Tax Code Isn’t Neutral On Race, Researchers Find

In Economy, Taxes On

Follow the lines of the IRS Form 1040, and a picture emerges of an America divided economically by race and ethnicity.

Although high-income Americans pay a larger share of their income in taxes, they nonetheless have a significant financial advantage over African Americans, Hispanics and low-income families, according to a newly released analysis by the nonpartisan Tax Policy Center.

Researchers for the center took a line-by-line look at the 1040 form for individuals in an effort to answer this question: Is the tax code neutral on race?

It’s not.

There’s definitely a bias that exacerbates income and wealth inequalities, says Kim Rueben, Sol Price fellow at the Tax Policy Center.

“Even though the IRS doesn’t ask about race, this doesn’t mean that the 1040 or the federal income tax system doesn’t have different effects for people of different races,” Rueben said in an interview. (You can access the guide here: https://urbn.is/2vyMXit).

In their interactive guide through the 1040 form, Rueben and research analyst Aravind Boddupalli explain various ways in which the tax code contributes to racial inequities.

For example, in 2018, the treatment of capital gains overwhelming benefited wealthier white families. Tax breaks for retirement savers and homeowners contribute to the wealth divide and also disproportionately go to high-income white taxpayers.

Workplace retirement plans — such as a 401(k) — have helped a lot of people accumulate wealth. But African American and Hispanic workers are less likely to have access to this tax-favorable benefit.

Employer plans boost participation in retirement savings. It’s easier to save when the money is coming out of your paycheck before you see it. If an employer matches employee contributions, plan participation increases by 15 to 15.5 percentage points, according to research by the Pew Charitable Trusts.

“Americans do most of their saving for retirement at their jobs,” the Pew Research Center said in a 2017 report on retirement access and participation.

The problem is many private-sector workers of color don’t have access to employer-sponsored plans. In 2016, 60 percent of white families had retirement accounts, compared with 34 percent of black families and 30 percent of Hispanic families, according to the Federal Reserve Survey of Consumer Finances.

It’s been a long-standing policy of the federal government to encourage homeownership. And the mortgage-interest tax deduction is one way to boost this mission. A married couple filing jointly can deduct mortgage interest on up to $750,000 for a qualified residential loan.

Taxpayers can also exclude capital gains from the sale of a home. Up to $250,000 (or $500,000 for married couples) of capital gains from the sale of principal residences can be tax-free if taxpayers meet certain conditions.

In their interactive guide through the 1040 form, Rueben and research analyst Aravind Boddupalli explain various ways in which the tax code contributes to racial inequities.

For example, in 2018, the treatment of capital gains overwhelming benefited wealthier white families. Tax breaks for retirement savers and homeowners contribute to the wealth divide and also disproportionately go to high-income white taxpayers.

 

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