This Tax Day, let’s talk about why we need real tax reform
The killings of George Floyd and several other Black Americans have shined a spotlight on the systemic racism that’s apparent in our policing and criminal justice systems. As awareness continues to grow on the insidious nature of racism throughout American society, “Tax Day” is an excellent time to highlight the massive role that our federal and state income tax systems play in perpetuating both racial and broader economic inequality.
The federal income tax brackets themselves are progressive in nature, but numerous loopholes, deductions, credits and more have been layered on top of those brackets to create a system that helps wealthy households build more wealth — worsening economic inequality. New research from our organization found that these wealth-building subsidies added up to $634 billion in the last tax year, and most of that money goes to wealthy, white households. In fact, we found that a millionaire received an average benefit of $160,000 from this spending, while a typical working family received only $220.
Building wealth is essential to long-term financial security, freedom and happiness. These provisions, many designed with good intentions, focus on helping Americans pay for higher education, purchase a home, save for retirement, and generally invest for the future. These are all core to the American Dream.
But in practice, many of these provisions are accessible exclusively to the wealthy. Even when more broadly available, middle-class and working families often receive only marginal benefits. One example, the mortgage interest deduction (MID) — which is often upheld as a tool for helping Americans become homeowners — is primarily a subsidy for the wealthy to buy bigger houses. Last year, according to tax expenditure data from the Office of Management and Budget, the MID cost American taxpayers $25 billion. Our study found that 79 percent of that spending went to the top 20 percent of households
The data become even more alarming when broken down by race. The top 20 percent of white households, who make up 15.8 percent of all tax returns claiming the MID, receive 59 percent of its benefits. Meanwhile, the top 20 percent of Black and Hispanic households, which make up 2.4 percent of all returns, receive 8.8 percent of the MID’s benefits.
Fortunately, not all tax provisions are bad. There are models that we should build on to redirect the $634 billion to help more working families build wealth, such as the earned income tax credit (EITC) and the child tax credit (CTC). In 2018, the EITC and CTC helped to lift more than 10 million people out of poverty. When broken down by race, the EITC is a major driver for racial economic equity. Households of color make up over 24 percent of all tax filers, but account for over 40 percent of all tax returns claiming the credit.
Rebuilding wealth will be even more important when the nation eventually begins its economic recovery from the COVID-19 pandemic. The tax code can be a crucial tool for assisting working families in rebuilding their economic security and making sure they are never as financially vulnerable as they were when the pandemic hit this spring.
There are several pieces of legislation in Congress that could help begin to make this a reality. Sen. Cory Booker (D-N.J.) and Rep. Ayanna Pressley (D-Mass.) have introduced the American Opportunity Accounts Act, which would give all children born in America “baby bonds.” Based on a proposal by Dr. Darrick Hamilton and Dr. William “Sandy” Darity, the legislation would provide a birthright investment of up to $60,000 to every child, which they could access when they become an adult to pay for higher education, purchase a home, or start a business.
Another promising proposal cosponsored by almost every Democratic senator, the Working Families Tax Relief Act, would greatly expand the EITC and CTC, among other things, and is projected to cut child poverty by about 30 percent.
There can be no broad racial justice without economic justice. The tax code is an essential place to begin reforms that would benefit Black, Indigenous and people of color — and many other Americans who are struggling. Many of the provisions in the tax reform law passed by Congress in 2017 that tilted the tax code even further in favor of wealthy, mostly white households will expire by the end of 2025 if Congress does not act.
Let’s make sure the next Congress and administration prioritize fixing this, so we can all benefit from a more equitable economy and nation.
David Newville is vice president of policy and research at Prosperity Now, a national nonprofit that works on issues of financial security and wealth inequality for low-income families. Emanuel Nieves and Joanna Ain are associate directors of policy at Prosperity Now.
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