The code has been designed with the intention of being broadly progressive — meaning the less you make, the less you are taxed. Or put another way, those with the ability to pay more should be taxed more.
At the same time, it also rewards certain economic and wealth building activities, such as home ownership, retirement savings and investing. But it is White Americans who disproportionately benefit from the tax breaks for those things, Emory University tax law professor Dorothy Brown told lawmakers on the Senate Finance Committee this week.
And even when Black Americans engage in those same activities, they often don’t benefit from the tax advantages, said Brown, who is also the author of The Whiteness of Wealth: How the Tax System Impoverishes Black Americans — and How We Can Fix It.
Here are just a few of the ways she suggests that happens.
Take just one of the tax advantages related to homeownership. When people sell their homes, any appreciation in their home value is tax-free up to $250,000 ($500,000 for married couples).
It’s a tax break that was created in the 1950s, when discriminatory lending practices made it very difficult for Black Americans to get a mortgage, while White Americans enjoyed low-cost, fixed rate and federally insured home loans, Brown noted.
And, as Brown pointed out, the tax code does not allow taxpayers to deduct capital losses on a home.
“Tax subsidies for homeownership, therefore, create White tax winners and Black tax losers,” Brown told lawmakers. “The federal government should stop subsidizing a racist homeownership market.”
Tax breaks for savings, investments and inheritance
When it comes to stock investing outside of a retirement plan, the capital gains tax-rate on investments held more than a year is usually lower than the tax rate applied to earned income. And investors can use their capital losses to offset their gains.
What’s more, wealthy investors can afford to time their stock sales to achieve maximum tax benefits, Brown noted. Or they can choose not to sell their shares at all, but instead leave them to their heirs, in which case all the gains that accrued during the investor’s lifetime pass tax-free to those heirs.
Brown recommended to lawmakers that changes to the tax code be made to address these inequalities.
“Our tax laws need a fundamental overhaul that places racial equity at the center,” she said.
But Mihir Desai, a professor of finance and law at Harvard who spoke at the same hearing, cautioned lawmakers that concluding the tax system disadvantages one racial group based on one set of provisions might be an incomplete assessment, in part because it underestimates other provisions in the code that disproportionately advantage that same group. For example, refundable credits for lower income households, of which minority groups are disproportionately represented.
“It’s critical to consider the totality of the tax system if one is to assess the racial impacts of the system,” Desai said. “It would be unwise to extrapolate from an analysis of savings preferences to the whole tax system.”
Brown contends that to fully assess the extent of racial inequalities in the tax system, the IRS should start reporting tax return data based on race, which it currently does not do.
And, she recommended, “every future Congressional proposal for tax reform should come with a racial impact statement.”