Most U.S. taxpayers interact with the IRS and state tax departments once a year — to file their income taxes.
The final amount owed may be seemingly unrelated to the tax filer’s race or ethnicity.
Yet research shows tax policy at all levels of government affects taxpayers, and their ability to build wealth across generations, differently by race and ethnicity.
In this primer you’ll learn about:
- How federal income taxes work.
- Tax policies that encourage the creation of wealth disproportionately for white Americans.
- State and local taxes that tend to place an outsized financial burden on Black and Hispanic households.
Federal income taxes are progressive. As a filer earns more, often in wages, salary, commissions, fees or tips, the percentage of their income that goes to taxes gets progressively higher.
A single filer making up to $9,875 a year in taxable income is taxed at a rate of 10%. Someone making between $9,876 and $40,125 is taxed at 12% on each taxable dollar over $9,875.
That means a worker making $35,000 per year pays $987.50 on the first $9,875 they earn, then $3,015 on the remaining $25,124, for a total tax bill of roughly $4,000 and an overall tax rate of 11%.
There are currently seven taxable income ranges, known as tax brackets. Each tax bracket comes with a marginal tax rate on income earned within the range.
At the highest end of the taxable income spectrum, someone earning $1 million automatically pays $156,235, plus a marginal tax rate of 37% on the amount earned over $518,400, for a total tax bill of roughly $334,000 and a tax rate of 33%.
Low- and moderate-income earners can lessen their tax burden through programs like the Earned Income Tax Credit, commonly called EITC.
It’s “one of the federal government’s largest antipoverty programs,” according to Congressional Research Service researcher Margot Crandall-Hollick, writing in a March 2018 report.
Because of the EITC and other credits, 4 in 10 tax units pay no personal income taxes to the U.S. government, according to David Splinter, an economist with the U.S. Congress’ Joint Committee on Taxation, writing in “Who Pays No Tax?” published July 2019 in Contemporary Economic Policy. A tax unit is the IRS term for a tax filing individual or group, such as a married couple and their dependents.
A larger number of taxpayers qualify for the federal child tax credit. Married couples making less than $400,000 a year or individuals making less than $200,000 are eligible for tax credits up to $2,000 per qualifying child under age 17, according to a January 2021 CRS report by Crandall-Hollick.
Federal gains and deductions
Some taxpayers have additional opportunities to pay significantly less than the federal tax scale might indicate. The federal government offers numerous deductions for certain financial assets, such as real estate. The IRS also taxes money earned through financial investments at a lower rate than income earned by working.
Billionaire investor Warren Buffet famously said in 2007 that he has a lower tax rate than his secretary and several other office employees. In 2013, taxes on the ultra-wealthy went up but Buffet told CNBC he was probably still the “lowest paying taxpayer in the office.”
He’s not alone. The Tax Cuts and Jobs Act of 2017 “helped push the tax rate on the 400 wealthiest households below the rates for almost everyone else,” New York Times columnist David Leonhardt wrote in October 2019.
Buffet takes home a relatively small salary but has substantial financial assets — about $100 billion worth of shares in his company, Berkshire Hathaway.
Investment earnings are a type of capital gains — profit from the sale of assets, such as real estate or stock holdings. Most people who sell their investments pay a 15% federal tax on their gains. The capital gains tax rate caps at 20% for individuals with more than $441,450 in total taxable income.
Another tax, the net investment income tax, adds about 4% for some investors, meaning the highest capital gains rate is 24%. The highest marginal income tax rate, by contrast, is 37%.
The system is well-established — top individual federal income tax rates in the U.S. have far exceeded top capital gains rates for most of the past seven decades, according to the nonpartisan Tax Policy Center.
President Joe Biden proposes raising the top federal capital gains tax rate to 43% — an increase of 19 percentage points. That would affect roughly 3% of taxpayers, the Tax Policy Center’s Robert McClelland told The Wall Street Journal.
Most states tax income from work and capital gains at the same rate, though several follow the federal government’s lead and tax capital gains at a lower rate, according to the nonpartisan Center on Budget and Policy Priorities.
Then there are deductions and exclusions. According to “Federal Wealth Policy and the Perpetuation of White Supremacy,” published March 2021 in The Review of Black Political Economy, these nine federal tax deductions and exclusions saved taxpayers about $626 billion in 2016:
- Home mortgage interest
- State and local taxes
- Charitable contributions
- Tax-exempt bonds
- Life insurance exclusion
- Pension exclusion
- Capital gains exclusion
- Home sales exclusion
- Estate step-up exclusion
Those deductions and exclusions disproportionately benefit households headed by white taxpayers, and have for decades, according to the paper.
They saved taxpayers a total of $256 billion in 1989, adjusted for inflation using 2016 dollars, finds author Bob Williams, an economist at Guilford College. His analysis is based on data from the Federal Reserve’s Survey of Consumer Finances, which has come out every three years since 1983.
Black and Hispanic households benefited substantially less than white taxpayers that year — and the gap has grown. White households netted $234 billion more through federal deductions in 1989 than Black and Hispanic households combined. The difference grew to $489 billion by 2016.
“We are pursuing racialized consequences by using a non-racial construct, which is wealth,” Williams says. “It’s perfectly OK to say, ‘We are going to help the wealthy.’ You can’t say, ‘We’re going to help white people because they’ll help everyone else.’”
The Federal Reserve survey asks respondents for their race and ethnicity. It also asks about earnings from capital gains and tax-exempt bonds, pension benefits, life insurance policies and home mortgage debt.
(Williams uses the 2016 survey because the 2019 survey results weren’t yet available when he began his research. He is analyzing the 2019 survey data and so far he has found the same general trend — white taxpayers reap outsized wealth benefits from federal tax policy.)
The IRS doesn’t collect taxpayer data on race or ethnicity. The agency also doesn’t provide that breakdown by matching their data with other federal demographic data, such as from the census. This has drawn criticism from some academic experts. For example, Emory University tax scholar Dorothy Brown writes in her 2021 book, “The Whiteness of Wealth,” that “there’s no justifiable reason for the government not to collect and make public tax statistics by race.”
Williams points out that tax deductions, rather than credits, tend to disproportionately benefit those with high incomes. A $1,000 deduction for someone in the highest marginal tax bracket, 37%, is worth $370. For someone in the 12% bracket, that same deduction is worth $120.
Most taxpayers take the standard deduction. A married couple filing jointly can automatically lop $25,100 off their taxable income. Individuals and married couples filing separately can take off $12,500. A taxpayer filing as head of household can subtract $18,800.
Filers have to choose between itemizing deductions or taking the standard deduction. Itemized deductions only make sense if their total exceeds the standard deduction.
For example, if an individual filer made $13,000 in charitable contributions in a given tax year, it would make sense for them to itemize that amount rather than take the standard deduction. The nearly 90% of taxpayers who take the standard deduction can write off $300 in charitable contributions made in 2020, a provision of the Coronavirus Aid, Relief and Economic Security Act aimed at encouraging giving.
Wealth building across generations, for some
The upshot of slavery, redlining and the Jim Crow era is evident today in wealth by race and ethnicity, according to Williams, Brown and other scholars.
Median wealth for white families is $188,200, compared with $24,100 for Black families and $35,100 for Hispanic families, according to the 2019 Federal Reserve survey, the most recent available.
“Other families — a diverse group that includes those identifying as Asian, American Indian, Alaska Native, Native Hawaiian, Pacific Islander, other race, and all respondents reporting more than one racial identification — have lower wealth than White families but higher wealth than Black and Hispanic families,” Federal Reserve economist Neil Bhutta and colleagues explain in a September 2020 analysis.
The home mortgage and property tax deductions are only available to homeowners, who are more likely to be white. Married couples filing jointly owe no tax on profits up to $500,000 from a primary home sale.
There are no federal deductions for rent paid, though a handful of states offer tax credits for certain renters.
About three-quarters of white households in the U.S. own their homes, compared with 58% of Asian households, 47% of Hispanic households and 41% of Black households, according to a January 2020 analysis from the Tax Policy Center.
Owner-occupied Black homes are also often undervalued, to the tune of about $50,000 on average, according to a November 2018 report from Brookings Institution senior fellow Andre Perry and colleagues.
The federal estate tax on assets passed from one generation to the next kicks in for individual estates valued at more than $11.7 million. A provision of the 2017 tax cuts upped the cap from $5.5 million. That provision expires in 2026. Any dollar value above $11.7 million is taxed at 40%.
A $15 million estate would be taxed on $3.8 million, for a final bill of about $1.5 million — 10% of the estate value. The same estate would have realized a 25% tax bill in 2016.
An estate worth $11 million in 2021 likely would be owned by a white family that, today, could pass it down without paying an estate tax. From the 2019 Federal Reserve survey, 17% of white families expected to receive an inheritance worth a median of $195,000, compared with 6% of Black families at $100,000 and 4% of Hispanic families at $150,000.
For Williams, it’s not about whether there should be a tax on wealth. His observation is simply that for generations the federal government encouraged and made wealth-building investments, such as home ownership, disproportionately possible for white Americans.
“We have these policies helping households build wealth but they’re targeted toward people who already have wealth,” Williams says. “I don’t think the problem is my wanting to do well by my son. The problem is how things are tilted toward the upper end — and toward the white end.”
Regressive tax burdens at the state and local levels
Brown notes that the modern federal income tax system traces to the Revenue Act of 1913.
Before that law, the U.S. collected revenue mostly through taxes on imports, tobacco and alcohol, “which hit the poorest Americans the hardest because they paid the same tariff rates as the wealthy despite having less ability to pay,” Brown writes.
Few Americans actually paid income taxes, at first. A married couple making less than $4,000 — worth about $73,000 today — was exempt. As Splinter tracks in his paper, 99% of tax units paid no federal income tax initially. In the early 1940s, the number of Americans paying federal income taxes increased dramatically to help fund World War II. By then, two-thirds of tax units owed federal income tax.
A tax structure similar to the federal system of more than a century ago persists today at the state and local levels. There are four major types of state taxes, explains Cortney Sanders, an analyst with the Center on Budget and Policy Priorities: property, sales, corporate income and individual income.
Sales taxes are proportional — every consumer pays the same rate for goods covered by the tax — but they also can be considered regressive because those with lower incomes use a higher portion of their income to obtain these goods compared with higher income consumers.
Consider a new car selling for $30,000. A 5% tax on the sale equals $1,500. For people making $50,000 a year, that $1,500 represents 3% of their income. For people making $150,000 a year, the sales tax represents 1%.
Sanders explains regressive taxes like this: “The people contributing the most are making the least — and people making the most are contributing the least.”
Asian and white workers in the U.S. take home thousands of dollars more per year than their Black and Hispanic counterparts. Asian workers employed full-time have a median income of about $67,000 per year while white workers make a median of $52,000, according to the U.S. Bureau of Labor Statistics.
The median income for Black workers is $42,000. For Hispanic workers, it’s $39,000.
That means, broadly, that Black and Hispanic consumers are more likely to bear a larger financial brunt from sales taxes.
Tennessee, Louisiana, Arkansas, Washington and Alabama have the five highest combined state and average local sales tax rates in the country, according to January 2021 calculations from analyst Janelle Cammenga with the Tax Foundation, a nonpartisan think tank.
“Local sales taxes are collected in 38 states,” Cammenga writes. “In some cases, they can rival or even exceed state rates.”
The nation’s modern history with retail sales taxes began in Mississippi in 1932. That year, half of Black Americans were out of work because of the Great Depression, compared with about one quarter of the total population.
Mississippi Gov. Mike Conner took office in January 1932, becoming executive of a state facing a $13 million deficit. He turned around state coffers with the sales tax while simultaneously keeping property taxes low for landowners, who were mostly white. The sales tax burden fell in part on Black families. Black citizens for decades in Mississippi and other states had been systematically denied the right to vote — which meant they had no say in electing those political leaders enacting tax policy.
“You could live in a state that never had slavery or Jim Crow laws, but the adoption of a policy rooted in structural racism intended to uphold white power and elitism is still there,” Sanders says.
Eight states do not collect personal income taxes — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming, according to Cammenga.
Another ten states have a flat income tax — one rate for all filers regardless of income. Those are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania and Utah. (New Hampshire doesn’t tax wage and salary income, but does tax income from dividends and interest.) The remaining 32 states have a progressive income tax structure.
Black and Hispanic homeowners across the country face 10% higher property tax assessments than their white counterparts in the same tax jurisdictions, according to a February 2020 working paper, “The Assessment Gap — Racial Inequalities in Property Taxation,” from economists Carlos Avenancio-León of Indiana University and Troup Howard of the University of Utah.
The authors take a closer look at data on property tax appeals in Cook County, Illinois, which includes Chicago. They suggest part of the reason for the higher assessments stems from Black and Hispanic homeowners being less likely to appeal an assessment and less likely to win an appeal, compared with their white counterparts. If they do win, they “typically received a smaller reduction than nonminority residents,” Avenancio-León and Howard write.
Differences in effective property tax rates by race and ethnicity are not new. The U.S. Department of Housing and Urban Development commissioned a study, published January 1973, on urban blight in Baltimore, Chicago and Philadelphia, finding that “the property tax has a regressive impact, and the burden of the tax bias falls most heavily on the properties occupied by low-income minorities.”
Some states offer expanded credits for taxpayers with low income, which can serve to offset regressive sales and property taxes. New Mexico Governor Michelle Lujan Grisham in April signed a bill raising a statewide tax rebate to $730 from $450 and expanding income eligibility from $22,000 to $36,000. The legislation also increases a tax credit for working families, from 17% to 20% of the federal Earned Income Tax Credit.
To know more about history’s imprint on race and wealth in America, learn how Black politicians during Reconstruction representing districts with higher taxes faced more violence, how 1930s housing practices eroded Black wealth, and 7 papers to know about reparations for slavery and the Jim Crow era in America.
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