Persistent income disparities between racial groups are evident – in 2022, Black men were paid 70% of the wages received by white men on average, while Black women received only 61% of the income compared to their white male counterparts.1 While the income gap is stark, income inequity pales in comparison to racial gaps in wealth. As of 2019, white households possess over ten times the wealth of Black households and nearly six times the wealth of Latinx households. The wealthiest 1% of U.S. households hold a disproportionate share of the nation's wealth, and white households own the majority of wealth compared to households of color. The wealth disparity between Black and white communities has a long history and has worsened in recent decades.2
In this article, researchers Palma Joy Strand and Nicholas A. Mirkay assert that the current federal, state, and local tax systems perpetuate racial wealth inequity. Racial disparities in wealth are exacerbated through tax policies and laws that preserve and concentrate existing white wealth, as well as shift toward regressive consumption taxes and tax expenditures that primarily benefit wealthier individuals. Since high-earners add more to their wealth annually than low-earners, wealth inequity continues to rise even when income inequality is stagnant.
Rising economic inequality poses a threat to societal stability and undermines both democracy and the economy. It grants disproportionate influence and opportunities to the wealthy while perpetuating disadvantage for others.
- While the effective tax rate appears progressive, the federal tax system has undergone a significant shift from progressive income and estate taxes to regressive payroll and excise taxes, resulting in a higher tax burden on most individuals and a lower burden for wealthy households.
- Many state governments collect more taxes from poor and middle-income families compared to high-income families, primarily due to reliance on sales and consumption taxes. The average effective state and local tax rate is higher for the poorest 20% of residents compared to the middle- and top-income brackets.
- Certain states with reputations as "low tax" states actually impose higher taxes on low- and middle-income families. The ten states with the highest taxes on the poorest taxpayers include Washington, Hawaii, Illinois, Pennsylvania, Oklahoma, Arizona, Texas, Indiana, Florida, and Iowa. The poorest families in Washington state pay an average of 17.8% of their income in state and local taxes.
Policy and practice implications
Acknowledge Racial Wealth Inequity: Anti-tax rhetoric and movements often serve the interests of the wealthy by securing tax benefits for them. This perpetuates wealth inequity and reduces investment in public infrastructure, which benefits all Americans and is essential to non-wealthy Americans. Addressing racial wealth inequity requires policymakers to champion change in tax policies and reforms.
Address Wealth & Racial Inequity in Our Tax Systems: Policymakers should evaluate which policies most effectively benefit their low-wage workforce. Examples of policy reform to tackle wealth and racial inequity in tax systems include:
- Expanding state payroll taxes beyond the federally-imposed Social Security annual cap to enhance the sustainability of social security programs. Increasing the taxable income threshold for payroll taxes generates additional revenue to support retirement benefits and other social safety nets.
- Enacting or increasing state earned income tax credits, which provides vital support for low-income individuals and families. By expanding these credits, states can alleviate poverty, incentivize work, and boost the economic well-being of vulnerable populations.
- Imposing higher income tax rates on higher earners and placing a cap on itemized deductions based on income levels. Promotion of a more progressive tax system ensures that those with higher incomes contribute a larger share of their earnings, reducing wealth disparities and providing funding for public services.
- Expanding estate or inheritance taxes that increase taxes on wealth. This more equitable distribution of wealth across generations helps mitigate wealth concentration, fund public services, and reduce intergenerational wealth disparities.
- Strengthening corporate taxes to eliminate loopholes and ensuring strong minimum taxes by corporate entities, and/or adopting combined reporting. This policy option prevents profit-shifting and tax avoidance strategies, ensuring that corporations contribute their fair share to public revenue and reducing the burden on individual taxpayers.
- Broadening sales tax to include services purchased by wealthy individuals. This supports a more progressive taxation system by ensuring that affluent individuals, who often spend more on services, bear a proportionate tax burden.
- Imposing a luxury tax on luxury goods such as high-end automobiles and expensive yachts. This policy promotes fairness and can generate additional revenue by targeting excessive consumption by the wealthy, which then provides funding for public programs and initiatives that benefit society.
- Targeting financial asset wealth through higher capital gains taxes and/or a financial transaction tax, which promotes fairness in the tax system. Levying taxes on investment gains and financial transactions ensures that wealthier individuals, who typically hold a significant portion of financial assets, contribute proportionally to public revenue.
- Promoting Shared Prosperity: Ensure that the overall tax system raises sufficient revenue to fund foundations of economic growth, such as education and healthcare access. Adequately funding of essential public services helps to bridge socio-economic gaps, improve social mobility, and provides equal opportunities for all individuals to thrive, resulting in a more equitable society.
Federal and state tax policies play a significant role in solidifying racialized wealth inequity. Addressing systemic racism is crucial for meaningful tax policy reform that promotes equity and invests in future generations. Therefore, it is of utmost urgency and significance for policymakers to overhaul their tax systems—particularly income taxes—in order to tackle systemic wealth inequity. This reform is crucial to enabling low-income workers to retain a larger portion of their earnings, allowing them to build wealth themselves through investments in human capital and asset acquisition. These investments, in turn, enhance their income, generate passive earnings, and foster intergenerational upward mobility.