William G. Gale (Brookings; Google Scholar) presents Racial Aspects of the Federal Income Tax (with Oliver Hall (Brookings) & John Sabelhaus (Brookings; Michigan; Google Scholar)) at UCLA today as part of its Colloquium on Tax Policy and Public Finance hosted by Kirk Stark and Jason Oh:

Although it does not explicitly discriminate on the basis of race, the federal income tax can still generate racially disparate outcomes, because factors that affect tax liability may be correlated with race. In this paper, we explore how the federal income tax differentially affects Black and white tax units. We use data from eight waves of the Survey of Consumer Finances, a public-use triennial household survey that contains information on race, demographics, income, and wealth. We split the household data into tax units and apply the result to the National Bureau of Economic Research’s TAXSIM model to calculate tax liabilities. To measure household resources consistently over time and robustly with respect to tax law changes, and to analyze the racial implications of tax preferences, we develop a new income concept, “expanded income” (EI), which creates a very broad measure of household income by adding untaxed cash and non-cash income components to adjusted gross income (AGI). We obtain several results: White tax filing units have higher average income and thus face higher average tax rates. But even after controlling for income, white units are more likely to file as married, less likely to file as head of household, and have a greater share of their income in the form of capital income, which is often tax-preferred.

Untaxed forms of income accrue disproportionately to whites, on an overall basis and after controlling for income. Black tax units have lower average tax rates than white tax units in the bottom half of the income distribution; controlling for filing status and the number of dependents explains the disparity. Black tax units generally have higher average tax rates in the top half of the income distribution because they receive less of their income in the form of capital income. Using a decomposition technique employed by Lin and Slemrod (2023), we show that about two-thirds of the difference in average tax rates between Black and white units can be explained by the combination of an intentionally progressive tax system coupled with group differences in income. The remaining one-third occurs within income deciles.