William Gale (Tax Policy Center; Google Scholar), Oliver Hall (Tax Policy Center) & John Sabelhaus (Tax Policy Center; Google Scholar): The Same But Different: How the Income Tax Affects Black and White Households:

The federal income tax does not explicitly take race or ethnicity into account; any two tax filing units with identical sources and level of income, deductions, and credits will face the same tax liability, regardless of group identity.

But there still may be disparate outcomes across groups because factors that affect liability may be correlated with group identity. For example, Black, Hispanic, and white households have different marriage rates, number of children, labor earnings, and wealth accumulation patterns, and these differences translate directly into income tax differences.

White households receive higher income, on average, and thus, in a progressive system, they pay a higher share of their income in taxes. At the same time, most exemptions and exclusions from income – such as housing, unrealized capital gains, and other preferential treatment of capital incomes – disproportionately benefit white households.

Relative to other low-income households, low-income Black households are more likely to file taxes as head-of-household and low-income Hispanic households are more likely to file married filing jointly and to have more dependents. Both sets of conditions reduce taxes for those groups relative to low-income white households.

Relative to other high-income households, Black households receive more of their income in the form of fully taxed labor earnings (wages, social security, etc.) and less in the form of tax-preferred or tax-exempt capital (business income, unrealized capital gains, imputed rental income, etc.). As a result, among high-income groups, Black households face higher tax rates than other groups.

Tax reform that broadens the base to include capital income and reduces tax rates will tend to help Black and Hispanic families relative to white families, as will expanding refundable credits for children and work. As a result, the Tax Cuts and Jobs Act in 2017 had little effect on racial/ethnic tax disparities by income class (although on an overall basis, it benefited white households disproportionately), whereas the American Rescue Plan Act of 2021 provided large benefits to low-income Black and Hispanic households.

Working Paper:

The federal income tax does not explicitly discriminate by race or ethnicity but can still generate disparate outcomes when a group’s activity correlates with determinants of tax liability. Using SCF data and NBER’s TAXSIM model, we find that untaxed forms of income accrue disproportionately to white households, on an overall basis and across most income levels. Black and Hispanic households face lower tax rates than whites in low-income groups due to differences in filing status and dependents but Black units face higher rates than whites in high-income groups due to differences in income composition. We also examine cross-group implications of historical and prospective policy changes.

• Online Appendix
• Policy Brief

Tax Policy Center, How the Federal Income Tax System Can Worsen Racial Disparities

Prior TaxProf Blog coverage:

• Aravind Boddupalli, Janet Holtzblatt & Lillian Hunter (Tax Policy Center), A Guide to Understanding Racial Disparities in the Federal Individual Income Tax System (July 8, 2024)
• Steven Sheffrin (Tulane), Disparate Impact in Taxation Meets Disparate Impact Jurisprudence: Burdens vs. Barriers (May 28, 2024)
• Diane Kemker (Southern), Do Black Taxpayers Matter? A Critical Tax Analysis Of IRS Audit Practices (May 21, 2024)
• U.S. Treasury Department, 2024 Racial Equity Progress Report (Apr. 13, 2024)
• William Gale (Brookings), Presentation Of  Racial Aspects Of The Federal Income Tax Today At UCLA (Feb. 15, 2024)
• Jacob Goldin (Chicago), Presentation Of  Measuring And Mitigating Racial Disparities In Tax Audits Today At Duke (Feb. 8, 2024)
• New York Times, IRS Admits Black Americans Face More Audit Scrutiny (May 16, 2023)
• American Tax Policy Institute Symposium, The Federal Income Tax: Racially Blind but Not Racially Neutral (Feb. 22, 2023)
• Benjamin Page, Tracy Gordon & Aravind Boddupalli (Tax Policy Center), Itemized Deductions Benefit Whites More Than Blacks And Hispanics (Feb. 18, 2023)
• New York Times, Black Americans Are Much More Likely To Face Tax Audits, Study Finds (Feb. 1, 2023)
• Ann Thomas (New York Law School), The Racial Wealth Gap and the Tax Benefits of Homeownership (Jan. 11, 2023)
• Palma Joy Strand (Creighton) & Nicholas Mirkay (Hawaii), Racialized Tax Inequity: Wealth, Racism, and The U.S. System of Taxation (May 20, 2022)
• Steven Dean (Boston University), Filing While Black: The Casual Racism Of The Tax Law (Apr. 22, 2022) (reviewed by Young Ran (Christine) Kim (Utah) here)
• Lawrence Zelenak (Duke), Examining the Internal Revenue Code For Disparate Racial Impacts (Sept. 24, 2020)
• Francine Lipman (UNLV), Nicholas Mirkay (Hawaii) & Palma Joy Strand (Creighton), U.S. Tax Systems Need Anti-Racist Restructuring (Aug. 4, 2020)
• Bloomberg, Treasury Department Plans First Analysis of U.S. Tax Benefits By Race (Dec. 15, 2021)
• Tax Policy Center, Racial Disparities and the Income Tax System (Feb. 8, 2020)
• The Atlantic, Tax Justice Is Gender Justice: Advancing Gender And Racial Equity By Harnessing The Power Of The U.S. Tax Code (Nov. 19, 2019)

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