New book explores racial bias in the US tax system [Video]
America’s progressive tax system is supposed to tax more as your income increases, with people with similar incomes paying the same rate.
That’s not true, according to a tax lawyer and professor, who has analyzed the history of the US tax system and how it can hurt black taxpayers when they jointly file or claim mortgage interest or interest deductions on student loans, among other tax policies.
“When it came to tax law, the only color that mattered was green, and race had nothing to do with my job,” Dorothy A. Brown, a tax attorney and professor, told Yahoo Money after her book, The whiteness of wealth, came out recently. “I’ve never been so wrong about anything in my life. You can’t earn more than your blackness.
The book’s case studies reveal how tax policy affects the ability to create wealth and how established tax principles often promote the white experience and perpetuate the racial wealth gap.
Our progressive tax system was established with the Revenue Act of 1913, when 5.6% of Americans paid federal income tax – those earning $3,000 a year or more. At that time, taxpayers paid taxes as individuals.
But in the 1930s, a wealthy shipbuilder named Henry Seaborn tried to split his earnings with his housewife to save on taxes. He felt that because he lived in a community property state, he could do this.
After being fined by the IRS, he sued and won. Her case meant that married taxpayers in communal property states – where marital property is divided equally – were allowed to reduce their tax liability.
This result violated the concept of horizontal equity that taxpayers in similar circumstances should be taxed the same because married taxpayers in non-community property states did not receive the lower tax rate. Congress stepped in and created the tax status of married filers jointly.
At the time, most sham marriages consisted of a husband as the sole earner and a wife as the homemaker. But both spouses of black married couples usually worked, and when they jointly applied for marriage they actually received a “marriage penalty”, unlike their white counterparts, according to Professor Brown’s research.
When more married white women entered the workforce, tax laws were changed to minimize the penalty, which also created a “marriage bonus” that benefited married couples where one spouse was the sole employee.
But couples with single employees were more likely to be white, according to census data analyzed by Professor Brown, meaning the marriage bonus was more often given to white couples than to black couples. The disparity widens as couples earn more money, and more white couples have a stay-at-home spouse than black couples.
The reverse happens when it comes to the marriage penalty between black and white couples. As income increases, black married couples are more likely to pay the marriage tax penalty than their white counterparts.
“High-income married black couples who are in the best position to save more, invest more, and create more wealth are paying Uncle Sam instead. After for the privilege of being married,” Professor Brown wrote in his book.
To fix the marriage penalty, Professor Brown proposes to abolish the marriage bonus and return to the old system where taxpayers declared individually.
When the Revenue Act of 1913 was created, only a handful of taxpayers were owners. However, a tax subsidy was created in the form of a mortgage interest deduction for homeowners.
To help fund World War II, the government enacted the Current Tax Payment Act of 1943 to levy taxes on employees’ wages. It continued after the war, and the government used the extra revenue to help Americans—especially servicemen returning from the war—achieve the American dream of homeownership through federal grants from the Federal Housing Administration ( FHA).
These FHA loans were the lifeblood of many white Americans who transitioned from renting to owning after World War II. However, the FHA’s discriminatory actions prevented black service members and families from accessing FHA funds to subsidize homeownership in the same way that they caused most white households to pass from tenants to owners.
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“Homeownership has always been an important way for Americans to accumulate wealth – in fact, at over $15 trillion, home equity represents 16% of total US household wealth” , according to a report by the Federal Reserve Bank of New York.
While outright redlining has been banned, white buyer preferences have a profound effect on home values. Professor Brown cites research that shows property values begin to fall in a neighborhood once black presence reaches 10%. It decreases more as the black presence increases more.
The whiteness of wealth found that home ownership is statistically more likely to result in a non-deductible loss for black homeowners because homes in black neighborhoods are undervalued and sold at a loss.
Professor Brown proposes allowing homeowners to claim the loss on a home sale to be deducted in the same way investment losses are deductible to avoid depletion of wealth.
Although education is touted as the great equalizer for a financially secure future, Professor Brown’s research has found that college does not pay off for black graduates in the same way it does for their white peers and that politics tax plays a role.
“Black households headed by a college graduate have less wealth than white households headed by a high school graduate,” Professor Brown said, noting that student loan debt accounts for 25% of the wealth gap.
The Tax Reform Act of 1986 made interest on student loans, credit cards, and auto loans non-deductible, but retained the exception for mortgage interest. In 1997, Congress made interest on student loans deductible up to $2,500.
But that capped amount is so small compared to the interest black graduates are paying on their student loan debt Black students, which total $53,000 four years after graduation, compared to $28,000 for white borrowers.
“White Americans are less likely than blacks to fund their college expenses with student loans, but more likely to take advantage of the Student Loan Tax Subsidy when they do,” Professor Brown wrote. “And black Americans are much more likely to finance their college education with debt, but less likely than white people to be eligible to deduct all their interest payments on their debt – especially if they are lucky enough to get a job that pays reasonably well.”
Professor Brown recommends increasing the interest deduction on student loans. While homeowners can deduct up to $750,000 in mortgage interest, student loan interest should not be capped at $2,500.
The whiteness of wealth also explores higher education institutions that receive tax breaks, which primarily help white students, mortgage interest deduction, 529 plans and generational wealth transfers, preferential tax treatment of certain investments, among other tax issues .
“It has long been known that black and white people live in separate and unequal worlds that shape who we marry, where we buy a house, who we have as neighbors and how we build a future for our children,” wrote the Professor Brown. “What my research has shown is that all of this also determines how much tax we pay.”
“Taxpayers bring their racial identity to their tax returns,” she added. “As in so many aspects of American life, being black is more likely to hurt and being white is more likely to help.”
Ronda is a senior personal finance reporter for Yahoo Money and an attorney with experience in law, insurance, education and government. Follow her on Twitter @writesronda