Tax Day Is Over. Now Let’s Change Our Tax System

By Heather McCulloch and Elvis Guzman

Now that most of us have just experienced the complexities of filing our tax returns, this is a good time to reflect on the role of U.S. tax policy as a driver of wealth inequality, in general, and the racial wealth gap, in particular. While tax day is now behind us, the mission of addressing the inequities within our federal tax code is just getting started.

We all know the purpose of the federal tax system is to generate public revenue. But we pay less attention to the fact that the tax code also plays an important role in advancing social policy, especially as it relates to building household wealth. The tax code actually subsidizes American households to build financial assets through tax subsidies – through deductions, credits, exclusions, deferrals, and preferential rates – that reduce a family’s tax bill if they do things like buying a home or saving for higher education or retirement.

These tax measures are known as “tax expenditures” to economists and policymakers because they have the same effect on the federal budget as direct spending. A dollar not collected due to a tax deduction or credit has the same effect on the budget as a dollar spent on federal programs or services. But the benefits of tax expenditures primarily go to wealthier households. A recent report by the Corporation for Enterprise Development (CFED) shows that, in 2013, more than half of the $1 trillion tax subsidies ($542 billion) supported households to save and build wealth. However, the bottom 60 percent of households received only 12 percent of these benefits and the top 1 percent of households received more benefits than the bottom 80 percent combined.

The Tax Policy Center found that 70 percent of tax savings from the mortgage interest deduction, property tax deductions, and employer-based retirement savings went to the top 20 percent of households. A 2013 Congressional Budget Office report showed that almost all of the benefits of preferential tax rates for capital gains and dividend income went to the top 20 percent of households.

It’s hard to know whether and how households of color benefit from these federal tax subsidies because the IRS does not collect data by race and ethnicity. A recent PolicyLink report used income data to get closer to an answer and found that the majority of tax savings from tax deductions, exclusions, and preferential rates for capital gains and dividends went to the top 20 percent of households. Almost 80 percent of those households are white, only 6 percent are black, 7percent Latino and 7 percent Asian/Pacific Islander.

The Great Recession resulted in an enormous loss of household wealth; lower-income households and households of color in particular are struggling to get back on their feet. Yet, ironically, they are the least likely to be able to access federal tax subsidies designed to encourage savings and investment. Instead, billions of dollars of tax benefits are flowing to the wealthiest households—those least in need of public support.

Recent polling data from the Pew Research Center shows that a majority of Americans (59 percent) see the tax system as “deeply flawed” and feel it should be completely changed. Their top complaint is that corporations and the wealthy don’t pay their fair share of taxes. In recent years, and again in this 114th Congress, members have devoted significant attention to tax reform. While few people are optimistic that comprehensive tax reform legislation will move anytime soon, these discussions provide an opportunity for advocates to shine a light on the inequitable nature of federal tax subsidies and call for inclusive, progressive, equitable and impactful tax policies that significantly expand savings and investment incentives for lower-income households and households of color.

The Center for Global Policy Solutions is a member of the Tax Alliance for Economic Mobility, a national coalition working to advance tax policies that expand wealth-building opportunities for low-income households and households of color through changes to U.S. tax policy. To learn more about how tax policy is driving inequality, promising policy solutions, and ways you can engage in discussions about policy change, please join us for a panel on tax policy at the upcoming Color of Wealth Summit on April 30th.

Heather McCulloch is the Director of the Tax Alliance for Economic Mobility. Elvis Guzman is the Policy and Program Associate for economic security at the Center for Global Policy Solutions.