Co-authored by Heather McCulloch, Director, Tax Alliance for Economic Mobility and Dedrick Asante-Muhammad, Senior Director of the NAACP Economic Department
As we all make sure we have done what we need to do to comply with our complicated tax code, there is a serious debate concerning the future of our tax code, and thus the future of our country. President Obama's announcement of new tax benefits for middle class and working families, highlighted in the State of the Union and detailed in his FY 2016 budget, shines a light on the tax code in a way that demands our attention and engagement.
The President is proposing a package of tax proposals that would help build an equitable economy in which all families, regardless of income, race or ethnicity, have an opportunity to earn, save, invest and prosper. The budget includes tax code provisions that help low- and moderate-income families to stabilize their household budget, build their financial security, invest in their children's education and save for retirement. And it includes measures to make permanent existing credits -- like the Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit -- that are already helping low-income and households of color to get by, and get ahead.
Most of the President's proposals face limited chances of success in this Congress, but they are important because they draw attention to the inequitable nature of our current tax code and the need for reform. Here's some data that puts the current tax debate in context: The U.S. tax code includes over a half a trillion in tax benefits -- deductions, credits, exclusions and preferential rates -- that subsidize households to save and invest. But lower-income households can't access most of them because of the way they're structured. For example, families who don't own homes, and less than half of African American households do, can't take advantage of the more than $200 billion in tax subsidies for homeownership. Workers without access to employer-based retirement savings accounts can't access the substantial benefits they offer for retirement savings; and only about four out of ten black workers participate in an employer-based retirement plan.
Today, the tax code is primarily benefiting wealthier households, those least in need of public subsidies, and it's contributing to a large and growing wealth gap. A recent report by the national nonprofit CFED showed that the top one percent of households receive more tax-code based benefits than the bottom 80 percent of households combined. Research by the Tax Policy Center found that the wealthiest 20 percent of households received 70 percent of the tax benefits that encourage homeownership and savings in employer-based retirement plans; and 2013 Congressional Budget Office data showed the top 20 percent receives 93 percent of the benefits from preferential tax rates for capital gains and dividend income.
We know little about how people of color do or don't benefit because the IRS doesn't collect data by race; but we can approximate using income data. As indicated above, we know that the majority of tax benefits that support savings and investment go to the top 20 percent of households (the top income quintile) and we also know that almost 80 percent of households in that quintile are white, only six percent are black, seven percent are Latino and seven percent are Asian/Pacific Islander. So, it's probably safe to assume that households of color are receiving only a fraction of the benefits.
The big question is -- what do we do about it? The President's proposals take some steps to level the playing field by expanding, making permanent or introducing new credits that are accessible to lower-income working families. His proposals may not pass in this Congress, but they are already framing a national discussion about the role of the tax code in fueling inequality, opening the door for a discussion about equitable tax policy solutions.
The NAACP, along with many of our allies, is involved in the Tax Alliance for Economic Mobility a national initiative to advance inclusive, progressive and equitable tax policies in the months and years ahead. We'll keep you apprised of these efforts, as they unfold, and hope you'll join us in pushing for a tax code that supports all families to save and invest -- in themselves, their children and a prosperous nation.