When considering policies with some of the most consequential impacts on racial equity, people often overlook taxes. Many see tax policy as race-neutral. However, tax policy perpetuates America’s horrendous racial wealth divide.
The tax code advantages people with wealth. Due to racial obstacles to economic opportunity, wealth in the United States is highly concentrated in white families. The median white household has a net worth 10 times that of the median Black household. Thus, the lower tax rate on income from wealth compared to income from wages perpetuates the existing racial wealth divide.
How Wealth Becomes Concentrated
Inheritances offer a primary means to transfer wealth (and income from wealth) across generations, and we barely tax it. Yet, the racial equity implications are huge because most inheritances in these countries go to white people.
In fact, according to the Institute on Assets and Social Policy, “among college-educated black families, about 13 percent get an inheritance of more than $10,000, as opposed to about 41 percent of white, college-educated families.”
The lower tax rate on income from wealth compared to income from wages perpetuates the existing racial wealth divide.
In addition, white families that receive such an inheritance get more than $150,000 from the previous generation on average, compared to less than $40,000 for black families.
The low tax rate on capital gains allows families to transfer huge sums of wealth across generations with minimal tax. Capital gains taxes focus on profit made from items that are typically owned by wealthy people, like art, real estate, and stocks. Thus, a low capital gains tax allows wealth to increase, perpetuating the already enormous racial wealth divide by allowing something that mainly white people benefit from to be taxed at a low level.
It doesn’t end there—there is also a tax provision known as step-up basis. If a person holds onto their assets until they die, then they never have pay a capital gains tax on the increased value of the assets. Therefore, by retaining assets, their wealth increases even more. Again, since such assets are disproportionately held by white people, step-up basis further perpetuates the wealth divide.
Corporations and Taxation
Corporations are not paying their fair share. According to the Institute for Economic Policy (ITEP), 55 of the largest U.S. corporations, such as Amazon and Netflix, paid zero dollars in federal taxes in 2020 despite bringing in massive profits.
For decades, large companies in the United States have avoided paying their fair share in taxes.
This is not an anomaly. For decades, large companies in the United States have avoided paying their fair share in taxes. Further, people of color only represent 20% of the nation’s 5.6 million business owners with employees, meaning that these flaws in the tax code concentrate wealth into mostly white hands.
An increase in taxes on wealthy individuals and corporations, as well as taxing income from wealth that currently goes un-taxed, like large inheritances, could put a major dent in the racial wealth divide.
A Chance to Raise Revenues
As we emerge from the COVID-19 pandemic, a number of policies to combat racial disparities in our economy have been considered in recovery negotiations. These include expanding the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), paid family and medical leave, childcare, universal pre-K, and free community college, among others.
We desperately need to prioritize these provisions—and we can pay for them by fixing our tax code. We must raise the corporate tax rate, raise the capital gains tax rate, and tax inheritances fairly. These measures can reshape the tax code to help close racial disparities in our country.