Abstract

Excerpted From: Brakeyshia Samms, Joe Hughes and Emma Sifre, High-rent, Low-wealth: Addressing the Racial Wealth Gap Through a Federal Renter Credit, 22 Pittsburgh Tax Review 101 (Fall, 2024) (68 Footnotes) (Full Document)

For many decades, the United States has experienced growing wealth inequality between the richest and poorest households and between households of different races. While the federal tax code has some policies focused on raising income of low earners, it contains fewer provisions designed specifically to address wealth inequality. The stark economic and racial wealth gap in the country necessitates a policy solution, and tax policy reform provides some innovative possibilities.

Getting to a better tax code first requires understanding the flaws in current approaches. Many features of the tax code contribute substantially to America's wealth gaps. For instance, investment income is taxed at a lower rate than wage income, unsold financial assets can be passed along to heirs without anyone ever paying tax on the income from growth in those assets, enormous estates can be passed along tax free, investment vehicles enable those with extreme wealth to further avoid taxation, and extensive corporate tax breaks reward shareholders.

These problems with the tax code also have racial implications--for example, taxing long-term capital gains at lower rates than wage income disproportionately benefits white households, who own a higher share of stocks (18%) than Black households (9%). One study by the U.S. Treasury Department finds that 92% of the benefits of preferential tax rates on capital gains flow to white families, widening the racial wealth divide. Corporate tax breaks mainly benefit owners of corporate stocks, which also widens both economic and racial inequality.

Historic and ongoing racial discrimination--and economic exclusion of Black Americans--has led to deeply entrenched racial wealth inequality, particularly between white and Black households. Wealth gaps also affect other ethnic groups. White households have about six times the average wealth of both Black and Hispanic households. At 67% of household population, white households hold 86% of the nation's wealth, while the 12% of households who are Black hold 2% of the wealth, the 9% of households who are Hispanic hold 2% of the wealth, and the 4% of the household population that is Asian holds 7% of the wealth.

A federal tax policy that could benefit low-wealth families is a renter tax credit (RTC). This Essay uses data from the Survey of Consumer Finances (SCF) to show that refundable tax credits geared toward low- and moderate-income renters could offer a targeted means of reaching low-wealth households. Conditioning credit eligibility on both renter status and income can ensure that a higher share of the credit will flow to low-wealth individuals than if the credit was conditioned on either of these criteria in isolation. A RTC offers a simple, administratively practical means of reaching low-wealth populations through the federal tax code without requiring a comprehensive measurement of every household's wealth.

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The tax code has immense potential to reduce wealth disparities across both race and class. This remains true even though the current code lacks a formal, comprehensive measurement of household wealth. The analysis in this Essay suggests that renter tax credits offer a meaningful and administratively practical means of tailoring federal tax benefits toward low-wealth households. In particular, a credit conditioned on both income and renter status will see more of its benefits flow to low-wealth households than a credit conditioned on either of these criteria in isolation. Given that parts of the tax code and other features of public policy have deepened economic and racial wealth divides both now and historically, lawmakers should consider remedies through the tax code. A renter tax credit is a promising option.

Brakeyshia Samms is a Policy Analyst at the Institute on Taxation and Economic Policy.

Joe Hughes is a Senior Policy Analyst at the Institute on Taxation and Economic Policy.

Emma Sifre is a Senior Data Analyst at the Institute on Taxation and Economic Policy.