How the Tax Code Makes the Racial Wealth Gap Worse

Earlier this week, the Department of the Treasury released its report, Disparities in the Benefits of Tax Expenditures by Race and Ethnicity, which outlines the differences in how tax deductions impact White, Black, and Hispanic families. The results show a troubling trend: there are clear disparities in how tax benefits and expenditures impact different racial and ethnic groups, and a significant amount of tax breaks and benefits disproportionately go to White Americans.

The report concluded that no less than 90% of tax breaks for capital gains, charitable deductions, and small businesses go to White Americans, with the remaining 10% being shared among other ethnic and racial groups. Additionally, the benefits of both tax exclusions for employer-sponsored health insurance and mortgage interest deductions go predominantly to White families. These benefits make up a significant portion of tax breaks offered by the government, and their impact on the racial wealth gap cannot be understated.

Department officials commented that due to an increased reliance on the tax system for the distribution of government benefits, ensuring equality under the tax code is vitally important to overall economic equality. We couldn’t agree more.

The Whiteness of Wealth
Last spring, we had the honor of hosting Dr. Dorothy Brown at our Oligarchs vs. All of Us conference, where she spoke on the topic of the whiteness of wealth and the state of wealth inequality in America. Her work focuses on how the racial wealth gap is intricately tied to, and caused in large part by, the systemic inequality within our nation’s laws and tax code.

Click here to watch Dr. Brown’s speech at last year’s Oligarchs vs. All of Us conference.

Dr. Brown is absolutely correct. The racial wealth gap is an enormous problem not only because government policies have allowed it to exist but also because lawmakers have actively contributed to its growth.

For decades, American racial minorities were explicitly shut out of social programs like the Federal Housing Act, the Social Security Act, and the G.I. Bill, which were geared toward establishing a stable middle class. These incredibly effective programs helped millions of White families build generational wealth. And while the explicit exclusion of Black and Brown Americans from these types of wealth-building opportunities may no longer be happening, the economic scars reverberate in new generations.

Preferential Treatment for Established Wealth
Our tax code privileges established wealth over labor by taxing income earned through work at double the rate that it does capital gains, i.e., investment income, which requires pre-existing wealth. This problem puts everyone working for a living at an automatic disadvantage when trying to build wealth compared to people who already have a significant amount of wealth.

This tax bias in favor of wealth naturally leads to higher levels of inequality. When the rich pay less in tax than the working class, the rich get richer, and workers can never catch up. This is a serious problem for workers of all racial backgrounds, but when White Americans start with significantly more wealth than Black and Brown Americans, the preferential treatment of existing wealth ends up growing the racial wealth gap.

When White Americans disproportionately possess wealth, they are able to take advantage of the preferential treatment our tax code gives to those who already HAVE wealth. Even though Black Americans made great strides in the mid-twentieth century in achieving civil rights, there has been little tangible progress in closing the racial wealth gap since. According to one study, the racial wealth gap has not changed much since the 50s; in 1950, the ratio of White-to-Black wealth was a massive 7 to 1. Today, it is only 6 to 1 – not much to boast about. Thanks largely to economic policies that are, at first glance, unrelated to race, Black Americans are put at a systemic disadvantage.

Subminimum Tipped Wage
To bring things back to our Closer Look earlier this week on the other NRA and the tipped minimum wage, we can see significant contributors to the racial wealth gap not only in tax policy but in wage policy as well. The subminimum tipped wage presents a significant systemic hurdle for people of color in America, as Black and Brown workers make up a disproportionate 48% of the country’s tipped workforce. The minimum wage for these tipped workers (a practice that is in many ways a vestige of slavery) is just $2.13 an hour – more than $5/hour lower than the federal minimum wage for other occupations. It has stood frozen at $2.13 for over thirty years (since 1991).

As a result, workers who rely on tips essentially must rely on customers’ altruism to make ends meet, which is undoubtedly an inherently unstable prospect. This adversely impacts millions of workers, making them more likely to live in poverty.

The takeaway from all this is that the racial wealth gap didn’t just “happen;” it is the direct result of deliberate policy choices and is still being perpetuated by policy choices today. The solution, therefore, must be equally as deliberate. Congress must work to reform the tax code to make wealthy, predominantly White investors pay more taxes, and it must eliminate the tipped minimum wage.

Background Reading and Resources
Dorothy Brown at the Oligarchs vs All Of Us Conference
Narrowing the U.S. wealth gap is important. Narrowing the racial wealth gap is urgent | The Washington Post
A Tax Code Optimized for White Wealth Leaves Black Americans Behind | Bloomberg
Congress is passing up a chance to close a tax loophole – and the racial wealth gap | The Washington Post
The Whiteness of Wealth by Dorothy A. Brown | Penguin Random
Dorothy Brown
Treasury study shows stark racial differences in tax breaks, credits – POLITICO

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