We know that the tax system is set up to advantage people with money. And we know that in the U.S., people with money are disproportionately white. But what many people don’t realize is that the tax system actively advantages white families. Tax law professor Dorothy Brown explains how racial inequality is baked into tax policy in non-obvious ways, and how that affects wealth-building.
Dorothy A. Brown is professor of law at Emory University School of Law. She is a nationally recognized scholar in tax policy, race, and class and has published extensively on the racial implications of federal tax policy. She is the author of The Whiteness of Wealth: How the Tax System Impoverishes Black Americans — And How We Can Fix It.
Twitter: @DorothyABrown
The Whiteness of Wealth: https://bookshop.org/books/the-whiteness-of-wealth-how-the-tax-system-impoverishes-black-americans-and-how-we-can-fix-it/9780525577324
Black families pay significantly higher property taxes than white families, new analysis shows: https://www.washingtonpost.com/business/2020/07/02/black-property-tax/
Website: https://pitchforkeconomics.com/
Twitter: @PitchforkEcon
Instagram: @pitchforkeconomics
Nick’s twitter: @NickHanauer
Nick Hanauer:
If there’s one thing we’ve talked a lot about over the years, it has been the ways in which the economy is set up to advantage people with more money. In no place is that more obvious than in the tax code.
Dorothy Brown:
Basically, when Black and white Americans engage in the same activity, whether it’s getting married, whether it’s buying a home or trying to build wealth, our tax system advantages how white Americans engage in the activity. And at the same time, disadvantage how Black Americans engage in that activity.
Speaker 3:
From the home offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics and Nick Hanauer, the best place to get the truth about who gets what and why.
Nick Hanauer:
I’m Nick Hanauer, founder of Civic Ventures.
David Goldstein:
I’m David Goldstein, senior fellow at Civic Ventures.
Nick Hanauer:
So Goldy, if there’s one thing we’ve talked a lot about on the podcast over the years, it has been the ways in which the economy is set up to advantage people with more money. And, the way in which we preference capital over work, and so on and so forth. In no place is that more obvious than in the tax code. We’ve talked about it a lot, how if you’re rich and have a ton of income, your rates are literally lower than if you’re middle class and have a job.
David Goldstein:
You mean, like me?
Nick Hanauer:
Yes, like you. Specifically like you. I think you and I have not understood as clearly as the ways in which that system disproportionately disadvantages Black families. So today, it’ll be super interesting to talk to Dorothy Brown, a tax professor at Emory Law, who researches system racism in tax policy.
Dorothy Brown:
I’m Dorothy Brown, I’m a tax law professor at Emory University and I’m the author of The Whiteness of Wealth: How the Tax System Impoverishes Black Americans and How We Can Fix It.
David Goldstein:
First of all, I want to tell you how much I enjoyed the book. It was eye opening. We certainly understood that our tax system preferences wealthy people and therefore, it would disadvantage Black families since they are less wealthy. But, I had no idea beyond that, how much just the whole structure of the system disadvantaged Black families.
If you could start off by just giving us an overview?
Dorothy Brown:
Sure. My research uncovered … Let me be clear. I went into tax law thinking it had nothing to do with race. So Goldy, you are not alone. What I discovered, I fell into it because of doing my parent’s taxes, is basically when Black and white Americans engage in the same activity, whether it’s getting married, whether it’s buying a home, paying for college for their kids, getting a job or trying to build wealth, our tax system advantages how white Americans engage in the activity. And at the same time, disadvantage how Black Americans engage in that activity.
David Goldstein:
Give us an example of that.
Nick Hanauer:
Yeah.
David Goldstein:
Let’s start with one of the biggies in your book, the joint return.
Dorothy Brown:
Right. The conventional wisdom is, when you get married, you get a tax cut. And, that’s only true if you are in a household with primarily one wage earner and the other spouse stays at home or contributes very little to household income. That household actually gets a tax cut when they get married. But, the household that doesn’t get a tax cut are those where both spouses work full-time and contribute roughly equal amounts to household income. That household can pay higher taxes when they get married.
When I looked at Census Bureau data … Because let me just drop a footnote, the IRS does not publish statistics by race. So the only way I was able to find this out and the only way I was able to write the book, was I had to become a detective, digging through any kind of data that I could use for my income tax analysis. So the Census Bureau is a great dataset because it’s large. What I discovered is white married couples were more likely to be in single wage earner households and eligible for the tax cut when they get married. But, Black married couples, regardless of income, were more likely to be in what I call marriage penalty households, 50-50, and therefore paying higher taxes.
When you think of marriage, white and Black Americans do marriage differently. White Americans are more likely to be able to have one single wage earner, the second spouse works at home. Black married couples can’t afford to do that. In order to produce a standard of living that’s above the poverty line, basically you need two workers.
Nick Hanauer:
This is just such an interesting example. And of course, the differences between these two modalities extends far beyond just how much tax you pay. But, can you put some numbers to it? In the book, you use the example of two married households, one where one person earned 100,000 and the other spouse earned zero. And, the second household, where both earned 50,000, to make 100. What are the actual dollars and cents implications of those two different circumstances?
Dorothy Brown:
Right. First, I’ll say that the tax law treats those two households equally and believes the right answer is for those two households to pay the same amount of taxes. But, the reality is a $50,000 job is very different than $100,000 job. It’s different in terms of the benefits that one might get, it’s different in terms of the ability to work at home, something we saw through the pandemic. It’s different in terms of the dual wage earner household has to figure out a way to pay for childcare. They may need two cars to drive to work. Whereas the $100,000 household, they don’t necessarily need two cars. Those households, economically, are very, very different.
I’ll walk you through it. Let’s say the $100,000 wage earner doesn’t get married.
Nick Hanauer:
Yeah.
Dorothy Brown:
And, he pays taxes at X dollars. When he gets married, he and his spouse pay taxes at X minus dollars, they get a tax cut.
Nick Hanauer:
Right.
Dorothy Brown:
Whereas the Black married couple, they’re paying taxes at let’s say half X, and when they get married, they pay taxes, because of the marriage penalty, X plus. They wind up paying higher taxes than had they remained single.
The dollars and cents, what the tax law does is say the $100,000 household should pay taxes at the same level as the two $50,000 households.
Nick Hanauer:
Okay.
Dorothy Brown:
That results in a tax cut from what the 100,000 single wage earner would earn. That’s in a perfect system.
We didn’t have a perfect system pre 2017, and what actually happened is the two $50,000 wage earners paid higher taxes than the $100,000 single wage earner couple.
Nick Hanauer:
Amazing.
Dorothy Brown:
Yes.
David Goldstein:
They pay the same, it’s just that the single earner got a tax cut and the double earners got a tax increase from marriage.
Nick Hanauer:
Right.
David Goldstein:
And then, on top of that, Dorothy, I think it’s an important point that you make, which is the costs are very different.
Dorothy Brown:
Right.
David Goldstein:
Because they’re both working.
Dorothy Brown:
That’s right.
Nick Hanauer:
Right.
Dorothy Brown:
That’s right. Our progressive income tax system is built on this notion of ability to pay. Why would you treat a single wage earner household with a stay-at-home spouse as having the exact same ability to pay as two $50,000 workers? It makes no sense.
David Goldstein:
Okay. I guess the question is how did we get here? If we go through the Congressional record, it’s not like Congress went and said, “Hey, let’s write the tax law in such a way as to disadvantage Black families.” You won’t find that intent anywhere, that legislative intent.
Dorothy Brown:
But, you will find legislative intent to write it to benefit rich, white taxpayers.
David Goldstein:
That’s for sure.
Dorothy Brown:
Like Henry and Charlotte Seaborn. We have the joint return because of this couple out of Seattle, Henry and Charlotte Seaborn, who were one of the few Americans in the late 1920s paying taxes and they didn’t like it. So they engaged in self help, I would argue, filing a fraudulent return that created a deduction that didn’t exist and the IRS said, “You can’t do that.” It went to the Supreme Court and the Supreme Court said, “Oh yeah, you can do that.”
We have tax policy that is intentionally designed to benefit rich, white Americans. You’re right, there’s no legislative history that says, “We want to harm Black Americans.” But, we know when the joint return came into existence in 1948, there was a higher percentage of Black married couples with wives working outside the home. So was it benign neglect, was it just intentional benefits in favor of white taxpayers? I think it’s the latter, which of course, necessitates a discriminatory impact on the part of Black taxpayers.
Nick Hanauer:
What are some other interesting examples of the ways in which the tax code is unfair in this way?
Dorothy Brown:
Let’s take home ownership. Lots of progressive Americans or policy makers think the reason why Black Americans don’t have more wealth is we need more Black homeowners. What the research shows is Black home ownership has different wealth implications than white home ownership. That is a function of where homeowners live and the fact that we have segregated housing.
But, when you talk about the tax breaks, if you sell your home for a half a million dollar … Well, you sell your home at a gain, up to half a million dollars if you’re married, you can receive tax free. If you sell your home at a loss, there’s no tax break. You would look at that and say, “Wow, isn’t that a great benefit? Everybody can build wealth, up to half a million dollars, tax free.” But, the problem is you have white homeowners more likely to have that half a million dollar gain and more Black homeowners more likely to have a non tax deductible loss. Our tax laws benefit how white Americans own homes and disadvantage how Black Americans own homes.
David Goldstein:
This difference in appreciation in houses, between white homeowners and Black homeowners, as you point out in the book, that’s not due to legal red lining like we used to have. It’s the preferences of white homeowners.
Dorothy Brown:
Correct. Correct, because white homeowners are the majority of the home buying population and white homeowners preferences are to live in almost all white neighborhoods.
So for example, there’s sociology research that did video experiments and they had the same neighborhood with the same amenities, but the only different was the race of the actors walking through the neighborhood. In video number one, all white actors. In video number two, all Black actors. And in video number three, 60% white, 40% Black actors. They people look at these neighborhoods, look at these videos and say, “Where do you want to live?” The white viewers wanted to live in the all white neighborhood and the Black viewers wanted to live in either the racially diverse or all Black neighborhoods.
You can’t say it’s because white homeowners want safer neighborhoods with less crime and better schools because when you show a video that has all of that equalized, they still pick the neighborhood that’s all white.
David Goldstein:
This creates a catch 22 for Black homeowners, doesn’t it? If they want the kind of appreciation that the white homeowners get, they need to move into the white neighborhood. But, if too many Black families move into the white neighborhood, the white families move out and they don’t get the appreciation.
Dorothy Brown:
That’s absolutely true, that’s part of the problem. You moving in the neighborhood, and then you have to literally root against other Black people moving into the neighborhood.
The other problem is if you are one of the only Black families in the neighborhood, you have the potential to be subjected to lots of problems. Your neighbors don’t know a Black person lives in the neighborhood so when you’re trying to get into your own home, they’ll call the cops. If you have children, your children may be targeted for discipline, for engaging in the exact same behavior their white peers do. But, the teacher sees a discipline problem when it’s a Black child acting up and they see a child who is intellectually curious when it’s a white child acting up.
There are all kinds of problems associated, or I would say drawbacks, associated with a Black American moving into an all white neighborhood and having their home be good financial investment.
Nick Hanauer:
Yeah. Just parenthetically, and this doesn’t speak to the Federal tax code but certainly to local property tax codes, what’s now pretty well understood is how disadvantaged poorer neighborhoods, and therefore Black neighborhoods, are in terms of property tax rates versus the wealthiest neighborhoods.
Dorothy Brown:
That’s absolutely true.
Nick Hanauer:
Yeah. That we now can see, there’s a lot of new data coming out, that shows no surprisingly that where the houses are most expensive, the rates are effectively lowest. And, where the houses are the least expensive, the rates are effectively highest.
Dorothy Brown:
There’s research that shows when you compare property tax rates of Black homeowners versus white homeowners, that white homeowners have lower tax rates. It’s a function of what Nick said, it’s white homeowners are more likely to appeal.
But, there’s also this idea that Black homes are valued, the assessment of Black homes is not based on the market reality, that white homeowners value them less. An assessor will put a value on Black home that’s wildly out of proportion to what they would actually get if they sold a house.
Nick Hanauer:
Right.
Dorothy Brown:
And of course, we’ve seen newspaper stories recently on what happens when you actually appraise Black homes, that when the appraiser comes in and thinks it’s owned by a Black person, the appraiser comes in $100,000 lower. And then, when a different appraiser comes in and a white person is sitting there, the appraisal comes back much higher.
Nick Hanauer:
If you had a blank slate to rewrite the tax code with no political considerations, what would you do?
David Goldstein:
The benevolent dictator question. You do it the way you want it.
Dorothy Brown:
I would tax, first, all income the same. Income from stock would be taxed at the same rate structure as income from wages, there’d be no preferential rate. And, I would have very few, if any, exclusions. There’d be one deduction for what I call a living allowance, which meant if you didn’t earn enough from your job to get out of poverty … not actually get out of poverty, to have a sustainable lifestyle, a living allowance. Then if you didn’t earn enough, the Federal government would write you a check for the difference. And if you earned more than that, you would pay taxes at the progressive tax rate. So there’d be pretty much no loopholes.
Nick Hanauer:
Okay.
David Goldstein:
No loopholes, no deductions, no home mortgage interest deduction.
Dorothy Brown:
No. You’d have this living allowance deduction and that’s it.
David Goldstein:
No capital gains exclusion.
Dorothy Brown:
No.
David Goldstein:
Well, what about the step up basis on capital gains?
Dorothy Brown:
Oh, that’s gone.
David Goldstein:
Oh, God. I love it.
Nick Hanauer:
What about the carried interest loophole?
Dorothy Brown:
That’s gone.
David Goldstein:
Sorry, Nick.
Dorothy Brown:
Now you’re just tossing me softballs.
David Goldstein:
Republicans talk about simplifying the tax code.
Dorothy Brown:
Yes.
David Goldstein:
I’m happy to do it, eliminate all deductions.
Dorothy Brown:
That’s right. That’s right. They don’t want simplification that way, they want extremely complexity when it helps themselves and their donors. They’re not really interested in tax simplification.
David Goldstein:
I think you mentioned in the book that the number of people who itemize, which was already very low, is much lower after the 2017 reforms.
Dorothy Brown:
That’s absolutely right.
Nick Hanauer:
Reforms is-
David Goldstein:
Yeah, I know.
Dorothy Brown:
In quotes.
David Goldstein:
I almost choked on the word.
Nick Hanauer:
Okay.
Dorothy Brown:
In quotes. It used to be about a third of Americans itemized, now it’s closer to 12 or 13 percent. I think we actually can get some things done. I think because the itemized deductions impact fewer and fewer Americans who are richer and richer that we may be in a moment where we see some movement here. The mortgage interest deduction could actually go.
Nick Hanauer:
Yeah. Or, at least you could divide it by every American.
Dorothy Brown:
Yeah.
Nick Hanauer:
Fine, incentive it. But just take that, whatever it is, 60 or 80 billion bucks a year and divide it equally among the people who buy the houses. Don’t give this massive advantage-
David Goldstein:
Why not the renters?
Nick Hanauer:
Fine.
Dorothy Brown:
Well, that’s the problem. That’s the problem because home ownership has always been raced in America. The minute you give subsidies to home ownership, you’re going to disproportionately benefit white Americans who are the majority of homeowners. And, we say we don’t allow a deduction for rent because that’s a personal expense, but so is a home. We make all kinds of exceptions that just so happen to disproportionately benefit white Americans while disadvantaging Black Americans.
David Goldstein:
Unfortunately, Dorothy, you’re not our benevolent dictator so you can’t rewrite the tax code. Given the current system we have right now, and not just the tax code but just the larger economic and social environment, what are your recommendations to Black families?
Dorothy Brown:
Yeah. I recommend Black Americans recognize that they have to take a defensive posture. Well, one, if you’re going to get married on New Year’s Eve, don’t do it, wait until January 1, because that puts off the issue for at least one more year. If you’re going to buy a home, then don’t be house poor if you’re living in a racially diverse or all Black neighborhood. You can be house poor if you’re living in a white neighborhood, but not in a racially diverse or Black neighborhood. Do not take home equity loans if you’re living in a racially diverse or Black neighborhood.
And whatever money you save by not being house poor, put it into your retirement account and max out. Or, start a 529 child savings account for your child or a niece or nephew. If you work and have access to an employer provide retirement account, to the extent you are financially able, max out. Think about, right now we do have these tax subsidies that are disproportionately benefiting white Americans, let’s make sure that to the extent we can, they start to benefit Black Americans as well.
David Goldstein:
You point out in the book that you recommend stocks. That there are no white stocks and Black stocks, unlike white neighborhoods and Black neighborhoods.
Dorothy Brown:
Right. I do think investing in the stock market is a way to go. The problem is the financial services industry does not see Black Americans as a potential target market. If you have money to invest, how do you know where to invest it? And how do you know someone’s not trying to take advantage of you, because we also have a history of the financial services industry, of targeting high income Black and Latino Americans for sub-prime mortgages.
What you need is the financial services industry to take a good, hard look at themselves and do better.
Nick Hanauer:
Good luck with that.
David Goldstein:
Yeah. What is your recommendation to white people? If we want to address this, what do we have to do?
Dorothy Brown:
Well, first, I talk about acknowledging the family financial transfers you’ve gotten along the way. Grandparents paid for culture, or parents paid through K through 12. How are you in the position you got yourself in? A lot of white Americans like to think they did it because of hard work, and there was some hard work, but there was also some luck. You were born white to parents who had some wealth, and they were able to provide for you to go to college without having significant student loan debt, to buy a home because you didn’t have to worry about paying for a down payment. Or, grandma died and you inherited the home, so talk about those stories of luck.
And, if you happen to be a white homeowner in a racially diverse neighborhood, don’t center yourself, but come into the neighborhood like you are new and sit there and listen to what the existing or the longterm homeowners are thinking about changing, and not coming in and making the neighborhood mold to your will.
David Goldstein:
And, we need to, I guess, advocate for things that don’t necessarily advantage us financially.
Dorothy Brown:
Absolutely. For example, is it fair that Black Americans have been paying higher taxes than their white peers? No. Well, what’s the solution? For white people to pay higher taxes, to pay their fair share. That’s what the conversation in Washington, DC has been about, who’s going to pay higher taxes. And yeah, white Americans who have been skating off the backs of Black taxpayers need to step up and advocate for tax reform that benefits Black Americans.
Nick Hanauer:
I was really struck by the marriage deduction example and how different it really is to have two taxpayers, both contributing 50 to make 100 versus one at a 100, because those circumstances are profoundly different.
Dorothy Brown:
Yes.
Nick Hanauer:
Treating those two circumstances the same, it just doesn’t make very much sense. But, while there are millions of Black families who would agree with that, the good news is that there are many, many, many millions more white families who would also agree with that.
Dorothy Brown:
Right.
Nick Hanauer:
Which is where political consensus comes from, and action.
Dorothy Brown:
I actually think the reason why the 2017 Tax Act solved the marriage penalty for so many families was because my research showed white married couples were becoming more and more subject to the marriage penalty that Black married couples had always been paying.
Nick Hanauer:
Right.
Dorothy Brown:
So over time, white married couples started looking like Black married couples.
Nick Hanauer:
Absolutely.
Dorothy Brown:
And, not like the Seaborns. So suddenly, out of nowhere, we get this marriage penalty fix in the 2017 Tax Act. I’ll drop a footnote here. It did nothing to fix the marriage penalties in the earned income tax credit. So there were certain families that the Trump folks cared about fixing, but how it fixed it was to increase the marriage bonus. We have white couples getting an even greater marriage bonus, to ensure Black Americans’ taxes don’t go up when they get married.
Nick Hanauer:
Interesting.
Dorothy Brown:
Black married couples still don’t get a tax cut, but I digress.
Nick Hanauer:
Yeah. I think we’re at the end of our time, but we always have a final question. I happen to know you have a really great answer to this question. Which is, why do you do this work?
Dorothy Brown:
I do it because I think I’m right. And, I want to push for reform. I do it because I can’t not do it. I think it’s important that our race and tax statistic be published. I think Treasury’s refusal to do it, and the IRS’s refusal to do it will not stand, given the President’s racial equity order. I think I’m actually close to winning this one.
Nick Hanauer:
I love it.
So Goldy, I know we discussed it a lot in the interview, but I was just really fascinated and taken by the difference in circumstances between two joint filers, married couples. Never occurred to me, until I read it in her book, what a big difference there is between a married couple where one person earns 100,000 and the other person earns zero, and two people, both of whom earn 50,000. And, how the tax code treats those as identical, but of course the circumstances are so different.
David Goldstein:
Right.
Nick Hanauer:
Forget the amount of tax that you pay, just the implication of the childcare costs that a married couple, both of whom work, have to deal with. The transportation challenges. Pick it. There isn’t a thing that isn’t different between those two circumstances.
David Goldstein:
It’s even more nuanced than that because, as Dorothy points out, the type of job that pays you 50,000 versus the type that pays you 100,000 is very different and tends to come with much fewer benefits. There’s obvious things, like 401K. If your employer is doing a 3% match, well, that’s a much larger amount of money on $100,000 income than on a $50,000 income.
Nick Hanauer:
Right.
David Goldstein:
But also, you’re much less likely to have that match.
Nick Hanauer:
Right.
David Goldstein:
You’re much less likely to have employer provided health insurance.
Nick Hanauer:
No, it’s super interesting. Obviously, there are a ton of things to change within our tax code.
David Goldstein:
She talks about this in the book, how we should be looking at wealth not income, in terms of the tax code a lot more.
In 2016, the median wealth of white households was $171,000, which is not a ton. It’s not a lot of money. You need more than that if you’re going to retire in Seattle. But, the median wealth of Black households was one-tenth of that, it was only 17,100. She also points out in the book that white families are equally likely to have zero wealth or be millionaires, whereas Black families are 20 times more likely to have zero or negative wealth than to be millionaires. It’s a huge difference, in terms of the lived experience in America.
Nick Hanauer:
Yeah. That’s why it’s worth leaning in to these issues.
In the next episode of Pitchfork Economics, we get to talk to two pals of mine, Dr. Eric Beinhocker and Dr. Doyne Farmer, both at the Institute For New Economic Thinking at Oxford University, about the economics of climate change.
Speaker 3:
Pitchfork Economics is produced by Civic Ventures. If you liked the show, make sure to subscribe, rate and review us wherever you get your podcasts. Find us on Twitter and Facebook at @civicaction and @nickhanauer. Follow our riding on Medium at Civic Skunkworks. And, peep behind the podcast scenes on Instagram at @pitchforkeconomics.
As always, from our team at Civic Ventures, thanks for listening. See you next week.