U.S. Tax Systems Need Anti-Racist Restructuring

A riot is the language of the unheard. And what is it America has failed to hear? . . . It has failed to hear that the promises of freedom and justice have not been met. And it has failed to hear that large segments of white society are more concerned about tranquility and the status quo than about justice and humanity.

— Rev. Dr. Martin Luther King Jr.

#BlackTaxpayersMatter

The world has witnessed the brutal suffocation of George Floyd on a concrete sidewalk in Minneapolis. While this is but one more example of centuries of relentless violence against Black people, many are hoping that this tragic death might be a catalyst for meaningful change. Around the world, rallies, marches, and vigils have filled public spaces to call out institutional racism and demand systemic change. The rage, despair, exhaustion, and frustration with targeted discrimination has not only permeated cities and streets, but racism is being condemned at kitchen tables, by businesses, in social media, and from groups as sweeping as Sesame Street, KPop fans, and NASCAR. People across the globe are raising their voices and insisting that something be done to stop the routine ruin of Black lives.

Many are looking to Black leaders in every discipline, including finance, economics, and tax, and asking what they can do to help. And Black leaders — once again, after centuries of explaining, exposing, discussing, writing, speaking, preaching, demanding, and demonstrating that American institutions are implicitly and explicitly discriminatory and must fundamentally change — are providing thoughtful, cogent answers. They rise to the challenge again and again, hoping that this horrific racist episode will be different from countless previous episodes. They call for a transcendent time of tangible change. However, they are rightfully saying that this is not their burden to bear, and that those with the privileged status of race, income, wealth, and platforms must step up, move forward, and finally do something. We have heard from many of our Black and brown colleagues that they are “sick and tired of being sick and tired.”

As writers, we understand the power of words. But it is also true that actions speak louder than words. As Maya Angelou said so poetically, “When someone shows you who they are, believe them the first time.” (Emphasis added.) What can we as tax professionals, scholars, and advocates do to show our commitment to racial justice?

First, we must recognize that tax injustice is economic injustice, which leads directly to income and wealth inequality; pervasive poverty; and the compromised health, welfare, and safety of communities of color. The immorally high and persistent 32 percent rate of poverty for Black children and the 380 percent higher death rate of Black individuals from COVID-19 as compared with their white counterparts are real-world problems that can be remedied. However, real remedies will require all hands on deck, because these issues are long-standing systemic harms created and perpetuated by federal, state, and local institutions over the last 400 years.¹

This article will help you think more critically about these issues. It discusses the racist history of U.S. tax systems, prescribes anti-racist² action items, and provides a wealth of referenced readable resources.

Racist Tax Systems: How We Got Here

Awareness of “systemic racism,” especially regarding Black individuals, has heightened since the beginning of 2020. The disproportionate vulnerability of people of color to the COVID-19 pandemic as a result of the racial wealth gap — among other, related race-based factors including discrimination in employment,³ housing,⁴ and education⁵ — has been substantiated with dramatic numbers in state after state.⁶ The Black Lives Matter protests of the police killing of George Floyd have shifted the national conversation from “bad apple” cops to racism⁷ as “a system of advantage and disadvantage based on race.”⁸

In this systemic racism frame and with an understanding of the preexisting condition of racial wealth disparities,⁹ the “antitax” shift of the U.S. tax system from more to less progressive over the past 40 years comes into focus as a manifestation of pervasive and continuous racism.¹⁰ Slavery, Jim Crow laws, lynching, residential segregation, redlining, subprime lending, and the U.S. tax system — these all constitute and perpetuate white advantage and Black disadvantage.¹¹

Since the early 1980s, our tax system overall has become less progressive.¹² “Antitax” fervor took root with Proposition 13 in California in 1978 and the Reagan tax cuts in Washington in the early 1980s, and it has steadily flourished ever since.¹³ Congress has consistently lowered estate and inheritance taxes along with top marginal income tax rates. State and local governments have reduced reliance on property taxes, replacing them with increased sales and other consumption taxes.

The antitax movement and economic inequality go hand in hand. Leading economists ranging from Nobel Prize winner Joseph Stiglitz to the team of Facundo Alvaredo, Anthony Atkinson, Thomas Piketty, and Emmanuel Saez identify decreased progressivity in the tax system as an important cause of rising economic inequality.¹⁴ High-income earners who are taxed at lower rates are able to add more to their wealth every year compared with low-income earners.¹⁵ “Antitax,” it turns out, is less about taking the burden of taxation off of everyone and more about shifting that burden away from taxpayers who can, for example, choose to domicile in states that raise revenue through (regressive) sales taxes rather than (progressive) income taxes.¹⁶

Economic inequality and decreased progressivity in tax systems are racialized. Specifically, they generate racialized outcomes, which distort access to economic opportunities¹⁷ as a result of racial wealth disparities. In 2014 Black households held less than seven cents on the dollar compared with white households¹⁸ — a white-Black wealth ratio of about 14 to 1. Tax policies that shift the fiscal burden from those who are wealthier to those who are less wealthy have the effect of shifting the burden from white taxpayers to Black taxpayers.

These tax effects are racialized in origin as well as in effect. Sociologist Manuel Pastor has documented how the antitax movement in Southern California that led to Proposition 13 was a reaction to changing demographics — a rise in the Latinx population — as well as soaring real estate assessments.¹⁹ President Reagan’s racialized “welfare queen” rhetoric invited white voters to dismiss and discard the social safety net that a strongly progressive tax regime had supported.²⁰ More recently, physician Jonathan Mertz has traced the connection between severe tax cuts in Kansas, which decimated the public schools, and rhetoric that marginalizes people of color.²¹

Racial wealth disparities today arise in part from a disadvantage imposed historically on Black people. That 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.²²

But it is essential to also recognize that throughout the same period during which the government was inhibiting the creation of Black wealth, the government was actively supporting and subsidizing the creation of white wealth.²³ White advantage makes a substantial contribution to racial disparities. The structure of U.S. tax systems perpetuates, and even exacerbates, racial wealth disparities, representing yet another government institution creating and sustaining white advantage.²⁴ That it is not explicit and overt does not make it less so.

Broad-based wealth-building for white Americans — and investment by the federal government in that wealth-building — have been integral to an important 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 indigenous occupants, to settlers. These settlers were overwhelmingly white. During the New Deal of the 1930s, Social Security retirement benefits were designed to provide a safety net for America’s 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 to mixed or neighborhoods of color. Following World War II, the GI Bill provided a subsidized college education to returning veterans. Black vets, it turned out, were often restricted to segregated schools, of which there were too few to accommodate demand.²⁵

Although 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 policy and funds. Today’s white advantage in the form of household wealth that is magnitudes greater than Black household wealth did not occur by accident.

Today, wealth for most families takes the form of home equity.²⁶ 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 generates wealth in the knowledge economy.²⁷

Substantial federal tax expenditures — expenditures that have increased since 1980 — subsidize this wealth-building. Tax expenditures, which are carveouts to taxes that would otherwise be owed and thus losses of government revenue that benefit targeted individuals, support taxpayers engaging in government-endorsed activity. Tax expenditures support the creation of home equity (residential mortgage interest and real property tax deductions), pensions (section 401(k) plans), medical insurance (exclusions for employer-provided health insurance), K-12 education (deduction for state and local property taxes), and college education (sections 529 and 530 plans).²⁸

Racialized tax deductions undermine progressivity. The benefit of tax deductions increases as a taxpayer’s household income increases,²⁹ 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 school districts 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 taxpayers.³⁰ Tax systems today are the stealth equivalents of overt whites-only wealth-building measures that were subsidized in the past.

White wealth advantage is also inherent in the realization-based system. Higher-income taxpayers have greater capacity to invest in assets such as vacation homes and artwork, the increased value of which is not subject to tax until a realization event occurs.³¹ Unrealized capital gains make up a large portion of the wealth gap.³² In 2018, 69 percent (or more than $584 billion) of unrealized capital gains — gains from investments in real estate, businesses, stocks, and investment funds — was held by the top 1 percent of income earners.³³ Wealthy families can hold onto these assets indefinitely without income taxation, creating the false impression that tax systems are more progressive because the very real economic income from unrealized capital gains is not included in income and therefore not taxed. The result is that wealthy taxpayers’ actual income is greater, but their tax liability remains the same. The effective tax rate for these taxpayers is thus even lower than presented in government tax data. Commentators have noted:

America’s tax code no longer adheres to the core principle of ability to pay — the idea that taxes should be based on a person’s capacity to pay taxes. Instead, today’s tax code turns that principle on its head by letting the wealthiest of the wealthy pay virtually nothing on their gains.³⁴

State and Local Taxes Exacerbate Inequality

State and local tax systems have emerged in recent decades as significant drivers of wealth inequality. This inequality is attributable, 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 (least progressive, most regressive). Nearly every state and local government collects more taxes from low-income families than from high-income families relative to their incomes, and more taxes are generally collected from middle-income families than from high-income families.³⁵

Many major state taxes were implemented in the first half of the 20th century, a period when many Americans — particularly Black citizens in the South — were barred from voting and when urban areas were underrepresented in many states’ legislatures. As a result of that history, most state tax codes have remained regressive today, resulting in low- and middle-income families paying a larger share of their income in taxes than wealthy families.³⁶ One of the primary reasons for that inequality is states’ heavy reliance on sales and other consumption taxes, which usually disproportionately affect 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 rate.³⁷ Further, as states and localities have jumped on the antitax bandwagon, they have increasingly cut or avoided raising taxes (particularly income taxes) while at the same time trying to make up for lost revenue. Many states and localities have increased reliance on fees (for example, admission to government-funded museums and state parks, costs for driver’s licenses and identification cards, and toll fees for roads and bridges), resulting in even greater regressivity than is reported in most tax studies.³⁸

In the 10 states with the most regressive tax structures, the percentage of income paid in taxes is up to six times higher for the poorest 20 percent of families than for their wealthy counterparts.³⁹ Seven of these states do not levy a broad-based personal income tax, while the remaining three have a flat or practically flat income tax rate.⁴⁰ Two of the most regressive state income tax expenditures are (1) preferential rates for capital gains and (2) deductions for federal income tax paid, both of which disproportionately benefit higher-income taxpayers. The regressive-tax states also rely heavily on sales and excise taxes, with six of the states deriving roughly half to two-thirds of their tax revenue from sales and excise taxes, compared with a national average of approximately one-third.⁴¹ Because food is one of the largest expenses for low-income families, particularly families of color, taxing food is especially regressive: Six of the 12 states with higher effective consumption tax rates include food purchases in their tax bases.⁴²

Taxes on personal and business property (both real estate and personalty), a significant revenue source for states and localities, also skew regressive in their overall effect, although less than consumption taxes. Besides the regressive effects of property tax on low- and middle-income families, for whom home equity is a high proportion of household wealth compared with high-income families, the increased shift in wealth from home ownership to less-taxed financial investments and assets is racialized as well.

A more troubling reality is the racialized administration of property taxes. A recent analysis of more than a decade of tax assessment and sales data for homes across the country revealed that Black families pay 13 percent more in real property taxes each year than their white counterparts.⁴³ Property tax assessments in virtually every state increased in areas with greater numbers of Black and Latinx residents. A historian noted that local property tax assessments during the Jim Crow era were “routinely manipulated . . . to punish black populations and as a hidden tax break to landowning white gentry.”⁴⁴

Racism as a system of advantage and disadvantage based on race has proven to be a hardy American strain. 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.

As commentators have recently observed, tax systems are “both a symptom of and instrument of systemic racism.”⁴⁵ Yet the tax system’s contribution to systemic racism is not even on the radar for the government or most Americans. In contrast to other federal agencies implementing equity-grounded social policy, the government neither compiles nor evaluates the effects of tax laws on various racial and ethnic groups.⁴⁶ Rather, such race-based analysis has been “relegated outside of the ‘mainstream’ of tax policy analysis.”⁴⁷

Anti-Racist Tax System Action Items

A history of unequal opportunities and access to education, housing, employment, and other economic resources based on race has resulted in current racial wealth disparities. The shifts in federal and state tax policy over the last several decades have been an essential component in solidifying this racialized wealth inequality. Although 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,⁴⁸ 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 all help address historical neglect of communities of color.⁴⁹

A reevaluation of federal, state, and local tax expenditures is imperative. Most provide “upside-down tax breaks” that benefit higher-income and disproportionately white households with less need for the financial incentives to build economic resources such as home ownership, college education, and retirement savings. Another alternative is to strengthen the wealth-equalizing potential of existing tax laws by raising capital gains rates, taxing capital gains at death by eliminating the stepped-up basis rules, and imposing a transferee-oriented accessions tax.⁵⁰

Refundable tax credits can also mitigate regressive taxes such as payroll and consumption taxes (for example, fuel, FICA, and sales taxes). The refundable earned income tax credit and partially refundable child tax credit (CTC) lift more children and their families out of poverty than any other government program. Black households are disproportionately represented among lower-income households with children. In 2018 Black households constituted 14 percent of all households with children, but 22 percent of those with incomes less than $55,000 (the EITC top threshold).⁵¹ Comparing these refundable tax credits with other social benefits programs, they operate with relatively low administrative costs and high participation rates. A significant body of research demonstrates that the EITC encourages 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 in the household.⁵² In 2019 the EITC increased the household incomes of 9 million women of color, who disproportionately benefit from the tax credit because of long-term systemic racism in their education, employment, and related opportunities.⁵³

Moreover, these credits stimulate spending in financially challenged communities that generates crucial jobs and tax revenue. The EITC can be improved to help 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 is taxed into poverty.⁵⁴ Expanding the EITC across the board — especially for childless workers — could relieve this issue.

EITCs would reach even more households of color if the credit did not require a Social Security number (as opposed to an individual taxpayer identification number) for all individuals listed on a tax return. If Congress eliminated this racialized prerequisite in favor of requiring an SSN only for taxpayers whose work required federal authorization, 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 (birth to age 5) suffer the highest rates of poverty (23 percent in 2015) as compared with any other age group, with 45 percent of these children living in low-income households.⁵⁵ Over half of all children born in the United States today are children of color.⁵⁶ 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.⁵⁷ America should invest in these children by increasing the CTC for our youngest children.⁵⁸ And finally, the recently increased CTC should be fully refundable, so that the 27 million children who live in families whose earnings are too low to receive the full (or any amount of) CTC also benefit from this critical investment in their health, education, and safety.⁵⁹

State and local governments collect approximately one-third of the country’s taxes and institute almost half of all domestic public-sector spending, including more than 90 percent of elementary and secondary education funding and nearly all public college and university funding. These governments are thus powerfully positioned to expand opportunity and increase equality based on race.⁶⁰ States must acknowledge their antitax shifts from progressive taxes on wealth transfers and income to regressive taxes on consumption, which have contributed to increased wealth inequality. A return to progressive income taxes, increased taxes on capital gains, and consequential estate or inheritance taxes are critical steps for anti-racist tax systems.⁶¹

State and local governments should also limit property taxes and provide refundable credits on other taxes based on household income. States have increasingly enacted EITCs that often piggyback on the federal EITC to mitigate regressive taxes. State EITCs stimulate participation in the federal EITC by enhancing household tax benefits from tax return filing. Thirty states, plus Washington D.C., have enacted some kind of EITC. Some state EITCs fill in gaps where the federal EITC fails, including enhanced benefits for childless workers and taxpayers who are too young or too old to qualify for the federal EITC.⁶²

Conclusion

The foregoing suggestions are but a handful of the necessary steps to begin to combat over 400 years of economic disadvantage for Black households. The racialized inequities perpetuated by current tax systems and the continuing discriminatory effects of federal, state, and local governmental tax policy must be acknowledged and then affirmatively eliminated. We must name and describe systemic racial inequity to move toward true racial equity. This goal can be accomplished only if we collectively 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.⁶³ #BlackTaxpayersMatter is a simple but profound anti-racist statement, and we encourage tax scholars and professionals to take intentional actions to make this simple hashtag a reality by acknowledging and recognizing white advantage and Black disadvantage, and working to interrupt explicit and implicit racism in our tax systems.