By lifting up families at the bottom through tax credits and taxing affluent households more, Democrats can help narrow the racial wealth gap.
“It’s baby steps,” Carl Davis, research director at the Institute on Taxation and Economic Policy, told Yahoo Money. “When you put them all together, they add up to a more meaningful package that would narrow racial wealth inequality. But the changes are more modest than they should be.”
House Democrats proposed increasing the top income tax rate and the long-term capital gains rate, among other proposals, which hit high-income households that are disproportionately white.
The expansion of the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC), among other credits, would reach a larger share of the Hispanic and Black population, helping to narrow the wealth gap between those two groups and white Americans, according to Davis.
“Broadly, the approach is right,” Davis said. “Biden's plan is unquestionably more ambitious and it would be more powerful.”
Expanding the child tax credit ‘would be a transformational change’
The proposal that would have the biggest impact on narrowing the racial wealth gap would be the extension of the expanded CTC through 2025, which is part of the House Ways and Means Committee plan. Right now, the expansion is scheduled to expire after this tax year.
“There's no doubt that that would be a transformational change for a lot of families,” Davis said. “The amount of income support that would be provided through that is just much larger than what's being considered for the other credits.”
Nearly half of Black children (48%) and almost half of Hispanic children (46%) live in families that were previously considered by federal tax law to be too poor to qualify for the full credit, according to estimates by ITEP. Under the Democrats’ proposal, the full credit would be extended to allow those families to continue getting the credit. Additionally, the larger credit amount would continue.
Additionally, The American Rescue Plan made the EITC fully refundable — in turn reaching more Black and Hispanic families — and extended the credit to workers without children at home.
“That's a benefit geared toward low-wage workers, [and] unfortunately, with the racial disparities in this country, people of color are more likely to be low-wage workers,” Davis said. “As long as that disparity continues, the EITC will be helpful in boosting the financial security of people of color.”
Democrats' tax plan targets wealthy — largely white — households
House Democrats also want to raise the top long-term capital gains and qualified dividends tax rate to 25% from 20%. Only a fraction of assets subject to that tax are owned by Black or Hispanic families, meaning the higher tax rate would hit wealthier white households.
White households own 89% of the assets that would be subject to such tax, while Black and Hispanic households own 1.3% and 0.8%, respectively.
Democrats’ plans to revert the top individual income tax rate to 39.6% from 37% and impose a 3% surtax on individuals with an adjusted gross income of more than $5 million also target more affluent families that are “disproportionately white,” according to Davis.
Last, the House Democrats’ proposal includes hiking the corporate tax rate to 26.5% from 21% could also aid in shrinking the racial wealth gap, according to Davis. The tax hike would hit families that own corporate stock, which are overwhelmingly white.
‘Being as politically palatable as possible’
The Democratic plan could have gone even further if it kept President Biden’s initial ideas.
Biden’s original plan included repealing the step-up basis, which allows heirs to pay capital gains based on the price of the asset when it was inherited rather than when it was originally acquired. The provision is not in the latest version of the plan introduced by the House Ways and Means Committee.
“You have these gains being passed along from one generation to the next, solidifying intergenerational inequality,” Davis said.
Biden also had proposed increasing the capital gains rate to 39.6%, rather than the Democrat’s proposal of 25%.
“They're pretty incremental reforms,” he said. “They were very much put out there with an aim toward being as politically palatable as possible.”