For centuries, communities of color have been ravaged by economic and racial discrimination. This has led to higher unemployment rates, lower homeownership rates, and lower wealth-building opportunities compared to their white peers. While not the main factor, bad tax policy has contributed to this divergence. Yet tax policy has too often been an afterthought as a way of improving these conditions.

With a presidential election this fall and many provisions of 2017’s Trump tax law expiring at the end of 2025, the debate over tax policy and economic fairness is in full swing. In the coming 14 months, federal lawmakers should address longstanding issues of racism in the tax code.

Racial Analysis of the Tax Code Helps Everyone

Many people assume since tax returns and tax laws do not mention race, the tax code must be absent of racism, too. But the idea that tax policy is race-neutral couldn’t be further from the truth. Tax policies favor certain types of income that have been largely restricted to white households for centuries and contribute to the wide racial wealth gap. And identifying and addressing these imbalances in our tax system would not help only people of color. It would help nearly everyone because these imbalances usually benefit very few people at the expense of most Americans of all races.

Capital gains and dividends

Take, for example, the special break allowing capital gains (which are profits from selling assets) as well as dividends to be taxed at a lower rate than other types of income. This tax break clearly contributes to racial inequity in our tax system. A 2023 Treasury Department report found, among other things, that white households received 92 percent of the benefits from the preferential tax rates for capital gains and dividends, despite making up just 67 percent of taxpayers.

Reducing this tax break would clearly remove some racial inequity in our tax code, and it would also benefit almost all white people as well. That is because 99 percent of Americans of all races receive little or nothing from the lower rate for capital gains and dividends. The Congressional Budget Office estimates that 75 percent of the benefits of the special rates for capital gains and dividends flow to the richest 1 percent of Americans. Congress could redirect the resources currently being lost to this tax break towards real public investments and the other 99 percent of Americans would fare better.

That is what Harris proposes. She would not eliminate this tax break entirely but would reduce it by raising the top personal income tax rate on capital gains and dividends to 28 percent from 20 percent (still a lower top rate than for other types of income). Harris’ proposal would apply only to those with incomes of more than $1 million, which ensures that the tiny fragments of this tax break flowing to the non-rich will be left undisturbed.

Trump would leave the lower income tax rates for capital gains and dividends in place. He would also extend his provision that greatly reduced the reach of the estate tax, which is often the only tax that reaches capital gains that are “unrealized” and exempt from income tax under current law when appreciated assets are passed onto heirs. (Harris would apply the income tax to some of these unrealized capital gains.)

Corporate taxes

Another example involves proposals to change the corporate income tax. A recent ITEP report demonstrated how cutting corporate taxes contributes to racial inequity and raising corporate taxes reduces racial inequity. This happens because the shares in corporations paying the tax are disproportionately owned by white taxpayers. Black and Hispanic households make up 12 percent and 9 percent of U.S. households, respectively, but only receive 1 percent each of the benefits of corporate tax breaks.

But identifying and addressing this imbalance in the tax code would help most Americans of all races. The study also demonstrated that nearly all Americans, even white Americans, receive less than their proportionate share of benefits from corporate tax cuts because 40 percent of those benefits flow out of the U.S. to foreign investors.

Raising corporate taxes is therefore another reform that would improve racial equity in the tax code while helping almost all Americans. This is what Harris proposes and is the opposite of what Trump proposes, and the bottom line is that corporations would pay more under Harris and less under Trump.

Tariffs

Tariff policy is another area where identifying and addressing racial inequity could benefit all Americans. Tariffs are taxes imposed on imports, but they can have the same general effects as consumption taxes. Research by economists shows that broad-based tariffs raise the prices paid by consumers and businesses on the goods and services they buy. Because lower- and middle-income families – who are predominately households of color – must spend a larger share of their earnings on goods, this new tariff policy would eat up a disproportionately large share of their income.

Dramatically increased tariffs would therefore create more racial inequity in our tax system. But massive new tariffs would also negatively affect everyone by increasing prices. This is the road taken by Trump’s tax plan, which includes a new 60 percent tariff on goods imported from China and a 20 percent tariff on goods imported from other countries.

ITEP’s report on Trump’s tax plan found that while his tariff proposal would significantly increase taxes on taxpayers at all income levels, the tax cuts he proposes would offset those tax increases only for the richest 5 percent of Americans. In other words, even when combined with Trump’s many proposed tax cuts, his tariffs would result in a tax increase on the bottom 95 percent of taxpayers. If the U.S. decides against this kind of tariff policy, the result will be a win not just people of color but for the vast majority of Americans of all races.

The Racial Implications of Tax Reform Proposals

Vice President Kamala Harris and former President Donald Trump have both released tax proposals as part of their presidential campaigns. These policy ideas would acutely affect people of color’s lives. First, they aim to change what gets taxed, by how much, and who pays. Second, they affect the revenue available for public programs that bolster financial security, make health care affordable, and strengthen education systems, for example. All of these reduce racial and economic inequity.

Corporate taxes

The 2017 tax law permanently slashed the corporate tax rate from 35 percent to 21 percent while creating or extending a variety of special tax breaks for corporations. As a result, our analysis found that some of the nation’s most profitable large companies – like Walmart, Verizon, Meta, Visa, and others – saw their effective tax rates fall from an average of 22.0 percent in the years before the tax law to 12.8 percent in the years after.

The candidates have opposing ideas on corporate taxes:

• Harris proposes to partially restore the corporate tax rate to 28 percent and increase the tax on stock buybacks from 1 percent to 4 percent.
• Trump proposes to further cut the corporate rate to 20 percent – and 15 percent for “companies that make their products in America.”

Continued weakening of the corporate tax system would hinder the fight for racial justice. Strengthening it would reduce inequities and advance equity. As mentioned above, our latest research shows that corporate tax cuts and breaks disproportionately go to foreign investors and white American households. Of corporate tax cuts that remain in the U.S., white households receive 88 percent of the benefit though they make up only 67 percent of the population.

Over the past three decades, the racial wealth gap has widened, driven by growing corporate equity value held in stocks and mutual funds. Any proposal to incentivize corporate investment in workers and tangible goods over investors and the stock market – such as increasing the stock buyback tax – will ultimately reduce the racial wealth gap.

Tax credits for children, families, and workers

Compared to their white counterparts, people of color confront more barriers to employment, education, and wealth. They tend to be in lower-wage jobs, making it more difficult to make ends meet. Tax credits are a powerful tool that boost incomes for workers, help pay for the costs of raising children, and lift millions out of poverty.

These credits are important, but they could better serve households of color. Currently the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) leave plenty of people ineligible for benefits. With a few tweaks to eligibility, these credits could reach more low- and moderate-income people, regardless of race.

Here are the candidates’ ideas on these credits:

• Harris wants to make the CTC fully refundable and increase the amount to $3,600 per child up to the age of five and $3,000 per child between the ages of 6 and 17. These changes are similar to the CTC expansion under the American Rescue Plan Act of 2021. She also wants to create a new tax credit of $6,000 for newborns and expand the EITC to more workers without children in the home.
• Trump wants to extend the expiring CTC provisions from the 2017 tax law, where the maximum credit would be up to $2,000 and include families with incomes up to $400,000.

Expanding the CTC in the way proposed by either candidate would boost low-income families and families of color, but Harris’ more robust proposal would do much more to help these families and reduce racial inequities. Currently, the CTC is $2,000 per child up to16 for families who make between $2,500 and $400,000. The income phase-in prevents many families of color from being eligible and the higher income eligibility limit means many wealthier, disproportionately white, households are eligible. Current rules prevent low-income people – disproportionately Black and Hispanic families – from receiving the full credit. We estimate that 45 percent of Black children and 42 percent of Hispanic children do not receive the full credit, roughly double the percentages of white and Asian children who are left out. A robust CTC expansion would help tens of millions of children, especially children and families of color.

Expanding the EITC to include more low-income workers without children in the home would reach more people of color, who are disproportionately in lower-income jobs because of historic and current employment and racial discrimination.

To make these tax credits an even stronger force for racial justice, lawmakers should extend eligibility to taxpayers with Individual Tax Identification Numbers (ITINs), who are often undocumented immigrant workers. The 2017 Trump tax law barred this population from accessing the CTC and EITC, despite the fact that undocumented immigrants pay nearly $100 billion in taxes a year. We estimate that allowing ITIN filers to access these credits would help up to 3.7 million undocumented households.

Exempting Social Security and tips

Both candidates are proposing to lower taxes for some types of pay or particular populations, ideas that are often politically popular but fail to deliver tax equity in the way that income-based tax cuts do.

• Trump wants to exempt tips and Social Security benefits from income taxes.
• Harris wants to exempt tips from taxes.

Research shows that wealthier, disproportionately white, households are more likely to benefit from exempting Social Security benefits from taxation. This is because they are more likely to already be taxed on their benefits, whereas lower-income people, who are disproportionally people of color, are not paying taxes on their Social Security because it’s too low of an amount. This policy would further increase the large racial retirement wealth gap that our research shows predominately favors upper-income white households. The policy would also undermine the Social Security system, possibly making it insolvent in as little as a decade, which would be catastrophic for older Americans of all races and particularly so for Black and Hispanic older adults whose sole income is more likely to be from Social Security.

Exempting tips from taxation is not a new idea, but it falls short of securing racial justice because it sets up an avenue for tax avoidance. This plan would make it easier for lawyers, accountants, and other high-paid workers – with low representations of people of color – to turn some of their fees into tips to avoid paying taxes on them. Additionally, tipping, a relic of slavery, has historically resulted in terrible economic conditions. Overall, it’s a more unstable form of income than non-tipped work, leaving more people in poverty and making more people susceptible to wage theft.

Wealth taxes

Tackling the disparity between the taxation of income from work and income from wealth is one of the most surefire ways to reduce wealth inequality and the racial wealth gap. Here are the candidates’ plans:

• As mentioned above, Harris wants to increase the top tax rate on long-term capital gains to 28 percent from 20 percent. She also wants to raise the net investment income tax from 3.8 percent to 5 percent. This would mean for people making over $1 million, their new capital gains rate would be 33 percent.
• Trump would maintain current law and extend the higher estate tax exemption passed as a temporary provision of the 2017 tax law.

Long-term capital gains have preferential treatment in the tax code compared to the tax treatment of the income from regular earners, but these benefits are not distributed equitably along racial lines, because of historic economic exclusion of communities of color. That’s why lower capital gains rates worsen overall racial and economic wealth inequality.

The already weak estate tax was made even weaker by the 2017 tax law, which roughly doubled the exemption level. Currently a couple could leave behind an estate of about $27 million without triggering the tax. As a result, the share of estates paying the tax is at historic lows: in 2019 only 8 of every 10,000 people who died left an estate large enough to owe the tax. Racial disparities in wealth are wide and persistent in large part due to generational wealth. Estate taxes play a critical role in curbing the excessive concentration of wealth that otherwise may go untaxed.

What’s Next

The upcoming tax debate provides an opportunity to reimagine the tax code for racial justice and pass tax policies that secure equitable outcomes in the tax code. There have been many strides in the race and tax policy analysis community. Lawmakers must act upon the findings of this research and ask for more research to be done on a routine basis. This research can make a strong case for policymakers to revisit and fix past injustices and pursue policies that:

• Make corporations pay their fair share. Corporate tax cuts mostly benefit shareholders, who are disproportionately white and wealthy. Continuing to allow companies to pay lower tax rates that result in few dollars going toward education, transportation, and health care – services that help reduce racial disparities – hurts communities and families and hampers economic growth. Corporations must pay a higher tax rate to shrink the racial wealth gap, increase revenue for the government, and make the code fairer.
• Expand programs to boost income. Income tax programs, like the CTC and EITC, can reduce racial wealth inequality, but only if designed in a way to help families who are marginalized and need the most access to financial security. Using a racial lens shows the reality of what workers and families are going through, allowing lawmakers to have a better sense of where the tax code could be fairer.
• Secure tax parity between wage income and income from wealth. This is critical to making sure people of color are not being disadvantaged by the tax code and that there is enough revenue raised to invest in public services that grow the economy and build a sustainable future.

The tax code is constantly changing every year, but in 2025, it will be a larger exercise of revision than in the past few years. Now is a crucial time to remind ourselves that racial justice is tax justice and both are worthy of being at the center of tax reform debates.

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