The Internal Revenue Code generally does not refer to race, but the racial wealth gap in the United States still may be reinforced by the federal income tax system. Black families held only 6 percent of their financial assets in stocks, compared with three times that share for white families. Black families, therefore, on average, don’t benefit as much as white families from the preferential tax treatment of income from stocks and certain other assets. This disparity may not only reinforce the current racial wealth gap but may also perpetuate it by reducing the after-tax income of Black families and their ability to invest.
Many researchers have studied the impacts of government policies and private actions on racial disparities in housing wealth, but none have done a comprehensive, data-driven study of how the tax code’s treatment of capital income and wealth might favor white families over Black families. This omission—as well as other analyses of structural racism in tax policy—is mainly a result of the absence of race on tax return data. The Urban-Brookings Tax Policy Center (TPC) is now addressing that shortfall by adding race and ethnicity imputations to its microsimulation model.
This project will use TPC’s enhanced model to examine how the federal tax treatment of capital income and wealth might affect Black families differently than white families. We will also consider the racial equity effects of alternative tax policies—both those aimed at reducing the tax burden of all capital holders and those that would explicitly redistribute wealth in ways that could narrow the racial wealth gap.
This study will address three critical questions:
- How does the current federal income tax treatment of capital and capital income affect the level and distribution of after-tax income for Black and white families?
- What are the racial equity effects of the proposals to either increase or decrease taxes on capital income and wealth?
- What would be the racial equity effects of policies that redistribute wealth through the income tax system?