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| DELIVERING ON DIVERSITY, GENDER EQUALITY, AND INCLUSION | | | In this issue, we look at how US tax policy disadvantages Black Americans—and how to make the system more equitable. | | | | What do taxes have to do with racial equity? That’s a question many Americans may not have considered—but Dorothy A. Brown is on a mission to change that. Brown is an incoming professor of law at Georgetown University and a nationally recognized scholar on race, class, and tax policy. She takes on those topics in her latest book, The Whiteness of Wealth: How the Tax System Impoverishes Black Americans—and How We Can Fix It. As Professor Brown explains in this edition of McKinsey's Author Talks, “Whenever Black Americans engage in the same activity as White Americans, tax policy will advantage how White Americans engage in the activity and disadvantage how Black Americans engage in the activity.” The Whiteness of Wealth sheds light on racial disparities in tax laws that affect Black Americans in many areas of life, from college and jobs to marriage and homeownership. The findings are eye-opening. | | When the author shared her research with Black families who were interviewed for the book, they were blown away. “They had always known something was wrong, but until then, they didn’t know what it was,” says Brown. Now they are left with a question: “How can we get ahead?” | | Professor Brown’s solution is “getting rid of the loopholes, exemptions, and deductions and taxing all income at the same rate, with no more preferential treatment for capital gains.” She also proposes giving everyone a living allowance deduction based on their cost of living: “What does it take to thrive in your geographical area? That amount of money you don’t pay tax on—only the amount you earn in excess. What if you earn less than that amount? In that case, you get money from the government.” Last year, the author told Congress that “the racial wealth gap will not be eliminated without a fundamental change in our tax laws.” A wealth tax credit, she explained, could help to reduce the country’s racial wealth gap. | | | McKinsey research confirms that most of the current federal tax expenditures—deductions, exclusions, credits, and reduced tax rates—reinforce disparities rather than narrow them. These expenditures amount to well over $1 trillion each year, and thus have a significant effect on the federal budget. The majority of tax breaks are claimed by individuals (not corporations), and they predominantly benefit the highest-earning Americans. Some of the largest tax expenditures benefit Americans with real-estate holdings, employer benefit packages, investment portfolios, and family wealth. In 2019, about half of individual income tax expenditures went to taxpayers in the highest income quintile—the top fifth of American households by income—a segment of the population in which Black Americans are underrepresented. That top quintile of households received 95 percent of the benefits from net preferential rates on capital gains and dividends—and three-quarters of the total benefits from this expenditure went to the top 1 percent of American households. | | After all, families can't realize capital gains on assets they don't have. Only one-third of Black households own stock, for example (whether directly or indirectly); that’s compared with 60 percent of White households. As Professor Brown reminds readers, “Access, trust, and history have all shaped today’s Black and White investment practices.” | | “The truth is,” she writes, “there’s nothing in this country that race and racism aren’t a part of.” To be sure, “tax policy may not be an obvious way to fight systemic racism.” But it’s long past time, Brown says, “to have a conversation about the racist acts buried deep in our tax returns.” |
| | — Edited by Julia Arnous, an editor in McKinsey’s Boston office | | Did you enjoy this newsletter? Forward it to colleagues and friends so they can subscribe too.
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