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WHEN TAX POLICY DISCRIMINATES THE TCJA’S IMPACT ON BLACK TAXPAYERS
 
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Beverly Moran
June 18, 2024
Roosevelt Institute
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_ When the trickle-down theory first took off in the 1980s, the
argument was that tax cuts lift all boats. After 50 years, no one can
continue to make this claim—yet they still do. _

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INTRODUCTION

In 1986, the Internal Revenue Code (IRC) changed so much that even its
name went from Internal Revenue Code of 1954 to the Internal Revenue
Code of 1986. Its modifications included taxing capital gains at the
same rate as ordinary income, ending the interest deduction for
personal loans (including interest for credit card debt and education
loans), an accelerated depreciation system that was so generous that
it returned more in tax benefits than the depreciated items cost, a
drop in the top tax rate for individuals from 50 to 28 percent coupled
with a rise in the bottom rate from 11 to 15 percent, and increased
amounts for personal exemptions and the standard deduction. The 1986
Code also introduced inflation adjustments, strengthened the
alternative minimum tax, reduced the corporate tax rate (from 50 to 35
percent) reduced certain business expenses (such as business meals,
travel, and entertainment) and restricted others (Winfrey 2023
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In the 1990s, William Whitford and I studied the IRC of 1986 to see if
it taxed black people more harshly than white people. When we first
proposed our study, we received the harshest blowback of our careers.
We were mocked by nearly every reviewer: How could a neutral law have
any racial effects? Civil rights laws had racial implications, of
course, but that is where it stopped, and we were fools to think
otherwise. Tax returns do not code for race. So, why would anyone
study race and the IRC?

This was at the beginning of the critical race theory (CRT) movement.
At that time, CRT relied a great deal on storytelling as a way of
exposing hidden racial discrimination, and certainly we could have
drawn on our own and others’ stories to illustrate our points. But
instead, we were determined to do a study that was so strong and
careful that the worst racist could not challenge our findings. We
used the Survey of Income and Program Participation (SIPP)—a
notoriously difficult database to work with—to construct tax returns
for a wide variety of people who were the same in terms of their
marital status, number of children, education, urban or rural
location, and a host of other factors.

We found that black taxpayers who looked like their white counterparts
in terms of these and other demographic factors paid higher taxes
because the IRC favors certain behaviors and benefits that are closed
to black people. For example, black people were then (and are now)
less likely to receive valuable employer-provided tax benefits such as
the opportunity to save for retirement tax-free, up to $50,000 of
tax-free life insurance, and reimbursement for employee business
expenses. A long history of federal government actions created and
sustained redlining, making black people less likely to own homes and
thus barred from receiving the home mortgage interest deduction and
the deduction for state and local taxes, while also making it more
difficult for black taxpayers to escape the standard deduction to get
the benefit of other itemized deductions through IRS Form 1040
Schedule A. A long American history gave white people wealth while it
made black people property, and so kept the benefits of the capital
gains rate from Black taxpayers. The list of inequalities was
extensive and, in the end, we inspired a generation of scholars to
produce quantitative research on racial tax disparities. (see, e.g.,
Blanton 2023; Collyer, Harris, and Wimer 2019; Fields, Perry and
Donoghoe 2023; Cale et al. 2018; Holtzblatt, McClellan, and  Garriga
2024; and Wiehe et al. 2018.
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The IRC changed dramatically again when Congress passed the Tax Cuts
and Jobs Act (TCJA) in 2017. I believe that the only reason the TCJA
did not become the Internal Revenue Code of 2017 is that so many of
its provisions were intentionally written to expire in 2026. We should
remember, however, that the Bush tax cuts were also set to expire but
never did. Instead, they blew a hole in federal revenues that never
healed (Horton 2017
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Now, it appears that the TCJA has done even more damage to the deficit
than the Bush tax cuts and might follow its lead and stick around.
Even if all the provisions that are set to expire do, the TCJA has a
host of permanent provisions that increase income and wealth
disparities while also worsening race and class injustice. Below is
the story of the TCJA, told through the work of a host of scholars
dedicated to the ideal of producing work so exemplary that even the
worst racist must stand down.

BACKGROUND

The Tax Cuts and Jobs Act (TCJA) of 2017 transformed the Internal
Revenue Code. For individuals, the TCJA temporarily changed income tax
rates, and dropped some deductions, credits, and exemptions, while
substantially changing others. For businesses, the TCJA temporarily
lowered effective tax rates for pass-through entities, changed
corporate deductions and credits, and permanently cut the corporate
tax rate. For multinational enterprises (MNEs), Congress made
substantial changes to the international tax system, moving MNEs away
from a citizenship-based model and toward a territorial tax system.

When Congress enacted the TCJA, the Joint Committee on Taxation (JCT)
estimated that it would reduce federal revenues by $1.46 trillion,
including $653.8 billion in tax benefits to businesses, $1.13 trillion
in benefits to individuals, plus $324.4 billion in increased tax
revenues from international tax reform (Congressional Research Service
2018 [[link removed]]). Beyond
revenue effects, the JCT also concluded that the law would help
high-income taxpayers most, providing them with the largest percentage
increase in after-tax income, especially taxpayers in the $500,000 to
$1 million annual income range. Further, the JCT estimated that, for
low-income taxpayers earning $40,000 or less, the TCJA would reduce
after-tax income in 2023 and beyond, and for those earning $75,000 or
less, the TCJA would reduce after-tax income by 2027 (CRS 2018
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The tilt of the TCJA’s benefits towards higher-income Americans, and
the JCT’s finding that after-tax income would decrease for
lower-income taxpayers, are driven primarily 1See, e.g., Blanton 2023;
Collyer, Harris, and Wimer 2019; Fields, Perry, and Donoghoe 2023;
Gale et al. 2018; Holtzblatt, McClellan, and Garriga 2024; and Wiehe
et al. 2018. by five factors (CRS 2018
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although the law temporarily increased the standard deduction and
doubled the Child Tax Credit, those provisions expire after 2025.
Second, the law included a permanent change in how the Internal
Revenue Service (IRS) adjusts tax provisions for inflation, which
tends to increase tax burdens over time, especially for lower-income
taxpayers (CRS 2014
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changes to the deduction for pass-through business income, which
expire in 2025, mostly benefited high-income Americans. Fourth, the
permanent reduction in the corporate tax rate primarily went to
high-income taxpayers (CRS 2017
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Finally, the after-tax income reductions for the lowest-income
Americans are complicated by the TCJA’s elimination of the fee for
failure to carry health insurance (commonly referred to as the
Individual Mandate), which the Affordable Care Act (ACA) established
in 2014 (Kaeding 2017
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CRS 2020 [[link removed]]). The
JCT hypothesized that fewer taxpayers would buy insurance on public
health insurance exchanges, reducing the government’s expenditures
for health insurance subsidies for lower- and middle-income taxpayers.
Thus, although the penalty elimination looks like a tax cut, it is
more than offset by the loss of government subsidies. For example, in
2017 alone, the Congressional Budget Office (CBO) estimated the
government subsidies to help individuals purchase health insurance at
$5,550 per person (2017
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In the same year, the average reported Individual Mandate penalty was
$788 (Ashe 2021
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Table 1). The difference between the two is a $4,712 loss of
government benefits per person.

History shows that the JCT’s estimates were overly optimistic.
Instead of TCJA giving away $1.46 trillion of federal tax revenue by
2027, as early as April of 2018—just four months after the law went
into effect—the CBO opined that revenues would fall $600 billion
more than the original JCT estimate. The biggest reason for these
larger losses were falling tax revenues from corporations and
pass-through businesses (Page 2019
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From 2018 onward, the TCJA gave taxpayers in the lowest quintile a
whopping extra $70 per year (Tax Policy Center 2017
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That $70 does not include the $4,712 loss per person of government
benefits resulting from the end of the Individual Mandate. Because the
lower subsidies affected this income group most, the TCJA did not help
this group at all (Marr, Jacoby, and Fenton 2024
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In fact, in this income category, the TCJA likely harmed more people
than it helped. Not far behind, households in the second quintile
gained $390 per year from the TCJA (or between 0.7 percent and 1.4
percent of income, depending on where the taxpayer fell in the
quintile) while the middle quintile received $910 (between 1 percent
and 1.7 percent of income) (Marr, Jacoby, and Fenton 2024
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Black households are overrepresented in these three income groups: In
2021, median Black household income was $48,297; two-thirds of all
Black households fell under $75,000, and three-quarters made less than
$100,000 (Semega and Kollar 2022
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Guzman and Kollar 2023
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Table A-2). Based on income distributions alone, Black taxpayers did
not thrive under the TCJA. 

In 2018, 80 percent of all TCJA tax benefits went to white households
(Wiehe et al. 2018, 5). On average, white households received more
than twice as many tax cuts as black households. Among the top 1
percent, the black/white difference was even greater: Wealthy white
households gained $52,400 per year from the TCJA, while wealthy black
households received just $19,290 (Wiehe et al. 2018).

BLACK AMERICA AND THE INTERNAL REVENUE CODE

Unfortunately, it does not “go without saying” that black America
is not intractably indivisible and uniform. In this study, I look at
black people as taxpayers. I begin the investigation based on income
groups, and then ask:

1. How will the TCJA changes affect the entire income group regardless
of race?

2. Do black people in this income group differ from other taxpayers in
a way that might make IRC changes more (or less) impactful for black
America?

Consider the home mortgage interest deduction. The TCJA temporarily
reduced the value of the deduction for high value homes (Harrison 2021
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Holtzblatt, McClelland, and Garriga (2024
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surmise that the home mortgage interest deduction under the TCJA helps
black families about half as much as the “average.” Yet it gives
white families a 21 percent boost in tax savings over black and
Hispanic families that will continue even when the reduction in the
home mortgage interest deduction reverses in 2026. (Their estimates
are based on the 2019 TCJA’s lower income tax rates, higher standard
deduction, and $10,000 cap on state and local tax deductions.)

Why does the home mortgage interest deduction help white taxpayers
twice as much as it helps black taxpayers? The home mortgage interest
deduction only aids taxpayers who(1) own a home, (2) pay mortgage
interest, and (3) use itemized (Schedule A) deductions rather than the
standard deduction—all traits that are more likely to apply to white
taxpayers than black taxpayers.

Black people are less frequent homeowners. Although the US
homeownership rate increased to 72.7 percent in 2021, the rate among
black Americans was only 44 percent (National Association of Realtors
2023
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The 28.7 percent gap between the black ownership rate and the white
ownership rate is the largest black-white homeownership rate gap in a
decade (NAR 2023
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Black people are less likely to own homes than white people for a
variety of reasons, including lower income and wealth (Oliver and
Shapiro 2006; Perry, Stephens, and Donoghoe 2024
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US Department of Labor n.d.
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racial discrimination in the housing market (Massey and Denton 1998),
racial discrimination in lending (Martinez and Kirchner 2021
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and residence in banking deserts (Havard 2020). Further, Black people
are less likely to marry (JBHE 2022
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Horowitz, Graf, and Livingston 2019
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and marriage is highly correlated with home ownership (Peter 2023
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2 Their estimates are based on the 2019 TCJA’s lower income tax
rates, higher standard deduction, and $10,000 cap on state and local
tax deductions. 

Black people are also less likely to itemize deductions. Especially
since the TCJA—but even before, and most likely after—most
taxpayers favor the standard deduction. Only high-income taxpayers are
more likely to itemize than not (TPC 2024a
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In 2020, more than half of all tax returns with an adjusted gross
income (AGI) over $500,000 itemized deductions, compared with 11
percent of tax returns with an AGI between $50,000 and $100,000 and
just 2 percent of returns with an AGI under $30,000 (TPC 2024a
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Ninety percent of individual returns did not itemize in 2020 (TPC
2024a
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The home mortgage interest deduction helps high-income taxpayers more
than any other income group (Glaeser and Shapiro 2003
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Indeed, almost half of all mortgagors receive no tax benefit at all
from the home mortgage interest deduction (Fischer and Huang 2013
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Those homeowners are mostly in the lower-income quintiles (Fischer and
Huang 2013
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In 2022, black households had a median annual income of $52,860 (Peter
G. Peterson Foundation 2023
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Only 25 percent of black households earned more than $100,000 and only
6 percent made more than $200,000 (Guzman and Kollar 2023
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In contrast, white households had a median household income of $81,060
(Peter G. Peterson Foundation 2023
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Thus, we would expect all people in the lower income quintiles to
receive small or no benefits from the home mortgage interest deduction
regardless of race. Nevertheless, low-income black people are even
less likely to receive a benefit than their low-income white
counterparts.

Notwithstanding Holtzblatt, McClelland, and Garriga’s (2024
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findings, and all of the reasons black taxpayers as a group get little
from the home mortgage interest deduction, the Office of Tax Analysis
found that the deduction favors upper-middle income black and Hispanic
families relative to white families (Cronin, DeFilippes, and Fisher
2023 [[link removed]]).
Although the authors did not explore why their study showed that the
home mortgage interest deduction favors high-income black and Hispanic
taxpayers, they suggest that black and Hispanic homeowners face higher
interest rates or have higher debt-to-value ratios than white families
with similar incomes (Cronin, DeFilippes, and Fisher 2023
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difference between white and black homeowners is that black people pay
higher property taxes than white people (Fields, Perry, and Donoghoe
2023 [[link removed]]). Any of
these factors would produce higher mortgage interest and state and
local tax payments, and so greater itemized deductions.

The Office of Tax Analysis study’s finding that high-income black
people are tax advantaged by the home mortgage interest deduction
illustrates the importance of looking at tax provisions by income
groups, and of studying black taxpayers within each group.
Nevertheless, the Office’s findings that high-income black people
are tax advantaged by the home mortgage interest deduction is not
enough to turn this provision into a pro-black taxpayer Code section.

Most black taxpayers do not itemize. Oddly enough, the same is true
for other Americans outside of the wealthiest 20 percent. Homeowners
in the bottom three quintiles, black or white, often get no benefit
from the home mortgage interest deduction. Therefore, from a class
perspective, most Americans are not served by the home mortgage
interest deduction. Add that most black people do not own their own
homes and it becomes clear that black taxpayers as a group are not
getting enough out of the home mortgage interest deduction to make it
a hill for policymakers to die on—even if some high-income black
people are advantaged.

One criticism of a research approach centered on the ways specific tax
benefits do (or do not) benefit black taxpayers is that it will lead
to recommendations that advantage black people over their white
counterparts. But that is not the intent—rather, the point is to
recognize that black people live with economic disadvantages that are
not of their making, and that the public does not support. To the
extent that the tax system is one of those disadvantages, it is worth
understanding it and considering alternatives. It is also worth noting
that there is great income and wealth inequality in the United States
(CBO 2021
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Urban Institute 2024
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et al. 2022
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(Between 1979 and 2018, average income, both before and after
means-tested transfers and federal taxes, grew for all quintiles, but
it increased most among households in the highest quintile.) and
because this analysis focuses on the lower three income quintiles, its
insights provide direction on how the IRC can avoid making those
problems worse for everyone.

TO READ THE FULL REPORT, INCLUDING PROVISION BY PROVISION CHANGES
CLICK HERE
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CONCLUSION

In a “Black Critique of the Internal Revenue Code,” William
Whitford and I (1996
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hypothesized that a black Congress would not have passed the many
provisions we identified that led to a higher tax burden for black
taxpayers. Today, I must ask: Why is Congress treating everyone below
the top 1 percent so poorly? When we look only at howblack taxpayers
fare under the IRC, we could believe that the reason for tax burden
disparities is that white legislators do not know how black people
live—that they shape tax laws for their (majority) white
constituents, and that there are too few black representatives and
senators to make a difference. But what politician, even from Beverly
Hills, Fifth Avenue, or the Gold Coast, represents only 1 percent?
Whenthe trickle-down theory first took off in the 1980s, the argument
was that tax cuts lift all boats. After 50 years, no one can continue
to make this claim—yet they still do. At the end of the last
century, William Whitford, and I predicted that racial income and
wealth inequality would spread to the rest of the nation, because
black people are the canaries in the coal mine. When we wrote, white
couples were more likely to have a marriage bonus than a penalty. That
has changed as more married white women entered the labor market. When
we wrote, white taxpayers still received help from itemized deductions
in a way that far fewer white taxpayers benefit from today. Thus,
there should be more political support for ending the itemized
deductions for the benefit of the deficit and for tax simplification.
When we wrote, the idea of black/white wealth disparities was just
being introduced. Now, these disparities, as well as wealth
disparities in general, are common knowledge. Thus, another
opportunity for political change.

I am sorry to learn we were right about the inequities in the IRC
spreading out to other taxpayers. Still, the country is much more
aware of income and wealth disparities than it was when we first
entered this field. Even the Treasury Department now recognizes the
many ways that the IRC and the tax collection and auditing system hurt
black Americans. With this expanded knowledge base, Americans must
finally demand that our legislators create tax laws that support us as
a whole,

_BEVERLY MORAN is professor emerita at Vanderbilt University, senior
fellow at the Roosevelt Institute, and Paulus Endowment senior tax
fellow at Boston College Law School. Her work focuses on various
aspects of federal income taxation, including individuals,
partnerships, tax-exempt organizations, and corporations. A leading
authority on US tax law, Beverly has testified before the House Ways
and Means Committee on the proliferation of US tax havens and the
Black Congressional Caucus on the race impacts of the Internal Revenue
Code. Her work is extensively cited in the recent Treasury report on
the race aspects of US tax laws._

_Beverly’s interdisciplinary and multidisciplinary work
encompasses topics ranging from legal philosophy (“Capitalism and
the Tax System: A Search for Social Justice
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critical race theory (“A Black Critique of the Internal Revenue
Code
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legal education (“Revisiting the Work We Know So Little About: Race,
Wealth, Privilege, and Social Justice”
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the course of her career, she has won a number of teaching awards and
grants, including a Fulbright award and grants from the Annie E. Casey
Foundation, the Rockefeller Foundation, International Rotary and the
Ford Foundation. Beverly holds a master of law degree (LLM) in
taxation from New York University School of Law; a JD from the
University of Pennsylvania, Carey School of Law; and an AB from Vassar
College._

_The author thanks Leon Trakman and Catherine Deane for their feedback
and insights. Elizabeth Pancotti, Elly Kugler, Sonya Gurwitt, Oskar
Dye-Furstenberg, and Aastha Uprety also contributed to this brief._

_THE ROOSEVELT INSTITUTE is a think tank, a student network, and the
nonprofit partner to the Franklin D. Roosevelt Presidential Library
and Museum that, together, are learning from the past and working to
redefine the future of the American economy. Focusing on corporate and
public power, labor and wages, and the economics of race and gender
inequality, the Roosevelt Institute unifies experts, invests in young
leaders, and advances progressive policies that bring the legacy of
Franklin and Eleanor Roosevelt into the 21st century._

_Support the Roosevelt Institute in the Fight for an Equitable Future_
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* Inequality
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* Racism
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* Trickle-Down Economics
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