The IRS does not ask for tax filers’ race or ethnicity on tax forms, but that does not mean the tax system affects people of different races and ethnicities similarly.
Overall, federal income taxes are progressive: people with higher incomes pay a larger share of their income in taxes than those with lower incomes. This can help narrow disparities in income by racial or ethnic groups (TPC 2020).
But some tax policies can also exacerbate income and wealth inequalities because of long-standing discrimination in areas such as housing, education, and employment. For example, certain tax provisions dedicate hundreds of billions of dollars each year to subsidize eligible homeownership costs or retirement savings for taxpayers (Holtzblatt et al. 2023a). However, access to those wealth-building vehicles (and sufficient incomes to dedicate towards them) are not equally distributed by race due to historical and ongoing inequities (TPC 2020). Redlining, restricted covenants, and housing segregation have distressed wealth accumulation and economic security for Black households across generations (Kijakazi, Schwabish, and Simms 2020).
For decades, many scholars, including Dorothy Brown, Beverly Moran, and William Whitford, have called attention to potential racial disparities in tax benefits and liabilities. Because of data limitations, researchers and policymakers could not accurately diagnose the problem and design maximally effective solutions. If Congress were to revise certain laws, such as Titles 13 and 26 of the United States Code to facilitate interagency data sharing, and if the US Department of the Treasury were to subsequently produce secure, linked taxpayer and demographic data, it would better enable tax analyses of racial disparities (GAO 2022). Instead, researchers have turned to sophisticated imputation techniques that essentially supplement tax data with surveys or administrative data on the race and ethnicity of individuals or families.
In one such effort, a January 2023 analysis conducted by the US Department of the Treasury showed that White families disproportionately benefit from preferential tax rates for capital gains and dividends as well as tax deductions for pass-through business income, charitable contributions, home mortgage interest, and employer-provided health insurance (Cronin, DeFilippes, and Fisher 2023). Black and Latine families, meanwhile, disproportionately benefit from the federal Earned Income Tax Credit (Cronin, DeFilippes, and Fisher 2023).
The Tax Policy Center (TPC) has also enhanced its microsimulation model to enable analysis of the distributional effects of tax policies by race and ethnicity. TPC’s February 2023 analysis showed that, across all income categories, itemized deductions disproportionately benefit White taxpayers (Khitatrakun et al. 2023).
Specific tax deductions can intersect with racial wealth gaps in surprising ways. For example, both Treasury and TPC have found that the deduction for mortgage interest overall disproportionately benefits White families, who are more likely than others to own homes (Cronin, DeFilippes, and Fisher 2023; Holtzblatt et al. 2023a). However, among only families with higher incomes, the average tax benefit of the deduction is slightly larger for Black families, in part, because Black families may face higher interest rates or larger mortgage debts (Holtzblatt et al. 2023a).
Further, a February 2023 analysis from TPC analyzed racial disparities in the tax treatment of married and unmarried couples. Marriage may cause a couple’s joint tax bill to remain unchanged or to go down (a marriage bonus) or up (a marriage penalty) relative to if the couple were not married and filing as individuals. On average, Black couples pay more in individual income taxes if they are married and White couples pay less—an annual advantage to the tune of $662 for White married couples relative to Black married couples (Holtzblatt et al. 2023b). This is, in part, because of how the tax rate structure treats dual-earned households in which spouses have similar earnings, a more likely scenario for Black couples than for White couples.
Tax administration and enforcement can also, in some cases, have racially unequal impacts. A 2023 study found that Black taxpayers are three to five times more likely to be audited than other taxpayers (Elzayn et al. 2023). It noted that the disparities are likely due to the algorithmic design of the IRS’s audit selection processes.
Further evidence on the distributional effects of tax policies by race and ethnicity may lead to more informed debates and promote a more efficient, fair, and simple tax system for all.