It’s official: the U.S. tax code worsens racial disparity in America


January 27, 2023

For some time, human needs advocates and many economists have maintained that the U.S. tax code discriminates on the basis of race and ethnicity by increasing disparities between families with wealth – more often White families – and families without wealth. 

Now, for the first time ever, a U.S. Treasury Department study has confirmed these suspicions: White Americans disproportionately benefit from a variety of tax breaks, including those aimed at investors. 

A little background is in order. On President Biden’s first day in office, he signed an executive order directing federal agencies “to examine their policies and programs to identify whether and how they perpetuate barriers to equal opportunity,”  

The Treasury Department study, released last week, was a direct result of Biden’s order. One of its starkest findings: Non-Hispanic White Americans, who comprise about two-thirds of families in the U.S., receive 92 percent of the benefits from the lower tax rate on dividends and capital gains. The top rate on capital gains and dividends is 20 percent, compared to a 37 percent rate for wage and other ordinary income. Because White families have higher incomes, they are much more likely to benefit from dividends and capital gains Black and Latino families. 

An example of how disparate this type of tax break is: the average White family gets an annual benefit of $1,086 from preferential rates on dividends and capital gains. But the average Latino family gets just $131 and the average Black family gets even less — $124. Blacks – who make up 11 percent of U.S. families – get just 2 percent of the benefit from lower rates on investment income. 

Other tax breaks that disproportionately help people with higher incomes include the deductibility of mortgage interest – people who own homes tend to have higher incomes. Only 4 percent of those benefiting from this deduction are Black families, while they are 11 percent of the population. On the other hand, 84 percent receiving the mortgage interest deduction are White, while they make up 67 percent of all families.  The average value of this deduction is $213 for White families; $63 for Black families. 

Not every aspect of the tax code leads to worse income disparities by race, the Treasury Department study found. Of particular note – and cause for optimism and perhaps future progress – is the Earned Income Tax Credit (EITC). 

Latino families, which make up 15 percent of the population, receive 28 percent of the EITC. Similarly, 19 percent Black families receive the EITC, while they are only 11 percent of the population. But while White families make up more than two-thirds of the population (67 percent), only 49 percent of White families get the EITC. In other words: while White families indeed benefit from the EITC, they benefit proportionately less than Black and Latino families – proof that tax policy can lead to diminished income disparities by race when it is targeted to provide benefits to those with lower incomes. 

The Treasury Department emphasized that its report is preliminary in nature – for example, because the IRS, which falls under Treasury’s oversight, does not collect data on race when collecting taxes, researchers had to make certain assumptions when it came to identifying the race of taxpayers. 

But the report nonetheless emphasizes the importance of examining the effect that future changes to the tax code might have on racial disparities. 

“While many questions remain, these initial findings emphasize the scrutiny that should be paid to existing and proposed tax expenditures that take the form of deductions, exclusions, and preferential rates,” the Treasury Department wrote in a blog post. “On a per capita basis, these types of benefits typically benefit a disproportionately While population and thus expand racial disparities. In contrast, refundable credits more frequently reduce racial disparities and can often be better designed to achieve the underlying policy goals as well.”