When debating the Bush tax cuts, consider the effects on people of color

It goes beyond higher unemployment or higher poverty rates.

In recent years, communities of color have seen a staggering loss of wealth -- those financial assets that allow families to weather a job loss or to send a child to college.

In 2007, the typical African-American family owned 10 cents of wealth, and Latino families 12 cents of wealth, for each dollar of wealth owned by the typical white American family. For African-Americans, that was a decline from the 12 cents they owned in 2004, a decrease caused, in part, by the Bush tax cuts that provide more wealth-building subsidies to white Americans than to those with low-incomes and people of color.

The tax code incentivizes wealth-building by lowering or deferring income taxes on a person’s specific asset-building expenditures. This is generally a good thing, but the Bush-era tax cuts subsidized wealth-building for the already-rich. They allowed taxpayers in the bottom quintile to save $80 a year while the top 1 percent saved $42,618 annually. Very low-income people got nothing. Given that they are a disproportionate share of those in poverty and in lower-income brackets, people of color were left even further behind.

Congress and the administration have a chance to address this inequity.

First, they should allow cuts in taxes on income earned through investments to expire.  

Of federal tax expenditures to incentivize savings and investments in 2009, $89.5 billion was spent on reduced tax rates on dividends and long-term capital gains. But those tax breaks did not reach many African-Americans and Hispanics who were 23 percent and 28 percent, respectively, less likely than all families to own direct or indirect holdings of publicly traded stock.

Second, Congress should not only keep the estate tax but the exemption level should be lowered, the rate should be raised and it should become more progressive.

While 1-in-4 white Americans will receive an inheritance, only 1-in-20 African-Americans will – and they will receive only 8 cents to the white inheritor’s dollar. Eliminating the estate tax would massively increase the deficit in order to help the children of the richest of our population become even wealthier. Instead, all of the nation’s children should benefit from its revenue.

Third, tax deferments on college savings and retirement accounts need to be supplemented with things like scholarships and matched retirement accounts to ensure racial equity.

These deferments help middle-income Americans but do little for low-wage workers, who are disproportionately people of color. They are less likely to have employer-sponsored retirement accounts that would allow them to benefit from pre-tax retirement contributions, and tax-deferred college savings accounts are not effective for them because they have lower tax rates.

Finally, as the co-chairs of the president’s fiscal commission recommended last week, tax subsidies for homeowners should be reformed. While these are not part of the Bush tax cuts, their re-examination is long overdue.

What began as an incentive for middle-class Americans to become homeowners has become a subsidy for mansions and vacation homes. Low-income homeowners who do not itemize their taxes get no benefit at all. Reining in the subsidies for high-cost homes and second homes and using those dollars to help those without homes or those who were targets of sub-prime lenders and lost their homes to foreclosure would help close the wealth gap between white Americans and those of color.

Oliver Wendell Holmes once said that “taxes are the price we pay for civilization.” One measure of a civilization is the economic equity among its people. We can do better than the tax policies of the Bush administration.

Meizu Lui is director of the Closing the Racial Wealth Gap Initiative at the Insight Center for Community Economic Development.