Tax breaks and tax enforcement are not agnostic when it comes to race, according to a pair of recent studies.
White taxpayers disproportionately benefit from five studied tax breaks versus Black Americans, in many cases when adjusting for income, according to a Treasury study from the Office of Tax Analysis. And even when Black taxpayers benefit more than their white counterparts from one credit, they are then subject to more audits because of it, a second study from Stanford University found.
The findings, which confirm previous research on tax disparities, underscore how supposedly race-neutral tax systems and policies can actually magnify racial disadvantages and perpetuate bias.
“The recently released working paper from the Treasury Department and other research articles are consistent with previous research conducted by CFP Board and others,” Kevin R. Keller, CEO of the Certified Financial Planner Board of Standards (CFP Board), told Yahoo Finance. “While the findings are disappointing, they are not surprising.”
Where white taxpayers benefit more
The Treasury report examined eight tax expenditures: capital gains and dividends, charitable contribution deduction, pass-through income deduction, home mortgage interest deduction (HMID), exclusion for employer contributions to medical insurance, the child tax credit (CTC), premium tax credit (PTC), and earned income tax credit (EITC).
According to the study, 92% of the tax benefits from the capital gains preferential rate went to white taxpayers. Additionally, that percentage was 91% for the charitable donations deduction, 90% for pass-through income deduction, 84% for the mortgage interest deduction, and 82% for the employer medical exclusion.
The disproportionate tax benefit for whites narrowed some when it came to the child tax credit (CTC) and premium tax credit (PTC).
Many taxpayers’ income is based on salary or hourly wages and is taxed around 37% or less, depending on income. However, capital gains income and dividends are taxed at a preferential rate of no more than 20%.
This means that taxpayers with substantial stakes in stocks and other assets get a tax break on the income derived from the sale of those investments compared with someone whose only income is their regular paycheck.
White households are much more likely to own stocks and mutual funds, according to research from the Federal Reserve Bank of St. Louis. The study shows 24% of white households report owning stock or mutual funds, while less than 8% of Black households do. The disparity doesn’t shrink much as income rises, either.
“These results track my research results, particularly how high-income Black Americans do not receive income from stocks like their peers and are less likely to own stock and benefit from the preferential tax rate for capital gains,” Dorothy Brown, tax lawyer, author, and professor at Georgetown Law School, told Yahoo Finance.
Further, the preferential capital gains tax “may promote income growth for white families relative to Black families which would work towards increasing income inequality,” according to the study.
“Since the 1980s, the wealth gap has widened again as capital gains have predominantly benefited white households, and income convergence has stopped,” a NBER report found.
In order to deduct charitable contributions, taxpayers need to itemize their tax returns. Only 11% of taxpayers itemize their tax return because itemizations for most taxpayers are lower than the standard deduction.
The Treasury report found that “higher income households are more likely to itemize and the value of itemized deductions increases with income because the marginalized tax rates increase with income.”
But Black households are underrepresented among high-income households and less likely to itemize and deduct charitable contributions, even though previous research shows they are more likely to donate than whites.
Similarly, a taxpayer must itemize to get the mortgage interest deduction. Around 8% of taxpayers claim the mortgage interest deduction and around 77% of mortgage interest deductions went to homeowners with incomes higher than $100,000, who are also disproportionately white.
“One other interesting point the study makes is how high-income Black and Hispanic taxpayers are more likely to take higher mortgage interest deductions than their white peers,” Professor Brown said. “While the study cannot tell us why, my guess is those taxpayers have been unfairly targeted with subprime mortgages and a higher tax deduction for interest means that principal is not being reduced and those Black and Hispanic taxpayers are unable to build housing wealth like their white peers.”
“It is yet one more example of how homeownership in America is more beneficial for white homeowners than Black and Hispanic homeowners,” she added.
Pass-through income deduction and employer medical exclusion
Taxpayers that own a business can deduct up to 20% of qualified business income (QBI) through the pass-through income deduction.
Usually, higher-income families benefit from this tax deduction as do white households, the Treasury study found. For instance, in the top 5% of households, average benefits from the deduction are $11,100 for white families versus $9,100 for Black families.
Likewise, the employer medical exclusion (ESI) benefit increases with higher income. Among high-income households, Black families get the least out of the deduction, with an average benefit of $3,200, versus $3,800 for white families.
However, among middle-income families, Black and Hispanic families benefited slighter more than White families from ESI.
Benefits from EITC get eroded
White families in the lowest-income percentile benefit from Earned Income Tax Credit, or EITC, at a much higher rate than Black families with similar income, the study found. The credit requires a base level of income to qualify and whites in the lowest-earning percentile are more likely to have income compared with Black Americans, potentially a result of the higher unemployment rate among Blacks than whites.
However, middle-income Black families benefit more than white ones with middle-income from the EITC. Among lower-income families, the average EITC benefit is also higher Black families, the study found.
But benefiting more overall from the EITC comes with a major drawback for Black taxpayers: more audits, according to a second study.
The IRS audits Black taxpayers at 2.9 to 4.7 times the rate of non-Black taxpayers, according to a study by Stanford in conjunction with the Treasury, with the “main source of the disparity” stemming from claiming the EITC.
“The Treasury study found that Black Americans disproportionately benefited from the EITC, but it ignores the well-known increased audit rates of Black EITC claimants,” Professor Brown said. “An audit prevents the EITC taxpayer from receiving any EITC amount and to the extent that the EITC is never delivered, then Black EITC taxpayers cannot receive it disproportionately.”
The disparity in audit rates also existed among Black taxpayers who did not claim EITC benefits.
The Stanford report contributed this in part to the design of audit selection algorithms, noting that a “growing literature in algorithmic fairness warns that policies based upon such predictions may inadvertently reinforce disadvantages against historically marginalized groups.”
For instance, the Casualty Actuarial Society (CAS) this year released four research papers examining the potential discriminatory effects algorithmic bias may have when used by financial institutions determining credit-scoring, insurance (auto, life, home), and mortgage lending.
“The inequalities found in IRS audits for Black taxpayers can be found in all areas of life and continues because of hundreds of years of systemic discrimination that affect Black life in the United States,” Sonia Gipson Rankin, a professor with a focus on race, technology and the law at The University of New Mexico School of Law, told Yahoo Finance. “AI perpetuates bias through codifying existing bias embedded into data. We will continue to see disparities in current and future systems as long as historical biases are integrated into the data and deployed in AI systems.”
Republished from Yahoo Finance