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Transformational Tax Reform Is One Remedy to Help Alleviate Racial Economic Injustice

By Robert Stewart

2021 was a year of continued racial reckoning in America after the 2020 murder of George Floyd from state sanctioned violence. Floyd’s killing amid a global pandemic was the “straw that broke the camel’s back” and sparked the largest protests in U.S. history and forced Americans to undergo great introspection on persistent racial inequities. We are now all asking ourselves how our nation can live up to its highest ideals that all men and women are created equal when such grave injustices are present in our society. As we approach the New Year, meaningful solutions are needed in 2022 and beyond that will both combat systemic racism that led to Floyd’s murder, but also to address racial inequality that is manifested through economic disparities. Progressive tax policy is an essential, transformative remedy to that ill, and Public Citizen is gearing up the fight to tackle these issues in the months ahead.

There are many compelling statistics that illustrate the Black and white racial wealth gap in our country. For example, according to Brooking Institute scholars, the “net worth of a typical white family [$171,000] is nearly 10 times greater than that of a Black family ($17,150) in 2016.” Unfortunately, the global pandemic has  exacerbated these inequities. Contrary to the widely held, but very mistaken assumption, merit is not the reason that white families enjoy more economic prosperity than Black families. Our economic system is rigged that way and our government chooses winners and losers. Centuries of targeted discriminatory practices and policies implemented by federal and state government against Black Americans wrought longstanding economic injustices that prohibited them from accumulating wealth at the rates of their peers. Real estate is a major engine of wealth in this country and federal policy created an unlevel playing field. For example, redlining, a practice of housing discriminatory segregation that extracted wealth out of Black communities, was encouraged by the Federal House Authority and had a ripple effect on housing values in which the white homes accumulated in value while Black-owned homes were devalued.

Tax policy is an extension of economic policy, and it has also contributed to the racial wealth gap. For instance, inequality in the tax code is manifested through tax policy around inherited wealth which allows the remnants of historic discrimination to persist today by creating an inheritance gap. White families are three times as likely to receive an inheritance than Black families, and the average figure received is twice as large an amount. The estate tax has been weakened over time so that fewer estates are subject to taxation which means wealthy families continue to hoard their wealth. Concurrently, certain forms of inheritance receive preferential tax treatment through a loophole called the “stepped up basis” which gives wealthy families, who are disproportionately white,  continued economic advantage. Through stepped-up basis, families of wealthy individuals are allowed a pathway to avoid paying taxes on assets that had investment gains during the decedent’s life and which are then passed on to beneficiaries who will never be taxed on the assets’ increase in value.

When it comes to wealth building, in addition to the stepped-up basis loophole, there are other racial disparities regarding investments in the stock market. White people are nearly twice as likely to have investments in the stock market than Black people. Furthermore, when those stocks and investments increase in value and are sold (known as a capital gain), that income is taxed at half the rate as income from work, giving wealthy white investors another advantage. Income should be taxed the same way, whether you work for your money, or your money works for you. That’s why Public Citizen supports equalizing the capital gains rate with income tax rates and other reforms like closing the “carried interest” loophole, which allows investment fund managers to characterize their wages as capital gains and not income for tax purposes. Additionally, a financial transactions tax—a tiny sales tax on the purchase of stocks, bonds, and derivatives– would do wonders to ensure that white investors are paying their fair share while the proceeds from the tax could be reinvested in disenfranchised communities.

Dr. Dorothy Brown at Emory University School of Law has done trailblazing research on race and taxes and makes very persuasive arguments in favor of government consideration of racial implications when implementing tax policy. She, along with Dr. Darrick Hamilton, director of the Institute for Race, Stratification, and Political Economy at the New School, sat down in a virtual event hosted by our allies in the Take on Wall Street Campaign at Americans for Financial Reform to discuss racial inequities in the tax code. You can watch a recording of the event here. The event covered a range of topics including the history of how the joint tax return came to be and how it gives wealthier families advantage in the tax code, the need for Treasury and the IRS to include racial data in their tax research, reparations as a solution to wealth inequality, and other important themes. Professor Brown also expressed her support of the Billionaires Income Tax, which would ensure that billionaires are paying taxes every year on their assets as they increase in value. Since corporate law firms are paid big money to help their wealthy clients avoid paying taxes, Dr. Brown commended Senator Wyden for championing the Billionaires Income Tax and said she thought the legislation would be very effective in preventing circumvention.

Luckily, the country’s leadership is focusing attention on the tax code’s exacerbation of racial economic inequality. President Biden’s administration has signaled a renewed commitment to providing solutions to longstanding racial economic inequality. The appointment of an inaugural racial equality counselor in Janis Bowdler at the Department of Treasury was an excellent step toward ensuring the government has a keen eye out for potentially harmful policies while advocating to end policies that contribute to the racial wealth gap. And, seating Lily Batchelder as the Assistant Secretary of Tax Policy is also good sign since during her tenure as a tax law professor at New York University her research highlighted racial inequality in the tax code. On another promising note, the Treasury Department announced that it would implement an equity analysis to evaluate and curtail inequality in tax policy moving forward.

We at Public Citizen agree that tax policies that advantage white families must end immediately, and we strongly encourage the Biden Administration and Congress to work together to build on the Build Back Better package of tax changes and pass tax policies that ensure we have a fair economy that works for all Americans. Please take a minute to get involved in the fight!