Are you wondering if the U.S. tax system disadvantages minorities? All workers in the U.S. earning an income need to file taxes with the IRS and state departments at least once a year.
While filing your taxes online may seem harmless, and the final amount owed or returned appears unrelated to race, research demonstrates that tax policy affects taxpayers’ ability to build wealth differently by ethnicity and race.
In this article, we’ll discuss how the U.S. tax system disadvantages minority groups and disproportionately encourages wealth creation.
The U.S. Tax System
The U.S. tax system is progressive, which means the more you earn, the more you’ll pay in taxes. There are a total of seven taxable income brackets, which consist of a marginal tax rate on income earned within a certain range. So ultimately, the lower your income, the less you’ll pay in taxes.
Not only that but low-income earners may qualify for Earned Income Tax Credit, also known as EITC, which can reduce their tax burdens even more.
With the EITC and other credits, such as the federal child tax credit, married couples and individuals can reduce their yearly tax bills.
Profit from the sale as assets, such as stock holdings, are considered investment earnings, which are a type of capital gains. People who sell their investments pay 15% tax on those gains, with caps at 20% for those with high income.
Essentially, tax rates exceed capital gain rates and have for many years—additionally, many states tax income and capital gains at the same rate.
Some taxpayers can pay significantly less on taxes when claiming deductions using tax software when they file taxes. For example, the government offers deductions for financial assets, including real estate. Not to mention, it also taxes money earned through financial investments at a lower rate than income.
This means that the more financial assets you have, the less you’ll pay in taxes. But, unfortunately, you typically have to be rich to take advantage of these deductions.
Billionaires who own real estate may pay significantly less in taxes than the average office worker because of these deductions. Since many minority groups don’t have the same opportunities to make millions or even billions of dollars, they’re left paying even more on taxes than people like Amazon Founder Jeff Bezos.
Another example is that someone might have a small salary but have financial assets or millions of dollars worth of shares in their company, which means they get high deductions even though they make millions of dollars.
There are nine main tax deductions and exclusions that people can claim on their taxes:
- Mortgage interest
- State and local taxes
- Charitable contributions
- Life and car insurance
- Charitable contributions
- Pension exclusions
- Home sales exclusion
- Estate step-up exclusion
- Capital gain exclusion
U.S. Tax System Disadvantages Minority Groups
These deductions and exclusions benefit white taxpayers and their households; data from the Federal Reserve’s Survey of Consumer Finances demonstrates that black and Hispanic households benefit less than white taxpayers with a growing gap.
For example, white households netted over two hundred billion dollars more due to deductions in the late 80s and over four hundred billion in 2016, with the gap increasing each year.
The IRS does not collect taxpayer data or information that includes race or ethnicity. It also doesn’t provide demographic data, but the tax deductions indeed tend to benefit individuals with high incomes.
For example, a $2,000 deduction for someone in the highest tax bracket of 37% is worth $740. However, for someone in the 12% bracket, the deduction is only worth $240.
Most taxpayers take the standard deduction rather than the itemized deduction, which means an individual can take $12,500 off their taxes while a married couple jointly filing can take off $25,1000. Meanwhile, the household tax filer can subtract $18,800.
While most people choose the standard deduction because it’s easier to manage, others can choose the itemizing deduction, which would only make sense if your deductions exceed the standard deduction limits.
The median wealth for white families is significantly higher than for black or Hispanic families. Some deductions are only available to particular groups of people who are more likely to be white.
For example, property tax deductions are only available to homeowners, who are more likely to be white, while there are no deductions for rent.
Not only that, but, homes owned by people of colour are typically undervalued, so any deductions they are getting will be far less than those from a home owned by a white person.
Many of the policies that help American households build wealth are targeted at individuals and families who already have wealth and disadvantage those who don’t.
For example, estate tax on assets passed onto the children of one generation only kicks in for estates valued at more than $11 million. An estate worth this amount is likely to be owned by a white family, and they could pass it down to their children without paying estate tax.
Our current tax system is similar to the system we had over one hundred years ago. Sales taxes are proportional, which means everyone pays the same rate, but they can also be considered regressive.
Regressive taxes occur when individuals have to pay a higher portion of their income to obtain the goods.
Let’s say that person A makes $30,000 per year and person B makes $ 150,000. If both individuals decide to purchase a mattress for $1,000, including sales tax, person A is spending 3.3% of their income, while person B is only spending 0.67% of their income.
Essentially, the people who contribute the most of their incomes are making the least amount of money.
Not only that but there is also a general wealth disparity between the races without the involvement of taxes. White workers take home thousands of dollars more per year than black and Hispanic workers.
U.S. Tax System Disadvantages Certain People Final Thoughts
The IRS doesn’t consider race when you file your taxes. However, the overall tax system disadvantages minority groups by not taking into account the different ways their lives are impacted by taxes, income, and even financial matters that are out of their control, such as property tax assessments.
We hope you found this article on how the U.S. tax system disadvantages minorities interesting.
Author: Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, travelling, and music.