America’s progressive tax system is supposed to tax more as your income rises, with people with similar incomes paying the same rate.
That’s not true, according to one tax lawyer and professor, who analyzed the history of the American tax system and how it can hurt Black taxpayers when filing jointly or claiming the mortgage interest or student loan interest deductions, among other tax policies.
“As far as tax law was concerned, the only color that mattered was green and race had nothing to do with my work,” Dorothy A. Brown, tax lawyer and professor, told Yahoo Money after her book, The Whiteness of Wealth, recently came out. “I have never been more wrong about anything in my life. You can’t out-earn your Blackness.”
The case studies in the book reveal how tax policy affects the ability to build wealth and how established tax principles often favor the white experience and perpetuates the racial wealth gap.
Our progressive tax system was established with The Revenue Act of 1913 when 5.6% Americans paid federal income tax — those that made $3,000 a year or more. At that time, taxpayers paid taxes as individuals.
But in the 1930s, a wealthy shipbuilder named Henry Seaborn tried to split his income with his stay-at-home wife to save on taxes. He reasoned that because he lived in a community property state, he could do so.
After getting fined by the IRS, he sued and won. His case meant that married taxpayers in community property states — where marital assets are shared equally — were allowed to lower their tax liability.
This outcome violated the horizontal equity concept that taxpayers of similar circumstances should be taxed the same because married taxpayers in non-community property states didn’t receive the lower tax rate. Congress intervened and created the married filing jointly tax status.
At the time, most white marriages consisted of a husband as the sole wage earner and a stay-at-home wife. But both spouses in Black married couples typically worked, and when they filed as married filing jointly, they actually received a “marriage penalty,” unlike their white counterparts, Professor Brown’s research found.
When more white, married women entered the workforce, the tax laws were changed to minimize the penalty, which also created a “marriage bonus” that benefited married couples where one spouse was the single wage-earner.
But couples with single wage-earners were more likely to be white, according to Census data Professor Brown analyzed, meaning that the marriage bonus was more often awarded to white couples than Black ones. The disparity widens as couples make more money, and more white couples have a stay-at-home spouse than Black couples.
The inverse occurs when it comes to the marriage-penalty between Black and white couples. As income increases, Black married couples are more likely to pay the marriage tax penalty than their white counterparts.
“High-income married black couples who are in the best position to save more, invest more, and build more wealth are instead paying Uncle Sam more for the privilege of being married,” Professor Brown wrote in her book.
To fix the marriage penalty, Professor Brown proposes getting rid of the marriage bonus and returning to the old system where taxpayers filed individually.
When The Revenue Act of 1913 was created only a handful of taxpayers were homeowners. However, a tax subsidy was created in the form of mortgage interest deduction for homeowners.
To help fund the second world war, the government enacted the Current Tax Payment Act of 1943 to take taxes from employees’ paycheck. It continued after the war and the government used the extra revenue to help Americans — especially service members returning from the war — achieve the American dream of homeownership with federal subsidies from the Federal Housing Administration (FHA).
Those FHA loans were the driving force behind many white Americans going from renter to homeowner post WWII. Discriminatory actions by the FHA, though, prevented Black service members and families from accessing FHA funds to subsidize homeownership in the same way it changed most white households from renters to homeowners.
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“Homeownership has historically been an important means for Americans to accumulate wealth—in fact, at more than $15 trillion, housing equity accounts for 16 percent of total U.S. household wealth,” according to a report by the Federal Reserve Bank of New York.
While outright redlining has been outlawed, white homebuyers’ preferences have a profound effect on home values. Professor Brown cites research that shows that property values begin to fall in a neighborhood once Black presence reaches 10%. It falls further as black presence increases more.
The Whiteness of Wealth found homeownership is statistically more likely to lead to a nondeductible loss for Black homeowners because homes in black neighborhoods are undervalued and sold at a loss.
Professor Brown proposes allowing homeowners to claim the loss from a home-sale to be deducted the same way investment losses are deductible to avoid wealth depletion.
Although education is touted as the great equalizer for a financially secure future, Professor Brown’s research found that college doesn’t pay off for Black graduates the same way it does for their white peers and tax policy plays a role.
“Black households headed by a college graduate have less wealth than white households headed by a high school graduate,” Professor Brown said, noting that student loan debt accounts for 25% of the wealth gap.
The Tax Reform Act of 1986 made interest on student loans, credit cards, and auto loans nondeductible, but kept the exception for mortgage interest. In 1997, Congress made student loan interest deductible up to $2,500.
But this capped amount is so small compared with the interest Black graduates pay on their student loan debt Black students, which is $53,000 four years after graduation compared with $28,000 for white borrowers.
“White Americans are less likely than blacks to finance their college expenses through student loans, but more likely to benefit from the student loan tax subsidy when they do,” Professor Brown wrote. “And black Americans are far more likely to finance their college education with debt, but less likely than whites to be eligible to deduct all of their interest payments on their debt — especially if they’re lucky enough to get a job that pays reasonably well.”
Professor Brown recommends increasing the student loan interest deduction. If homeowners can deduct up to $750,000 in mortgage interest, student loan interest shouldn’t be capped at $2,500.
The Whiteness of Wealth also explores which higher education institutions receive tax breaks, which predominantly help white students, the mortgage interest deduction, 529 plans, and generational wealth transfers, preferential tax treatment of certain investments, among other tax issues.
“It’s long been understood that blacks and whites live in separate and unequal worlds that shape who we marry, where we buy a home, whom we have as neighbors, and how we build a future for our children,” Professor Brown wrote. “What my research showed was that all of this also determines how much we pay in taxes.”
“Taxpayers bring their racial identities to their tax returns,” she added. “As in so many parts of American life, being black is more likely to hurt and being white is more likely to help.”
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda