Lawmakers should know who is affected by their own proposals, and tax enforcers should know about whether there are disparities in enforcement.”

Advocacy groups would welcome that kind of transparency. The more data on race, ethnicity and other demographic data improves, the greater the role it could play in future policy debates.

“How Americans build wealth in America is deeply related to the tax system,” said Eric Rodriguez, senior vice president for policy and advocacy for UnidosUS, the largest Hispanic rights group. “We need fairer policies going forward.”

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