A Black Critique of the Internal Revenue Code

TL;DR: Using Census data and the Survey of Income Program participation (SIPP), this article showed that black Americans pay more federal income tax than whites at the same income levels than white Americans.

Abstract: Using Census data and the Survey of Income Program participation (SIPP), the authors use social science methodology to show that blacks pay more federal income tax than whites at the same income levels.

Summary

A BLACK CRITIQUE OF THE INTERNAL REVENUE CODE

• This article raises the question of whether the Internal Revenue Code systematically favors whites over blacks.
• If this part of critical race theory has merit, then every important American institution should reflect racial subordination, even such a seemingly neutral institution as the American tax system.
• When it existed, income averaging allowed taxpayers with fluctuating incomes to average their incomes over several accounting periods, thereby placing themselves in lower tax brackets.'.
• The exclusion of interest on tax free bonds 3 explicitly removes from the tax base "accessions to income, clearly realized, and over which taxpayers have complete dominion.".
• While many studies about the impact of tax law rely on data from returns, the authors were unable to do so because tax returns are not coded by race.

A. Critical Race Theory and Method

• Critical race theory has generated heated debates about method.
• For us, narrative is a powerful and worthwhile method.
• When Professor Williams writes about being denied entrance to a store because of her race,2 she opens this experience to whites in an intimate way that statistics cannot replicate.
• Bell often uses such devices as a means of exposing society's faults.
• In their view, hostile critics of critical race theory have placed too much emphasis on the use of narrative, and not enough emphasis on the theory of systematic racial subordination in American society.

C. The Significance of Our Work

• For the most part the authors reserve their conclusions until they have presented the data.
• Nonetheless, in America a gap exists between blacks and most lawmakers because many whites and blacks do not interact in any meaningful way.
• The authors believe that this ignorance is one of the reasons for structural racial subordination in America.
• As lawyers concerned with racial justice in America, the authors also believe that if the Internal Revenue Code systematically subordinates black interests, then Congress should change it.
• The authors next present their evidence about how the provisions that they studied have different impacts on blacks and whites.

A. Tax Benefits

• The authors looked at four code sections that protect wealth, both while the original owner holds it and when the original owner passes it on to other people, usually younger family members.
• 33 These provisions are relevant to their topic of black/white differences in tax benefits for two reasons.
• In addition to the general benefits that flow to appreciated property, owner-occupied homes come with four tax benefits of their own.
• If a couple has a taxable income between the rate shift levels for single and joint returns, there is a possibility of a marriage bonus.

1. REALIZATION AND REFINANCING

• 37 In contrast, when many assets appreciate in value in their owners' hands, the increased value is not immediately taxed.
• A nonstatutory rule called "realization" determines the time of taxation.

2. SECTION 1014 BASIS ADJUSTMENT

• In order for a taxpayer to obtain Section 1014's benefits, the type of property involved is crucial.
• First, Section 1014 only benefits property that has appreciated in value.
• Property that has declined in value receives a stepped down basis on the owner's death, and thus nobody takes a deduction for the lost value.
• Bank accounts can appreciate as they accumulate interest but that interest is realized and taxed each year.
• When the heirs receive the contents of those already-taxed accounts, there is no built in-yet untaxed-gain for Section 1014 to protect.

3. CAPITAL GAINS

• The practical result of the difference between "ordinary income" and "capital gains" is that the highest rate of federal tax on ordinary income is 39.6% while the highest capital gains rate is 28%.'.
• ' the more than forty percent increase in tax from 28% to 39.6% is enough to keep wealthy taxpayers focused on the capital gains rate.

4. GiFrs

• In combination with other rules, the net result of the "detached and disinterested generosity" requirement is that gifts from strangers (such as prizes and awards) are usually taxed.".
• In contrast, gifts from family members and friends commonly receive the Section 102 exclusion.
• Moreover, wealthy people generally count other wealthy people as their family and friends, while low-asset individuals can only hope to get wealth transfers from strangers and lotteries.
• The gift exclusion under Section 102 thus favors the more fortunate both because wealthy individuals have access to more gifts and because they have access to the "right" gifts.

B. Wealth and the Social Science Literature

• Until the 1970s, studies of race and economics focused on income rather than wealth.
• Studies of wealth differences by race were few and far between.
• 53 Income surveys are relatively easy because researchers can obtain income information from pay stubs, tax returns and bank records.'.
• Because value is constantly affected by ever-changing market conditions, information on home and car equity or the value of household goods is harder to obtain.
• Even today, social scientists point out that wealth data is suspect if for no other reason than that the wealthy are uncooperative subjects with a tendency to substantially underestimate their holdings.

1. EARLY WEALTH RESEARCH

• Social scientists conducted several race and wealth studies from the 1960s through the 1980s.
• 59 Despite limitations on the data, some authors did try to make more precise comparisons between more similarly situated blacks and whites.
• Social scientists also became interested in the different types of assets owned by individuals of different races.
• Using different databases and slightly different controls, Lorman Lundsten and Harold Black, 61 O'Hare, and Terrell all looked at asset composition and came to much the same conclusions.

C. Results of Our Study

• The authors review of the social science literature confirms a wide gap in black and white wealth, both in gross averages and after controlling for such factors as income, education, region, marriage, and children.
• The studies also confirm that blacks hold a higher percentage of their wealth in consumption items than whites do, and a lesser percentage in financial and investment assets.
• First, because the authors are concerned about tax consequences, they are interested in different categorizations of assets than the social scientists are.
• For several reasons, the authors did their own analysis of the same data used by Hersch and White-Means.
• Using a sample called the PUMS Couples File drawn from the 1980 United States Census data, the authors constructed a variable that measured the proportion of family income earned by the wife for married couples with incomes that triggered the marriage penalty.

1. ANALYSIS OF RACE AND ASSET COMPOSITION

• Table 2 shows the mean amounts owned in each asset category, by black and white respondents separately.
• The last two columns report the percentage of total holdings in these four asset categories that consist of assets in each individual category, again for black and white respondents separately.

2. GIFTS AND INHERITANCE

• To partially rectify this data deficiency, the authors constructed a variable from the NSFH database that measured the value of assets held by blacks and whites at age sixty-five in four asset categories: home, other real estate, business or farm property, and motor vehicles.
• The authors intent was to get some measure of the value of assets that blacks and whites owned at a time near death, as a way of estimating the differential potential by race of taking advantage of the stepped up basis for property transferred by bequest.
• Their constructed variable is far from perfect because it does not include the value of stocks and bonds, which are most likely to benefit from basis adjustments at the time of gift or death.
• Furthermore, their variable includes motor vehicles, which rarely benefit from such adjustments.

D. Conclusion

• It must be emphasized that the authors have not measured directly the differential impact on blacks and whites of the tax rules they have discussed, because they have been unable to directly examine returns.
• Nonetheless, the authors have gathered very strong inferential evidence to support the hypothesis that whites benefit more than blacks from the tax provisions they have studied, each of which deviates from an ideal income tax as set forth in Glenshaw Glass.
• The value of benefits received, which Hersch and White-Means crudely estimated, is more relevant to tax concerns, since as the value of excluded or deferred benefits increase, the tax benefits grow as well.
• It seems likely that the value of employer-provided health benefits is more or less the same for all workers, since the Code requires that employer provided health benefits be "non-discriminatory" if they are to be excluded from the employee's income.the authors.
• Because blacks are less likely to be highly compensated, when they do participate in employer provided pension and 401(k) plans, they are likely to receive less pension benefits than whites.

Figures

TABLE 5 Participation in Employer-Provided Benefits by Race

TABLE 2 Race and Wealth Composition

TABLE I Race and Home Equity

TABLE 3 Gifts and Inheritance by Race

TABLE 1 Distribution of Financial Assets, 1979

TABLE 4: Home Ownership by Race and Income

TABLE 3 Gifts and Inheritance by Race