A Guide to Understanding Racial Disparities in the Federal Individual Income Tax System

Introduction

This report examines how the federal income tax system contributes to racial disparities in the United States. Although tax provisions do not reference race directly, they operate in an economic landscape shaped by deep, persistent inequity. The authors argue that the code distributes benefits in ways that reflect long-standing disparities, particularly between Black and white households, in income, wealth, and family structure.

These issues are rarely addressed in tax policy debates. But policies tied to wealth accumulation, such as mortgage interest deductions or capital gains tax rates, tend to favor households that have benefited from generations of racial exclusion. At the same time, income-based credits are limited in scope and can impose burdens on the very families they are designed to support.

The authors include Aravind Boddupalli, a Research Associate at the Urban-Brookings Tax Policy Center; Janet Holtzblatt, a Senior Fellow at the Urban-Brookings Tax Policy Center; and Lillian Hunter, a Research Assistant at the Urban-Brookings Tax Policy Center.

Methods and Findings

The authors use the Tax Policy Center’s microsimulation model for their analysis, supplementing it with data from the Federal Reserve’s Survey of Consumer Finances and the Census’ Current Population Survey.  Since tax returns do not collect racial data, the report uses imputation methods to assign likely racial identities to tax units, allowing the researchers to analyze average outcomes by race.

The report identifies three major structural drivers of tax disparities:

1. Labor market inequality. Black workers earn less on average and are more likely to face inconsistent or low-wage employment. These income patterns reduce eligibility for many income-based tax benefits.
2. Wealth inequality. Tax preferences for homeownership, capital gains, and retirement savings disproportionately benefit white households, as they are more likely to hold these assets.
3. Household structure. The tax code offers larger benefits to married couples with one high earner. As a result of the enduring effects of a history of structural racism, Black families are more likely to be headed by single adults or to have more complex caregiving arrangements, which can reduce or complicate access to tax credits and filing statuses.

The report finds that Black households are less likely to benefit from tax breaks tied to wealth, such as deductions for mortgage interest or tax-free investment income. Instead, many lower-income Black families rely on refundable tax credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). While these credits are important, they are usually smaller than the benefits received by higher-income households through wealth-related provisions. Furthermore, people who claim the EITC are more likely to be audited than high-income earners, which places a greater burden on Black taxpayers who are more likely to receive this credit.

Collectively , these patterns show how tax rules that appear neutral can reinforce racial and economic inequality.

Conclusions

The authors call on policymakers to design tax reforms that actively consider how race and structure intersect with income and wealth. Without this focus, tax policy will continue to reflect and reinforce long-standing inequalities.

They recommend several interventions:

• Improve federal data collection and access to better analyze race-based effects within tax administration;
• Reconsider wealth-based preferences, including deductions for mortgage interest and exclusions for investment income;
• Expand and simplify refundable tax credits to support a broader range of family and income structures; and
• Shift enforcement efforts away from low-income households and increase transparency in audit selection.

These proposals are meant to shift the system from one that passively reproduces inequity  to one that addresses the historical and structural factors shaping economic life. The report makes clear that fairness in tax policy cannot be achieved without confronting the broader context in which that policy operates.