It’s Not Butter: The Other Tax Spread

Congress and the White House are wrangling over the future of the Bush tax cuts, which expire this year.  Much has been written about how the 2001 and 2003 cuts widened the gap between the very wealthiest 2% of Americans and the middle and working classes. But far too little notice has been paid to the other spread caused by the tax cuts:  the growth of the economic divide between white Americans and people of color in the 2000’s.

Communities of color have seen a staggering loss of wealth — those financial assets that allow families to weather a job loss or to send a child to college.  In 2007, the typical African-American family owned 10 cents of wealth, and Latino families 12 cents, for each dollar of wealth owned by the typical white American family. For African Americans, that is a decline from the 12 cents they owned in 2004. Given the greater loss of housing wealth in neighborhoods of color than in white communities, odds are that in 2010, it will be found that there is an even wider gap.  If the decline were to continue by two cents every three years, in 12 years the typical African American family will be down to zero.

The tax code incentivizes wealth building by lowering or deferring income taxes on a person’s specific asset-building expenditures. The Bush tax cuts subsidized wealth-building for the already-rich. They allowed taxpayers in the bottom quintile to save $80 a year while the top one percent saved $42,618 annually. Very low-income people got nothing. Given that they are a disproportionate share of those in poverty and in lower-income brackets, people of color were left even farther behind.

How can tax reform reverse this dangerous trend?  First, let the cuts in taxes on income earned through investments expire.

Of federal tax expenditures to incentivize savings and investments in 2009, $89.5 billion was spent on reduced tax rates on dividends and long-term capital gains. But those tax breaks did not reach many African-Americans and Hispanics who were 23 percent and 28 percent less likely, respectively, than all families to own direct or indirect holdings of publicly traded stock.

Second, Congress should not only keep the estate tax but the exemption level should be lowered, the rate should be raised and it should become more progressive.

While one in 4 white Americans will receive an inheritance, only one in 20 African-Americans will – and they will receive only 8 cents to the white inheritor’s dollar. Eliminating the estate tax would massively increase the deficit in order to help the children of the richest of our population become even wealthier. Instead, all of the nation’s children should benefit from its revenue.

Third, tax deferments on college savings and retirement accounts need to be supplemented with things like scholarships and matched retirement accounts to ensure racial equity.

These deferments help middle-income Americans but do little for low-wage workers, who are disproportionately people of color. They are less likely to have employer-sponsored retirement accounts that would allow them to benefit from pre-tax retirement contributions, and tax-deferred college savings accounts are not effective for them because they have lower tax rates.

Finally, tax subsidies for homeowners should be reformed.

What began as an incentive for middle-class Americans to become homeowners has become a subsidy for mansions and vacation homes. Low-income homeowners who do not itemize their taxes get no benefit at all. Reining in the subsidies for high-cost homes and second homes and using those dollars to help those who were targets of sub-prime lenders and lost their homes to foreclosure would help close the wealth gap between white Americans and those of color. A renter’s deduction would increase the possibility of saving to buy that first home.
Oliver Wendell Holmes once said, “taxes are the price we pay for civilization.” There is nothing wrong with the use of tax policy to help Americans build wealth, nor is the magnitude of the tax expenditures the problem:  it’s the distribution. Economic equity is a mark of modern civilization, and if we pass policies that exacerbate class and race divides, we will get civilization-lite. We need to end the tax spreads.  We deserve butter.

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Meizu Lui is director of the Closing the Racial Wealth Gap Initiative at the Insight Center for Community Economic Development. She co-authored The Color of Wealth: The Story Behind the US Racial Wealth Divide.