Cecily Zamora
The tax code in the United States has been criticised for perpetuating racial disparities, with Black Americans paying higher taxes than their white peers. The federal tax code is based on factors such as total income, sources of income, savings, and spending on certain items. However, historical racism and contemporary racial discrimination and bias affect a household’s income, types of income, savings, and consumption, thereby influencing the federal tax code’s impact on households of different races. For instance, in 2017, the Child Tax Credit was eliminated for about 1 million children in low-income working families because they lacked a Social Security number. These children are predominantly “Dreamers” with undocumented status. Furthermore, Black taxpayers are three to five times more likely to be audited than other taxpayers, with the IRS disproportionately auditing lower-income earners.
| Characteristics | Values |
|---|---|
| Racial disparities in income and wealth | Households of color are overrepresented at the bottom of the income scale, while non-Hispanic white households are overrepresented at the top |
| Impact of tax policies on racial disparities | Changes in tax policy can widen or narrow racial disparities, and racism has influenced the historical development of tax policies |
| Historical racism and contemporary racial discrimination | Racial discrimination and bias affect a household's income, types of income, savings, and consumption, influencing the federal tax code's impact on different races |
| Tax cuts and racial attitudes | Tax cuts can tap into racist attitudes and serve as a substitute for explicit racial denigration, as they may result in budget cuts that disproportionately harm Black communities |
| Child Tax Credit (CTC) | The 2017 tax law negatively impacted low-income working families, including many households of color, by providing token increases or no improvement in CTC, while eliminating CTC for about 1 million children due to lack of Social Security numbers |
| Marriage considerations in taxation | The current tax system disadvantages Black families, as it increases taxes when both spouses work in the paid labor market, and this can be addressed by taxing individuals separately |
| Discriminatory audits | Black taxpayers are three to five times more likely to be audited, and this may be due to the IRS disproportionately auditing lower-income earners who claim certain tax benefits |
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What You'll Learn
Racial disparities in income and wealth
The tax code, specific tax provisions, and the way the code is enforced can have vastly different impacts on different races and ethnicities. Racial barriers to economic opportunity have played a significant role in shaping today's income and wealth distribution, with households of colour being overrepresented at the lower end of the scale and non-Hispanic white households at the top.
The Black-white income gap has persisted and grown since 1970, with the median income for a Black family of three in 2018 being $33,000 compared to $84,600 for a white family of the same size. Black degree holders also earn lower incomes than their white counterparts, and Black graduates face the additional challenge of paying off greater student debt. The pandemic-related economic crisis in 2020 disproportionately impacted people of colour, with Black and Latino workers being much more likely to be jobless than white workers.
Structural barriers, including lower incomes, higher rates of mortgage denials, and racial segregation, have prevented many Black families from becoming homeowners and building wealth. In 2021, the typical White household had 9.2 times as much wealth as the typical Black household, and white households also had significantly more wealth than Hispanic households. The relative youth of the Hispanic population and immigration status also play a role in the wealth gap.
Addressing racial disparities in income and wealth requires tackling systemic racism and discriminatory policies and providing equal opportunities for all races to build wealth. Progressive tax policies and public investments that advance racial equity are crucial in narrowing the wealth gap.
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Racist historical development of tax codes
The historical development of tax codes in the United States has been influenced by racism, which has resulted in racial disparities that continue to affect tax policies today. The tax code, specific tax provisions, and their enforcement can have disparate impacts on different racial and ethnic groups.
One example of how racism has shaped tax policies is through historical racism and contemporary patterns of racial discrimination and bias, which have affected households of colour disproportionately. Racial barriers to economic opportunities, such as slavery, the confiscation of Native American tribal lands, and the forced internment of Japanese Americans during World War II, have contributed to the overrepresentation of households of colour at the bottom of the income and wealth distribution scale.
Additionally, racist attitudes have influenced tax policies. For instance, in 1981, Republican strategist Lee Atwater suggested that cutting taxes could tap into racist attitudes and serve as a substitute for explicit racial denigration of Black people. The perceived "byproduct" of tax cuts resulting in budget cuts would disproportionately harm Black communities.
The 2017 tax law further exacerbated racial disparities by largely neglecting low- and moderate-income households, which are disproportionately households of colour. The law failed to improve the Child Tax Credit for the lowest-income working families, while providing significant increases to households with incomes up to $400,000. Additionally, the elimination of the CTC for about 1 million children in low-income working families due to their lack of Social Security numbers disproportionately affected "Dreamers" with undocumented status.
Furthermore, the U.S. tax code has been criticised for disadvantaging Black Americans. Differences in how married couples are taxed can place Black families at a disadvantage. When only one spouse works, the couple receives a tax cut, but if both spouses work in the paid labour market, their tax rate tends to increase. This dynamic contributes to a generational wealth gap between White and Black Americans.
The impact of racism on the historical development of tax codes has resulted in racial disparities that persist today. Addressing these disparities requires a critical examination of the tax policies and a commitment to advancing racial equity through progressive tax reforms.
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Disproportionately low tax credits for low-income households of colour
The federal income tax system is progressive, with higher incomes typically attracting higher taxes. This system is designed to reduce income inequality and fund social safety nets and healthcare programs. However, the impact of tax laws varies across racial lines due to historical racism and contemporary racial discrimination and bias.
Racial barriers and racist policies have influenced income and wealth distribution, with households of colour being overrepresented in the lower half of the scale. As a result, tax laws that seemingly treat all taxpayers equally can have vastly different impacts on different racial groups.
The Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) are examples of tax credits that disproportionately benefit white households. While these credits lift millions of people out of poverty, they could deliver more benefits to families with the lowest incomes, who are disproportionately households of colour. In 2018, only about half of Black and Latine children were eligible for the full CTC, compared with three-quarters of white children. The 2017 tax law further exacerbated this disparity by eliminating the CTC for about 1 million children in low-income working families, mainly "Dreamers" with undocumented status.
Differences in how married couples are taxed can also disadvantage Black families. When only one spouse works, the couple receives a tax cut. However, if both spouses work, their tax rate increases. This dynamic disadvantages Black families, as they are more likely to have dual-income households due to financial necessity.
To promote racial equity, policymakers should consider how tax policies and reforms may exacerbate racial disparities in wealth and income. Targeted income tax breaks for first-time homebuyers and taxpayers with low incomes could help families of colour build wealth through homeownership. Additionally, changes to the phase-in of benefits for the CTC and EITC and removing the CTC's minimum earning requirement could provide more support to low-income families.
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Higher taxes for Black married couples
The US tax code has been criticised for disproportionately impacting Black Americans, who are overrepresented in the lower half of the income and wealth distribution scale. One manifestation of this disparity is the higher taxes paid by Black married couples compared to their White counterparts.
This discrepancy arises from several factors. Firstly, Black married couples are more likely to have both spouses working and contributing similar incomes to the household. When both spouses earn comparable incomes, their combined income can push them into a higher tax bracket, resulting in a "marriage penalty". In contrast, if one spouse earns significantly more than the other, they may benefit from a "marriage bonus" as joint filing could shift the higher earner's income into a lower tax bracket. Census Bureau data reveals that single-wage earning families, who are more likely to be White, enjoy a tax cut when getting married. On the other hand, Black couples with both spouses working full-time often experience an increase in their tax rate.
The presence of children further exacerbates the marriage penalty for Black couples. The Earned Income Tax Credit (EITC) begins to phase out for married couples at lower income thresholds compared to unmarried parents. As a result, the combined income of a married couple may cost them some or all of the EITC they would have received if they were unmarried. Additionally, the head-of-household filing status, which offers a higher standard deduction, benefits unmarried caregivers, thereby increasing the marriage penalty for couples.
The racial disparities in marriage penalties are challenging to address because the tax code does not explicitly refer to race. However, by understanding these inequities, policymakers can work towards creating a more equitable tax system. One proposed solution is to eliminate marriage considerations and tax individuals separately, as is done in Canada. While this approach may simplify taxes and reduce marriage penalties, it could also make the tax code less progressive and create new opportunities for tax avoidance.
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Black taxpayers more likely to be audited
The United States' historical and contemporary racial discrimination has impacted households of colour disproportionately, affecting their income, types of income, savings, and consumption. This has resulted in racial disparities in wealth distribution, with households of colour being overrepresented at the bottom of the scale.
One instance of racial discrimination in the US tax system is the higher rate of audits for Black taxpayers. Researchers from Stanford University, the University of Michigan, the University of Chicago, and the Treasury Department reported that Black Americans are three to five times more likely to have their federal tax returns audited than non-Black taxpayers. This disparity persists even when comparing Black taxpayers to other taxpayer groups who also claim the Earned Income Tax Credit (EITC).
The EITC is a tax break designed to supplement the income of low-wage workers. A single Black man with dependents who claims the EITC is nearly 20 times more likely to be audited than a non-Black married couple claiming the same credit. This disparity is attributed to the algorithms used by the IRS to select audits, which focus on the likelihood of underreporting rather than the magnitude of underreporting. As a result, Black taxpayers, who are more likely to have lower incomes, are disproportionately flagged for audits.
The higher audit rates for Black taxpayers are not due to higher rates of tax evasion among this group. Instead, it reflects systemic discrimination in the IRS's audit selection process, which utilizes race-neutral algorithms that inadvertently perpetuate racial biases. This issue is not limited to the IRS, as similar patterns of racial discrimination have been observed in other government and private organizations' algorithms.
The racial disparities in audit rates have significant implications for the debate on the IRS's funding and highlight the need for progressive tax policies that advance racial equity. Addressing these disparities can help reduce the concentration of wealth among white households and improve economic opportunities for households of colour.
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Frequently asked questions
The tax code, specific tax provisions, and the way the code is administered and enforced can affect different races and ethnicities in varying ways. For instance, Black families are disadvantaged due to differences in how married couples are taxed versus singles. When only one spouse works, the couple gets a tax cut, but if both spouses work in the paid labor market, their tax rate increases.
Historical racism, contemporary racial discrimination, and bias deeply affect a household's income, types of income, savings, and consumption, influencing the federal tax code's impact on households of different races. For example, the 2017 tax law largely overlooked low- and moderate-income households, which are disproportionately households of color.
Racism has influenced the historical development of the tax code, continuing to impact tax policy today. For instance, racist actions by policymakers and government officials have disenfranchised people of color and deprived them of economic opportunities, such as through laws upholding slavery and the confiscation of Native American tribal lands.
Researchers have found that Black taxpayers are three to five times more likely to be audited than other racial groups. This disparity is attributed to the IRS disproportionately auditing lower-income earners who claim the earned income tax credit. This discovery highlights how race is woven into the tax system, impacting its enforcement and contributing to racial disparities.
