Senate Finance Committee Tax Inequality Hearing
Senate Finance Committee
Combatting Inequality: The Tax Code and Racial, Ethnic, and Gender Disparities
Tuesday, April 20, 2021
- Dorothy Brown, Asa Griggs Candler Professor of Law, Emory University School of Law
- Dr. Mihir Desai, Mizuho Financial Group Professor of Finance & Law, Harvard University
- Himalaya Rao, Managing Director, Black Founders Matter Fund
- Shay Hawkins, President and CEO, Opportunity Funds Association
Chairman Ron Wyden (D-Ore.)
In his opening statement, Wyden stated that the typical white American family has eight times the wealth of a Black American family. He said tax incentives only really work for people who can afford to set aside money, who are much more likely to be white. Wyden said during hearing, they will discuss more examples on how tax code adds to inequality in America. He said the American Rescue Plan begins to change the math of racial injustice, noting it expands the earned income tax credit (EITC) and the child tax credit (CTC). He added that families and workers with lower incomes have not had access to these full benefits, saying these expansions will be game changers and expressing hope that they will be made permanent. He added that the discussion around inequality must also focus on gender as much as it does race. Wyden stated that women of color are under-represented, under-capitalized, and under-appreciated. He said he believes introducing the Progress Act will help promote investment in women- and minority-owned businesses. He concluded that policymakers need better confidential data on how tax laws affect Americans of different races, saying it makes no sense to blind lawmakers to the key data that indicates injustice in our tax laws, arguing for more transparency.
Ranking Member Mike Crapo (R-Idaho)
In his opening statement, Crapo questioned whether the tax code itself leads to inequality or if there are other underlying disparities, expressing hope that the hearing will help answer some of these differing viewpoints. Crapo said he believes the underlying disparities are key, and that there are a variety of disparities in measures of income, wealth and assets across many dimensions. Crapo said the witnesses will provide perspectives on the income tax system, barriers to opportunity, and policy solutions Congress should consider. He highlighted that prior to the pandemic, the country had one of the strongest economies seen in decades. Crapo said with the Tax Cuts and Jobs Act (TJCA) in place, and an agenda focused on smart regulation, there was progress along many dimensions, including: record low unemployment rates; 50-year lows in overall unemployment; robust wage gains skewed toward lower-wage earners; record high household incomes; and record low poverty. He noted it will be challenging to return to that robust economy with the endless streams of tax hikes and regulation currently being proposed, specifically noting efforts to roll back the cap on the state and local tax (SALT) deduction included in TCJA . He concluded that it will be important that policies are developed on a bipartisan basis.
Dorothy Brown, Asa Griggs Candler Professor of Law, Emory University School of Law
In her testimony, Brown mentioned many points from her book, “The Whiteness of Wealth” and discussed three tax policy areas that are more likely to provide breaks for white people than Black people. She said the key takeaway she would like to emphasize is the need for greater transparency in the Internal Revenue Service (IRS) tax statistics to better understand racial disparities. Brown noted that the issues around many tax provisions date back to when separate but equal was the lay of the land. The first imbalance she explored was that white married couples, typically surviving on one income, are more likely to get a tax cut than married Black Americans who tend to live off two equal lower income jobs. She said the joint return has led to Black couples paying higher taxes and believes the solution to be a return to individual filing and a repeal of the joint return. Regarding homeownership, she noted that white homeowners mostly live in only white neighborhoods, and as a result, are more likely to sell their homes at a larger tax-free gain than Black homeowners who tend to live in mixed-race neighborhoods. She said tax subsidies for homeownership creates white tax winners and Black tax losers. The final area she highlighted is the tax break for employer-provided retirement accounts, saying that Black Americans are less likely to work for employers who provide these retirement accounts, and more likely to take an early withdrawal and, in turn, face a larger tax penalty for these withdrawals. She concluded that tax subsidies should be withheld until the private sector increases their participation rates.
Dr. Mihir Desai, Mizuho Financial Group Professor of Finance & Law, Harvard University
In his testimony, Desai said he wants to establish facts around the correlation between race and income, savings, wealth and mobility. Given that the tax system uses income and the returns to wealth as important inputs to taxing decisions, he said it is useful to consider the degree to which the tax system is racist, suggesting that many ideas around taxation and racial justice can easily be analyzed incompletely or loosely. He said some solutions other witnesses may be exploring, like more data about race on tax forms, would actually not accurately answer the question at large. He said he plans to discuss the most meaningful ways to advance the goals of racial justice through the tax code. Desai said that racial justice is an important goal for many Americans today and pursuing this goal effectively through the tax code has several implications. He concluded that the real promise of this hearing will be to reorient the policy debate away from its current obsession with inequality broadly, and toward more careful consideration on how the tax system can serve and impact the welfare of populations who need the most help.
Himalaya Rao, Managing Director, Black Founders Matter Fund
In her testimony, Rao spoke about her experience as a first generation immigrant, starting out as a social worker, and eventually turning to venture capital. During her MBA program, she said she was introduced to entrepreneurship and venture capital where she realized that even with a willingness to invest in women and minority founders, there are many barriers to doing so. She said investors engage in a pattern matching behavior to determine if a founder has the potential to be successful, which poses a threat to equity in this space that is dominated by white males. She said everyone engages in homogenous groupthink, and even though there are many initiatives to promote diversity, we often overlook the necessity to include people with different values and socioeconomic backgrounds at the decision making table. The final issue she mentioned is the lack of on ramps to including new investors in this space. She said everyone has implicit bias in their decision making process, but if we can find a way to create a broader level of participation, we can create a more equitable space for growth in this industry.
Shay Hawkins, President and CEO, Opportunity Funds Association
In his testimony, Hawkins shared a few success stories from opportunity zones in how they help create more jobs and provide care and wealth to the most underserved communities. He also discussed ways tax reform made the tax code more equal and suggested policies to get capital into the hands of minority entrepreneurs. Hawkins said he was proud to advise Sen. Tim Scott (R-S.C.) as he and the committee developed the bipartisan SECURE Act. He said the bill was the largest retirement reform to impact the economy in more than a decade, made it easier to save for retirement, and made retirement plans more accessible to more people. He said it is critical to build on previous efforts to make the income tax code more simple, fair, and focused on helping the American people as it relates to the TCJA, and argued that the cap on the SALT deduction should not be lifted. He agreed with Sen. Catherine Cortez-Masto (D-Nev.) in saying the SALT deduction is a gift to billionaires. He said he looks forward to discussing ways to use the tax code to draw money into the hands of minority communities, keeping the playing field level for entrepreneurs, and democratizing and extending opportunity zone investments and policy.
Question & Answer
Wyden mentioned the issue of giving tax breaks to the wealthy that perpetuate long-standing inequality and asked Brown to describe her research relating to stock ownership by Black households, and if the ability to defer tax on capital assets adds to the racial wealth gap. Brown said her research shows Black Americans are less likely to own stock than white Americans and the benefit of owning stock in the current tax code is that your taxes are much lower. She said since Black Americans are less likely to own stock, they are less likely to take advantage of that tax break. Brown said it does add to the racial wealth gap because a wealthy parent can buy stock, have it appreciate and not sell it, and then leave it to their child as a tax free inheritance that creates generational wealth.
Women and Minority Entrepreneurs
Wyden asked what the top challenges minority female entrepreneurs face in obtaining capital. Rao said the top challenges are though there may be platforms for these founders to pitch their ideas, there remains a lack of diverse representation on the investor side to better understand and see potential in minority founders. She said she believes greater representation among investors will be beneficial to understanding what success can look like. Wyden asked if his first employee credit and investor credit proposals would help solve this problem. Rao agreed that the two proposals will help increase the participation of diverse investors and help funnel money into different types of businesses.
Sen. Bill Cassidy (R-La.) asked Rao to speak about the inability of women and minority entrepreneurs to raise capital and asked if education is the key to overcoming some of the barriers. Rao said the difference is that people of color and women need to reach a certain level of notoriety to be seen as credible, and in contrast, white founders do not have to reach that same threshold of credibility. She agreed there is some connection to more prestigious universities and colleges that might enable women to progress further.
Sen. Maria Cantwell (D-Wash.) asked what needs to be done for women and minorities in terms of raising capital and building wealth. Rao said a re-education of investors in how to evaluate different subsets of entrepreneurs, as well as an inclusion of tax incentives to include more diverse individuals at the decision making table which will allow for investments in different types of businesses.
Removing SALT and Pass Through Deductions
Sen. Mike Crapo (R-Idaho) applauded results seen by the TCJA and asked Hawkins if he agreed it made the tax code more progressive, as well as if the SALT cap should be rolled back. Hawkins agreed the TCJA made the tax code more progressive and that the SALT cap should not be rolled back because it is objectively oriented towards to the absolute one percent and should not be repealed.
Sens. Steve Daines (R-Mont.) and Cassidy asked Brown for her thoughts on eliminating the SALT cap. Brown said she disagrees that the benefits would accrue solely to the extremely wealthy. She added that all itemized deductions should go, including the SALT cap, clarifying that she more so does not want any taxpayer to itemize deductions if only ten percent of Americans typically can do so.
Sen. Pat Toomey (R-Pa.) asked Hawkins if lifting the SALT cap would in turn unwind the pro-growth features of tax reform. Hawkins said that lifting the SALT cap would cause almost 96 percent of benefits to go to the top quintile, and over half to the top one percent of Americans. He said there is no intellectually honest argument to eliminate the SALT cap if the goal is to eliminate income inequality in the tax code.
Daines asked if making the Qualified Business Income Deduction (Section 199A) permanent will help minority entrepreneurs and grow the economy, and in turn if it would hurt them if it were to be scaled back as proposed by the Biden administration. Hawkins said it absolutely helps them, it should be made permanent, and it would hurt them if it was cut back.
Other Tax Code Changes
Sens. Michael Bennet (D-Colo.) and Sherrod Brown (D-Ohio) expressed interest in further expanding the CTC and EITC, and asked Brown for her thoughts on its impact on families of color and if these credits should be made permanent. Brown said it was a significant advancement in the American Rescue Act for low income minority families and should be made permanent. Desai added that the expansion was a wonderful move and should be made bigger and permanent. Desai noted that he thinks these credits should be the way forward on this general agenda.
Sen. John Thune (R-N.C.) asked witnesses to discuss the economic growth seen from the TCJA and if there are particular tax proposals that would be counterproductive to that growth. Hawkins said the TCJA led to higher wages and reduced poverty. He said raising the corporate rate would be counterproductive and also eliminating Section 199A would be damaging. Desai said if one is interested in helping the bottom quintile, the most direct solutions are expanding the EITC and CTC. Desai added that Congress should be careful about heavily raising the corporate tax rates because the idea of it creating easy revenue is not well founded and the impact will more heavily trickle down to workers.
Crapo noted claims that there is inequality caused by the joint filing and mortgage interest deductions, and also for those investing in retirement savings. Crapo asked if disallowing these deductions would reduce the burden on those most negatively affected. Desai said we are misled if we think we can solve racial inequity problems by taxing billionaires. He said narrowly, the areas and instruments Crapo mentioned could help, but, in the context of the overall tax system he said we have to think about where these revenues would go. Desai said it does not address the underlying problem about building wealth.
Sen. Debbie Stabenow (D-Mich.) asked what steps Congress can take to ensure on the front end that tax policies do not enforce wealth disparities. Brown said Congress going forward could make a point of making a racial impact statement on any proposed tax changes and asked for more tax transparency in general. Desai said that there is not really a need for more collection of data but rather the issue is the politicization of the analysis. He said he thinks there is already ample data in place to do what is needed.
Sen. Ben Cardin (D-Md.) spoke about the discriminatory nature of the tax code and how it can be compounded by discretionary spending. He expressed his interest in introducing the Neighborhood Homes Investment Act as well as New Market Tax Credits, saying they could be helpful in areas for revitalization. Cardin asked how to improve the tax code and simultaneously deal with the housing crisis, noting he would like to increase opportunities under direct spending. Brown said when we subsidize an activity, we have to think about who we help and who we hurt. She said the biggest barrier to increasing homeownership rates is the down payment, which the tax code alone cannot fix, saying the only solution is using both tax reform and spending. She added that one big problem is the nature of the EITC and that she thinks Congress could take steps to simplify it.
Sen. Tom Carper (D-Del.) said we are not focusing on the root causes as much as we are the symptoms and added that he wants to keep directing efforts towards expanding the EITC, retirement programs that allow low income people to sign up from day one of employment, opportunity zones, child care funding, student debt repayment assistance, and the child tax credit. On the subject of opportunity zones, Carper asked what more can be done to improve and better target opportunity zones to help minority businesses and families. Sen. James Lankford (R-Okla.) also asked how democratization can occur in opportunity zone investment. Hawkins said there are three levels of possible benefits that can be improved and his suggestions included allowing for a 100 percent step up in basis on the capital gains on business, as well as allowing for non-capital gains to be invested long term for 10 years or greater. He said this allows people who would not normally have capital gains to partake in those opportunity zones as investors and build wealth.
Sen. Tim Scott (R-S.C.) asked Hawkins if he agrees that opportunity zones are one of the more important parts of legislation to bring private capital into distressed communities and to address the concerns around the gentrification of those neighborhoods. Hawkins spoke to their importance and noted that they have not been severely leading to gentrification. He said to maintain this trend, Congress needs to reintroduce the Impact Act which provides reporting and transparency around what is happening in those zones in terms of jobs created and impact to communities.
Sen. Sheldon Whitehouse (D-R.I.) expressed his concerns around tax spending and expenditures saying a lot of money goes out the back door with the tax code and it tends to be regressive. He asked Brown to explain the extent to which opportunity zones run counter to the tax spending problem. Brown said opportunity zones are a giveaway to wealthy white investors who have also influenced which areas were made opportunity zones rather than strictly being distressed communities. She said there is a lot of leeway in opportunity zones that actually make them not helpful.
IRS Enforcement and Data
Sen. Elizabeth Warren (D-Mass.) said that IRS’s efforts to enforce tax laws do not focus on wealthy tax payers and asked what that means for the racial impact of the tax enforcement strategy. Additionally, she asked if auditing the wealthy more could help reduce racial disparities in the tax system. Brown said Black Americans are bearing the brunt because they are less likely to have access to tax attorneys than white Americans. She said ensuring the IRS has the funds needed to audit the wealthy with attorneys would help make our tax system more equal.
Sen. Brown said the country needs a more equitable tax code and a better IRS, and asked how responsible IRS guardrails could prevent disproportionate impacts. Professor Brown said data should be collected on who is being audited so it can be compared to the broader tax-paying audience and to not overly audit low income tax payers.
Sen. Bob Casey (D-Pa.) asked what types of data from the IRS would have helped Professor Brown with her research. She said statistics on income should be published by race, and said she would like to see what percent of taxpayers who benefit from which exclusions and who benefits from which deductions.
Casey asked Brown if she thinks it is possible for the Treasury and IRS to undertake gender and racial analysis by adding more statistical data and if it could be included with a reasonable degree of certainty as part of policy analysis. Brown said they have already published work with respect to gender and believes there is the capacity for the agencies to get this done.
Lankford said he wants to incentivize more people to save for retirement and reduce the penalty if people have to withdraw. He asked for a suggested dollar amount that should be allowed for people to withdraw from their 401(k) as an emergency fund. Hawkins said the number varies for different families, but imagines that somewhere in the $3,000 to $5,000 range would be appropriate.
For more information on this hearing, please click here.