Inequalities in Tax Code Fuel Call for IRS to Collect Data Based on Race

IRS data on racial disparities in the laws it administers remains conspicuously absent, but the effort to change that is starting to gain traction.

Researchers say the code could be fairer if the IRS, the Treasury Department and the Joint Committee on Taxation incorporated race into their data and analysis, which many other federal agencies are already doing. But collecting the data raises thorny questions of authority, confidentiality and public perception that do not provide easy answers.

Collecting and analyzing race-based tax data would make it easier for lawmakers to see who disproportionately benefits from tax breaks or bears the brunt of IRS enforcement, allowing them to develop legislation more equitable. Passing laws without this knowledge can widen the gaps between people of different races and ethnicities, according to academics and researchers.

“If you are equal to me and I am equal to you, color blindness is fine. But if there are inherent disparities and inequalities, then color blindness only reinforces that disparity, ”said Wilton B. Hyman, professor at New England Law in Boston and author of articles on the intersection of taxation and of the race. “So while it seems right, in a general sense, in a more substantial sense, it essentially creates permanent disparity, permanent prejudice, permanent injustice to that person who is in the back.”

Disparities exist

Many other agencies collect racial demographics. The monthly employment report from the Ministry of Labor, for example, details unemployment and other statistics by race. The Department of Housing and Urban Development collected and reported data on discrimination in housing, and the Department of Justice did the same with discrimination in the police service.

There is evidence that certain provisions of the tax code lead to very different results for different racial groups, mainly due to differences in wealth. But researchers often have to rely on best estimates using incomplete data.

For example, tax-efficient retirement accounts reward people with money to put away, the preferential treatment of long-term capital gains from assets like stocks and bonds benefits those who hold those assets, and Mortgage interest deductions are useful to homeowners.

Blacks and Hispanics — who have median income and median wealth than whites – are less likely to benefit, tax policy researchers say.

“You could argue that the mortgage interest deduction is ideal for all families,” said Amy Matsui, senior lawyer and director of income security at the National Women’s Law Center, who has studied this problem.

But the tax break has limited usefulness for women and women of color especially because of their lower income levels, although that’s hard to see without more precise data, Matsui said.

The JCT, a non-partisan body that helps lawmakers analyze and estimate revenue from legislative proposals, may be able to help Congress spot racial and demographic inequalities. But the committee generally avoids potentially controversial studies, in the absence of significant pressure from lawmakers, a former JCT economist told Bloomberg Tax. The individual requested anonymity to speak freely about the committee’s thinking.

Correspondence data

JCT typically relies on IRS data pulled from tax returns and other files that do not ask for information on characteristics such as race or gender.

To perform race analysis, JCT should link IRS tax data with racial data from other sources like the Census Bureau. This could lead to backlash from policymakers, as individuals do not consent to this happening when they file their statements, the former committee employee said.

The IRS has a limited ability to make some connections on its own. The agency under tax code Article 6103 may share tax data with other federal agencies for tax administration purposes, but Congress should act to expand that capacity, said Tom Petska, former director of the IRS’s Statistics of Income division.

The IRS, at one point, contributed a robust data set matching information from the Census Bureau’s current population survey with limited tax reporting data and Social Security income and benefits, said Petska.

“In the ’70s, I thought this was the future of federal statistics,” Petska said. “We’re going to have selective matches, we’re going to take an oath of confidentiality, and we’re going to have these rich datasets. “

But the Nixon administration’s attempted political abuse of the IRS has killed much of the appetite for this type of work, he said.

What is needed for compliance

One of the main barriers to integrating race into IRS data is the long-held belief among some members of government that information is purely a tool for collecting and administering taxes, and not not for researchers to analyze inequalities, according to several former officials.

But to enforce the Civil Rights Act of 1964, many federal agencies must collect data on race and ethnicity to make sure there is no discrimination and to intervene if so, a noted Jeremy Bearer-Friend, associate professor at George Washington Law University, who wrote a paper about this question.

The IRS collected data and fought segregation in its workforce, but did not extend that to the treatment of taxpayers, he found.

The lines of what is needed to collect for taxpayer compliance are “already a little blurry,” Bearer-Friend said. “You could argue that it is necessary to ask taxpayers what their race is,” and this is in fact directly relevant to compliance, as it is necessary for them to monitor themselves to ensure that they adhere to the non-discrimination in the way they administer the code. “

JCT declined to comment for this story. The IRS addressed questions to the Treasury. The Treasury did not return requests for comment.

Confidentiality, precision, political concerns

There is a risk that asking a question about race and ethnicity on a tax return could lead to abuse or create a perception of discrimination, even if the IRS does not perform an audit or measurement collection against taxpayers based on their race, said Mark Mazur, a former treasury official who also worked at the IRS and the JCT.

Mazur said the general opinion during his tenure in government was that race, gender or religion should not be determinants or potential influences on tax administration decisions.

Such a question could also take people away from reporting, tax professionals have said.

Undocumented immigrants in particular might fear filing their case if asked about their race, said Francine Lipman, a professor at the William S. Boyd School of Law at the University of Nevada in Las Vegas, which helps low income taxpayers.

Alternatives to adding a racial question to tax returns, such as a separate survey or matching data from the tax return to data from other agencies, are likely to produce errors.

Census Bureau survey data is generally based on households and taxpayer data is not, and the office’s income measures may underestimate income disparities by leaving out capital gains, said. tax policy researchers.

Some fear that the data is politicized in a racist manner. But stereotypes about who benefits from and who contribute to government coffers have been around for decades, and the data could also help refute those stereotypes, the tax experts said.

The structure of the child tax credit, for example, “leaves out some of our lower income colored children”, because of the way the credit is phased in as incomes rise, said Meg Wiehe, deputy director of the Institute on Taxation and Economic Policy, citing a 2019 report from the Columbia University Center on Poverty and Social Policy. ITEP, like other think tanks, has analyzed racial disparities in tax policy.

Congress action

Several lawmakers, amid a national conversation about systemic inequalities, said they were working on legislation to treat government tax data regardless of race.

Sen. Sherrod Brown (D-Ohio) hopes to introduce a bill requiring additional reports from the IRS – potentially in consultation with other agencies – on racial disparities within the tax system later this year, according to a door -speak from his office. The joint committee on taxation should play a role in this regard, the spokesperson said.

House Ways and Means Committee chair Richard Neal (D-Mass.) Is also drafting legislation to require the collection of race data from taxpayers, a spokesperson said. Neal and Rep. Ayanna Pressley (D-Mass.) Recently request Treasury Secretary Steven Mnuchin will provide an analysis of racial disparities in tax policy and administration, including the results of recent Covid-19 stimulus measures. Spokesmen for the two said they had not received a response.

“As our country focuses on identifying and eliminating systemic racism, we have a duty to ensure that our tax laws do not perpetuate racial injustice,” lawmakers said.

—With help from Faris Bseiso.

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