CEO DailyCFO DailyBroadsheetData SheetTerm Sheet

Changes to U.S. tax policy were supposed to help more Americans. Instead, they widen the racial wealth gap

April 5, 2022, 8:22 PM UTC

Dorothy A. Brown thought she had it all figured out.

“I became a tax lawyer to get away from race,” she says in her must-read book The Whiteness of Wealth: How The Tax System Impoverishes Black Americans. She though she was insulating herself from anti-Black discrimination in the world and leapfrogging her way into the kind of income that was not possible for her parents who made their way through Jim Crow with segregated, working-class jobs. “Because I learned early on the people might look at me and see Black, but as far as tax law was concerned, the only color that mattered was green.”

When she put her newfound skills to work on her parents’ tax return, she found out how much the green really mattered.

“What I sensed then—and what 25 years of academic research have revealed to me in greater detail since—was that changes to the U.S. tax code typically benefit white taxpayers while putting Black taxpayers at a further disadvantage, even when Black and white Americans have made the same life choices. Subsidies for homeownership benefit white homeowners more than Black homeowners. Tax breaks for workers benefit white workers more than Black workers. And tax reform has always been a fight over which white Americans get tax cuts, with Black Americans paying the price,” she writes in this piece in The Atlantic.

The race penalty that became buried in the tax code begins with a well-to-do couple named Henry and Charlotte Seaborn, members of the Seattle Yacht Club, who married in 1902. Long story short, Henry lobbied to reduce their tax burden by using Charlotte’s return to report some of his income, a workaround that was remedied later by a legislative provision that created the joint tax return. The problem? The joint tax return favored men who worked in the formal economy with stay-at-home wives who worked at home.

It was a uniquely Norman Rockwellesque vision of the American dream which did not include the two-income families which were the most common arrangement in Black households.

The damage compounded quickly.

“We might be able to mimic white behavior—getting married and filing jointly, buying homes, trying to get our children into the best colleges—but we do not become white and benefit from decades, or in some cases centuries of opportunities that white Americans have enjoyed,” she writes.

Without equitable job opportunities, Black couples have been historically underpaid in the workforce and overtaxed by the government. Because of redlining, discriminatory real estate practices, and the underinvestment/over-policing of Black neighborhoods, Black home values have lagged behind those of their white counterparts, contributing to a pervasive wealth gap.

So what’s next? Reparations leap to mind. Brown cites the work of a journalist named L.G. Sherrod who, in 1993 wrote a column in Essence that did the Jim Crow math. “Although we were consigned by law to second-class citizenship, we were still forced to pay first-class taxes.” By calculating the overpayment of taxes by race from the start of formal discrimination (Plessy v. Ferguson) to the end of Jim Crow, she came up with a figure of $43,209 that she believed should be considered a “Black tax” credit owed to Black taxpayers. While the Black filers who attempted to take that non-existent credit got into serious trouble with the IRS—yikes—it did raise the general question of lobbying to fix the tax code, just like the Seaborns tried to.

“The changes to the tax policy that will help reduce the racial wealth gap will also more accurately reflect the way our tax system was intended to operate in the first place before rich and powerful influencers demanded conditions and loopholes that would benefit them and preserve their wealth,” Brown says in her book.

Which (I appreciate) sounds like a lot of work.

But, we can start by insisting on better data, she says. The IRS publishes aggregate taxpayer data by gender and age but not by race. Without that disaggregated data—a lot of which she had to cobble together herself—it’s impossible to know just how disadvantaged certain demographics are, particularly as the tax code has gotten more complex.

Now, employers could likely fill in some of this knowledge gap with their own anonymized employee data if they were willing. Information that would likely reveal some historic inequities in compensation, of course.

Which (I appreciate) is going to be a tough decision in lots of C-Suites.

That said, this is the kind of thing that big corporations had promised to do when they promised to address inequity going forward. Right?

Ellen McGirt
@ellmcgirt
Ellen.McGirt@fortune.com

This edition of raceAhead was edited by Wandy Felicita Ortiz.

On background

“The tax code, and the public investments and other programs it funds, reduce racial disparities, but they would be more effective if the nation raised more revenue and did so in a progressive manner.” Center on Budget and Policy Priorities

The ‘safety net’ works, y’all  Two Harvard University economists examined 133 U.S. policy changes over fifty years looking for the biggest bang for the investment buck—which includes analyzing Medicare, Medicaid expansions, the introduction of food stamps, and dozens of state and local programs. The goal was to identify the interventions that saved the government money long term, typically by figuring out which who ended up need less assistance over time, or who were able to increase their earnings and taxes paid. Programs benefitting low-income kids were the clear winner: every dollar spent on education and health care programs returned 47 cents in down-the-road savings. “The results show there’s a potential to get really high returns when you’re focusing on kids,” says co-author Ben Sprung-Keyser.
Wall Street Journal

The embedded racism in the Electoral College  It is the secret irony of complaints about racial entitlements argues Wilfred Codrington III, a Fellow at Brennan Center for Justice at NYU School of Law. They exist, but they benefit white voters. “For centuries, white votes have gotten undue weight, as a result of innovations such as poll taxes and voter-ID laws and outright violence to discourage racial minorities from voting, he says. “But America’s institutions boosted white political power in less obvious ways, too, and the nation’s oldest structural racial entitlement program is one of its most consequential: the Electoral College.” While there are plenty of valid reasons to constrain executive power and diminish the temptation of corruption, in advocating for the electoral system, the slaveholding South held significant sway. He quotes future president James Madison: “The right of suffrage was much more diffusive in the Northern than the Southern States, and the latter could have no influence in the election on the score of the Negroes. The substitution of electors obviated this difficulty and seemed, on the whole, to be liable to fewest objections.”
The Atlantic

What it means to be the working poor. Chauncey DeVega argues persuasively that Americans alternately hate and fear the poor. Poverty is traumatizing, very expensive, and the working poor lack basic services that could help them live comfortable and dignified lives. "Ultimately, social inequality in America is the predictable (if not intentional) result of a political and economic system that is anything but meritocratic," he writes. "America may not have kings and queens and titled nobility, but it has a plutocracy and a system of dynastic wealth that operates much the same way." It doesn't help that homes in poor neighborhoods are taxed at twice the rate of those in wealthy ones. Or that millions of workers can't afford both food and rent
Alternet

Are you an ethical leader? Part of the trouble is recognizing what the right thing to do is in any given situation. Neil Malhotra and Ken Shotts, two political economists at Stanford Graduate School of Business, teach a class called Values-Based Leadership, designed to prepare future leaders to grapple with some of the big questions of the day–like what are values? How do you stay true to your own values while respecting the values of others in the organization? In this excellent Q&A, they take on everything from the pitfalls of gut instinct to the creeping rationalizations that produce the Theranos’s of the world. And then there is the leadership bubble. “Powerful people typically don’t perceive that other people are agreeing with them because of their role. They have to learn to recognize that,” cautions Malhotra.
Stanford Graduate School of Business

Parting words

"This is too difficult for a mathematician. It takes a philosopher."

Albert Einstein, on taxes in the U.S.

 

This is the web version of raceAhead, Fortune’s daily newsletter on race, culture, and inclusive leadership. To get it delivered daily to your inbox, sign up here