National protests after George Floyd’s videotaped killing in police custody are spotlighting disparities between the experiences of black Americans and white Americans that go beyond their treatment by law enforcement.
Black taxpayers also face tax rules that, some observers say, keep the gap between black and white wealth wide. Median wealth for a black family is $17,000 and it’s $171,000 for a white family, according to one estimate.
It’s a matter of what gets taxed, at what rate, and — equally important — what doesn’t get taxed, they note.
‘The tax code amplifies those disproportionate gaps that already exist, based on the way our economy works and the way our society treats African Americans.’
— Wilton Hyman, a professor at New England Law Boston
“The tax code amplifies those disproportionate gaps that already exist, based on the way our economy works and the way our society treats African Americans,” said Wilton Hyman, a professor at New England Law Boston who’s studied the tax code’s uneven effects.
Including federal and state taxes, the tax code likely “worsens” the wealth gap, said Kim Rueben, senior fellow at the Tax Policy Center. Local taxes tend to be flatter, eating up more money from lower-earning households as a proportion of their income, she noted.
Disparities are less clear when focusing on the federal code, she said. Higher earners pay higher income rates — but they also have access to “special aspects of the tax code.” That includes the rules surrounding capital gains and inheritances, she noted.
‘For people starting with less assets, which on average Black and Hispanic households are, it is harder to access these benefit in the tax code.’
— Kim Rueben, Tax Policy Center senior fellow
“For people starting with less assets, which on average black and Hispanic households are, it is harder to access these benefits in the tax code,” Rueben said.
“There’s nothing in the way the federal income tax is written that’s explicit about race. But because of the demographics and characteristics of different taxpayers, it can have different effects,” she later added.
Some critics say it might also have to do with the demographics of the tax code’s authors, who have traditionally been wealthy white men. This might explain various blind spots, like a double standard where plaintiffs in sexual-harassment settlements, who are typically women, can have their settlement money taxed, but not people getting worker’s compensation money for workplace injuries, who tend to be men.
Capital gains taxes are a good deal for people who invest in the stock market
Ordinary income, like a wage, is taxed between 10% and 37% depending on the amount. Capital gains, such as stock sale proceeds, are taxed between 0% and 20% (with some exceptions).
The lower rates are good deal for those playing the markets, and white investors are more common than black investors.
Overall, 55% of Americans own stocks, according to a Gallup poll conducted in March and April.
64% of whites in one poll said they owned stock, compared to 42% of black poll participants.
But 64% of white participants said they owned stock, compared to 42% of black and 28% of Hispanic poll participants.
Income is taxed as you make it, but capital gains taxes kick in at the sale. That gives stock owners extra flexibility to sell when it’s to their advantage or buy and hold for the next generation, Rueben said.
Estate tax laws tend to favor white families
Americans are poised to inherit almost $765 billion in 2020, according to one New York University Law School professor’s estimate. But white families will benefit more, in terms of inheritance size and the tax laws surrounding them.
White households have twice the chance of getting an inheritance compared to black families, Lily Batchelder, the NYU professor, wrote. A white household’s inheritance leads to a $104,000 increase in median wealth compared to $4,000 rise for black counterparts, she added.
Estate tax exemptions were raised temporarily under the 2017 tax law changes.
The Tax Cuts and Jobs Act of 2017 temporarily raised the threshold when estate taxes kick in, going from $5.49 million in 2017 to $11.1 million in 2018. The higher levels, adjusted for inflation, end in 2025.
The higher thresholds are a blow to minority taxpayers who could benefit from that missed-out tax revenue, said David Newville, vice president of policy and research at Prosperity Now, a nonprofit promoting financial security in minority communities.
That money could underwrite government programs or fund expanded credits that do help low- and moderate-income taxpayers. “The estate tax is not technically a wealth tax,” but it could function as one, he said.
The super-wealthy are very aware of estate laws. More than 40% of billionaires over age 65 moved out of states with laws taxing inheritance, one study showed.
Federal estate taxes and related taxes are projected to raise $16 billion this year, Batchelder wrote. That’s an effective tax rate of 2%, according to her calculations.
People who claim the Earned Income Tax Credit are more likely to get audited
This credit helps low- and moderate-income households. This tax year, the maximum credit ranges from $529 for a taxpayer with no qualifying children to $6,557 for those with three or more.
The 45-year-old credit has been hailed by researchers as a powerful anti-poverty measure. In 2018, the earned income tax credit (EITC), combined with the child tax credit, kept 8.9 million people out of poverty, according to the U.S. Census Bureau.
Black and Latinx taxpayers combined are 40% of all those who are eligible for the credit, according to the Brookings Institution.
The IRS gives a closer look at returns claiming the EITC. In fiscal year 2018, the IRS audited 1.1 million returns. That’s less than one percent (0.6%) of the total number of returns, according to the Tax Policy Center. But 1.4% of returns with an earned income tax credit were set aside for review, the think tank noted, citing IRS data.
That’s slightly down from the EITC audit rate of 1.7% in fiscal year 2015 but it still outpaced the 0.8% audit rate overall that year.
‘We are not necessarily maximizing the amount of money we get with current federal audit priorities and that means you end up having more black and brown households getting audited than what you would expect.’
— Kim Rueben
“We are not necessarily maximizing the amount of money we get with current federal audit priorities and that means you end up having more black and brown households getting audited than what you would expect,” said Rueben.
While EITC audit rates are roughly steady, audit rates for high earners have been slipping.
Last month, a Treasury Department watchdog said the IRS, between 2014 and 2016 didn’t dig into approximately 370,000 cases from high-net worth non-filers. They owed almost $25 billion dollars in estimated taxes, according to the Treasury Inspector General for Tax Administration.
In a reply to the report, the IRS noted it’s lost roughly a one-third of its enforcement staff since fiscal year 2010. But since 2018, it’s put more resources on the non-filer issue and has been recouping more money.