Nicole Cardoza Nicole Cardoza Nicole Cardoza Nicole Cardoza

Fight racial tax inequity.

Happy Monday! The NYTimes released Trump's taxes and I'm sure we'll be hearing a LOT about it this week. As you follow the news (or tune it out, your choice) consider how racism and racial bias have helped to craft a tax system that enables some people to struggle with tax debt and others to avoid paying taxes at all.

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TAKE ACTION

  • Explore how racial disparities affect the income tax system in this interactive Form 1040, via the Tax Policy Center.

  • Review the tax policies of both Presidential candidates

  • Consider: How has generational wealth impacted your life today? What experiences would change based on your family's generational wealth?

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By Nicole Cardoza (she/her)

Yesterday the New York Times released President Trump’s tax information. The comprehensive report leads with news that Trump paid $750 in federal taxes in 2016 and 2017 (NYTimes). In a press conference response, Trump called these allegations a lie and that the “IRS does not treat me well” (NYTimes). But when we zoom out at the history of federal taxes in the U.S., I think it’s more accurate to say that “the IRS does not treat” marginalized communities well, not billionaires. And part of this is because of the racism embedded in our tax code.

 

Let’s start with our federal tax. Generally speaking, it reduces racial disparities by taxing the wealthy more than the poor and investing tax revenue into programs that support lower-income communities. But the apportionment of these taxes is rooted in slavery. Back then, to determine the number of seats per state in the House of Representatives, the Framers recommended apportioning them based on population size. This put the North and the South in conflict because population sizes varied greatly in each area. Many citizens were living in the North – consisting of urban areas with a high density of people. In contrast, the South had fewer free people spread across high-acreage farms.

 

However, the South had significantly more enslaved people in the North, and they considered them “valuable property” that could be leveraged for more representation. So, the South fought that free and enslaved people should count towards population size. The North fought to make representation dependent on the size of a state’s free population. Ultimately, the Framers agreed to the “three-fifths compromise,” the abhorrent decision that representation in Congress was based on a state’s free population plus three-fifths of its enslaved population (Britannica). 

 

But this meant that taxes would be applied the same way. So the Apportionment Clause, written by delegates at the Constitutional Convention in 1787, emphasized that “representatives and direct taxes shall be apportioned among the several States” (The Conversation). This meant that even though Southerners may have more people counting towards their representation, their taxes wouldn’t scale significantly because of it. That was a real fear of many people during the time; about 40% of the population were enslaved people (Forbes).

 

The decision to use apportioned tax regulations to protect Southern states from higher taxes has prevented more progressive tax reform. This same argument has been used to block a federal tax proposal on the wealthy in 1894 and, over 100 years later, question the legitimacy of wealth taxes proposed by candidates in this election (NPR). Some argue that because this apportionment no longer applies, taxes should be redefined to address the wealth gap (Center on Budget and Policy Priorities).

 

It also enabled significant wealth creation for Southerners that enslaved people. It allowed them to benefit from the labor of enslaved people with marginal tax implications. Economists Emmanuel Saez and Gabriel Zucman argue that this mentality is a driving force of the anti-taxation sentiment present in today’s society, particularly against the wealth (Forbes).

 

Not only does our current tax code inadequately address the wealth gap,  it also doesn’t reflect the systemic racism and discrimination that exacerbates it. Our federal tax liability is influenced by things like our income, savings, and what we spend on a mortgage or education. But the opportunities to spend and earn in these aspects of society aren’t equal. People of color have historically been paid less, are less likely to have savings, often declined from mortgage opportunities, and less likely to be accepted into college – among other things (Center on Budget and Policy Priorities). Our work income is also taxed more highly than our income from wealth, but people of color have been systemically disadvantaged in building wealth throughout their lifetimes. 

 

State taxes aren’t much better. In fact, the report from the Center on Budget and Policy Priorities argues that they increase income inequality. States make most of their money through regressive taxes: taxes that have an increased burden on lower-income communities. These taxes include sales taxes, property taxes, and excise taxes. It doesn’t matter if you make $10,000 or $10million a year, you’ll pay the same amount of taxes*. But its impact is more considerable on those that have less to spend. (Center on Budget and Policy Priorities).

*There’s research that shows that people of color, particularly Black people, often pay more in property tax than their neighbors due to the systemic racism in real estate. But that’s for another newsletter.
 

Lower-income people are more likely to be audited too. It’s easier than going after wealthy business owners and corporations with confusing (and often evasive) revenue streams and assets (Popular Science). And funding cuts at the IRS have encouraged auditors to choose cases that require less bandwidth. Ironically, these wealthy constituents – who are overwhelmingly white – are the most likely to have unpaid taxes (Center on Budget and Policy Priorities).

 

To offset this lack of bandwidth, the IRS started a program to outsource tax collection to private firms. These private companies are empowered to act under the IRS to recoup lost revenue from tax payments and get to keep a percentage of what’s earned for themselves. And most of the taxpayers targeted are low-income. A report from the Taxpayer Advocate, an independent organization within the IRS that represents taxpayers, found that 33% of funds collected by private firms in 2017 came from Americans facing “economic hardship” (Washington Post). The IRS has programs designed to protect low-income earners from getting overwhelmed with tax debt, but private companies are financially incentivized to get any dollar they can. And private debt collection has a long history of racial discrimination (ACLU).


But the most shocking part of all this (to me, at least) is that the IRS doesn’t even collect racial data. So although we can infer how the tax codes affect communities of color, there is no hard data, and tax law decisions may not consider these disparities (Popular Science). It might be for the best; you could argue that more discriminatory practices could be applied because of this added information. But on the other hand, it would illuminate more spaces where we can create a more inclusive economic structure that supports us all. Even if the data isn’t captured, it’s clear that racism and racial bias has shaped the tax code we see today.

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