Race, Class, and the Internal Revenue Code: A Class Based Analysis of a Black Critique of the Internal Revenue Code

• Author: Wilton Hyman
• Position: Associate Professor, New England School of Law; B.A., University of North Carolina; J.D., North Carolina Central Univers
• Pages: 119-162

Page 119

I would like to thank my research assistants Emily Haley, Matthew Adams, Bruce Tyler, and Nancy Salerno. Their comments and research were invaluable and contributed greatly to improving this project. I would like to thank Professors Mary Wright and Phyllis Craig- Taylor for their support and encouragement, as well as Professors Sarah Salter, Eric Lustig, and Russ Versteeg for their unwavering support while I completed this project.

Introduction

Economic class differences within the black community should be considered, in conjunction with the history of black racial oppression, in developing proposals to reduce economic disparities between whites and blacks. Analysis of A Black Critique of the Internal Revenue Code (A Black Critique),¹ as well as the writings of commentators on that article,²will serve as evidence for this view. In A Black Critique, Professors Beverly Moran and William Whitford documented the white and black tax gap by analyzing the extent to which blacks and whites benefit from certain provisions of the Internal Revenue Code (Code).³ They focused primarily on code sections related to wealth while controlling for factors Page 120 such as race, "income, education, region and marital status."⁴ They concluded that race was a statistically significant predictor of the benefit that whites and blacks receive from the Code, with whites benefiting disproportionately.⁵

Professors Moran and Whitford did not analyze class differences within the black community; they focused on the tax provisions' impact upon blacks in the aggregate in developing strategies to remedy the tax gap.⁶ Their proposals, however, reflect a bias toward lower-income⁷blacks and against the economic interests of middle-income⁸ blacks due to their focus on race as the primary determinant of the tax disparities.⁹ That analysis leads to overly broad prescriptions. The racial tax disparity is a consequence of the historical effects of racial subordination, reflected in wealth disparities between whites and blacks.¹⁰ As a result, a race-based approach will not adequately address the problem because it may eliminate tax provisions that benefit middle-income blacks in an effort to assist lower-income blacks who are unable, due to their economic condition, to utilize those provisions. This Article supports the incorporation of class- based considerations in creating tax legislation to resolve black-white economic disparities because class allows for a more particularized Page 121 approach, and for specific segments of the black community to be identified and targeted for assistance.

In support of this approach, this Article reviews Professors Moran and Whitford's research and their recommendations. In addition, this Article looks at the historical development of social class within the black community, beginning with the antebellum period and through the modern Civil Rights Movement. The history of social class development within the black community illustrates the impact of relevant events and their effect upon black class mobility. Next, Professors Moran and Whitford's proposals to remedy the black-white tax gap, taking into account their likely effect on middle-class blacks as compared to lower-class blacks, are discussed. In connection with that discussion, the views of other law professors who have written about Moran and Whitford's article are analyzed. Ultimately, this Article finds that Professors Moran and Whitford's research and analysis is beneficial and important in illustrating the degree of economic disadvantage between blacks and whites. However, because they focus on aggregate tax outcomes on the basis of race, without considering class differences within the black community, their recommendations would harm the economic interests of middle- income blacks. This proposal does not supplant the racial critique that Professors Moran and Whitford utilized. It merely supplements the critique in order to target black taxpayers who would benefit most from assistance, without harming the interests of those who benefit under the current system.

I A Black Critique of the Internal Revenue Code, by Beverly Moran & William Whitford

In their article, Professors Moran and Whitford analyzed whether the Code benefited whites more than blacks.¹¹ They defined tax benefits as provisions allowing deductions, exclusions, or deferrals of income that were inconsistent with the Glenshaw Glass¹² definition of income.¹³ Page 122

Taxpayers with similar incomes were considered to be similarly situated for purposes of identifying tax code discrimination.¹⁴

They looked at four areas of the Code: (1) the exclusion for gifts and inherited property, the capital gains preference, and realization; (2) mortgage interest and other housing-related provisions; (3) the pension and health benefit exclusion; and (4) the marriage penalty.¹⁵

Tax preferences generally benefit white taxpayers more because blacks have lower levels of material wealth and lower incomes.¹⁶ However, blacks whose incomes are equal to that of white taxpayers benefit less from the tax code.¹⁷ This reflects a tax disparity, even for blacks who are similarly situated, income-wise, with their white peers.¹⁸ In devising remedies for these disparities, Professors Moran and Whitford used the "Black Congress"-a fictional body that would create legislation furthering the interests of black taxpayers.¹⁹

The next section briefly details the tax provisions analyzed by Professors Moran and Whitford and the response the Black Congress would take in addressing the interests of black taxpayers.

A Gift Tax, Basis, Capital Gains Tax Rate, and Realization

1. Section 102(a) Gift and Inheritance Exclusion

Section 102(a) allows taxpayers to exclude gifts and inherited property from gross income.²⁰ This benefits wealthy taxpayers disproportionately because they own more assets and are more likely to make gifts or transfers at death.²¹ Whites possess more assets than blacks²² and therefore are more likely to benefit from this provision.²³ The Black Congress Page 123 would not change this provision because adjustments to the estate and gift tax regime would be necessary and because it provides incentives for blacks to save and transfer wealth to future generations.²⁴

2. Section 1(h) Capital Gains Tax Preference

Gain from the sale or exchange of capital assets is taxed at a maximum rate of 15% under section 1(h).²⁵ The capital gains rate allows significant tax savings compared to the top marginal rate of 35% which otherwise applies to taxable income,²⁶ which includes wages,²⁷ interest,²⁸ and rental income.²⁹ When Professors Moran and Whitford's article was published, the maximum rate was 28% for capital gains and 39.6% for taxable income.³⁰

Because blacks own fewer capital assets than whites³¹ and have a lower percentage of their wealth invested in stocks, mutual funds, and investment real estate,³² they benefit less from the capital gains preference.³³ The Black Congress would repeal this provision because most blacks do not benefit from it.³⁴ Page 124

3. The Realization Requirement

Realization is an administrative rule that requires a sale or exchange of an asset to take place before gain or loss is recognized for tax purposes.³⁵Whites derive a greater benefit from the deferral of tax on unrealized appreciation³⁶ because they own more assets than blacks.³⁷ Therefore, the Black Congress would tax appreciation on publicly traded securities and nonresidential real estate as it accrues.³⁸

B Home Mortgage Interest Deductions and Other Property Provisions

The tax benefits of home ownership increase as a taxpayer's marginal tax rate increases.³⁹ As a result, high-bracket taxpayers derive greater tax savings from home-related deductions than lower-bracket taxpayers.⁴⁰ In addition, the lower market value of homes owned by blacks and their lower rate of ownership results in their having a "lower share of aggregate housing wealth."⁴¹ Whites, therefore, benefit more from home ownership related tax provisions.⁴²

1. Section 163(h) Home Mortgage Interest Deduction and Section 164 Property Tax Deductions

Section 163(h) provides interest deductions on loans used in acquiring, constructing, or improving a personal residence and section 164(a)(1) Page 125 allows deductions for state and local real estate taxes.⁴³ Based on the disproportionate tax benefits that...