When you file your taxes each spring, the IRS asks for a lot of your personal information. The IRS uses this information to verify that you paid the federal taxes you owe. But there are some questions the IRS does not ask you, such as “What is your race or ethnicity?”
Some have argued that asking taxpayers to report their race and ethnicity on tax returns could make some taxpayers reluctant to file because they’d worry their data may be misused.
Recent research, however, has shown that this “colorblindness” can hide how taxes worsen racial inequities in wealth and income.
Here, we outline ways the federal income tax system exacerbates racial inequities. We also highlight what data tax officials and Congress would need to collect to better understand and address these issues.
Several tax breaks disproportionately benefit higher-income White taxpayers
Overall, federal income taxes are progressive. That means if your income is higher than your neighbor’s, you pay a larger portion of your income in taxes. In theory, this system is rooted in fairness: the tax system takes more from people who can pay more.
This progressive system and some tax breaks for families and workers with low incomes, such as the earned income tax credit, help narrow racial disparities in income.
However, other tax breaks, such as those for retirement savings, homeownership, or business investments often disproportionately benefit White taxpayers, who also tend to be wealthier and earn more income.
For example, retirement savings are a crucial way families build wealth in the US and avoid economic insecurity in their older years. The federal government spends $300 billion each year on tax breaks for people who make contributions to and earnings from retirement plans, such as workplace plans and individual retirement accounts (IRAs). But these tax breaks do not benefit all communities in the same way.
To take advantage of these tax breaks, families need to have enough money to meet all their basic needs and then set some aside. As a result, retirement tax breaks largely benefit taxpayers with high incomes.
Discrimination in labor and capital markets also mean that people of color are disproportionately represented in lower-paying jobs with less access to benefits like retirement plans. When it comes to saving, many White families have a big head start because for centuries, communities of color have not had the same access to wealth-building opportunities.
More data for a more equitable tax system
Before policymakers can address these racial inequities, they need to better understand how taxes can impact households by race and ethnicity. The Tax Policy Center and others are working to develop more accurate estimates, and with better data, so that policymakers can make more-informed decisions.
To get a more accurate picture of the tax system’s impacts on all families, policymakers and the IRS could also expand tax data sharing with the US Census Bureau. The Census Bureau, which already collects and shares demographic information about people across the US, could then analyze who has IRAs by race and gender, for example.
With more accurate and robust information, policymakers and federal agencies could transform the tax system to better support the prosperity of all families.
