Planet Money - Tax Code Switch

Episode Date: April 19, 2023

This past January, researchers uncovered that Black taxpayers are three to five times as likely to be audited as everyone else. One likely reason for this is that the IRS disproportionately audits lower-income earners who claim a tax benefit called the earned income tax credit. And this, says law professor Dorothy Brown, is just one example of the many ways that race is woven through our tax system, its history, and its enforcement.Dorothy discovered the hidden relationship between race and the tax system sort of by accident, when she was helping her parents with their tax return. The amount they paid seemed too high. Eventually, her curiosity about that observation spawned a whole area of study.This episode is a collaboration with NPR's Code Switch podcast. Host Gene Demby spoke to Dorothy Brown about how race and taxes play out in marriage, housing, and student debt.This episode was produced by James Sneed, with help from Olivia Chilkoti. It was edited by Dalia Mortada and Courtney Stein, and engineered by James Willets & Brian Jarboe.Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

NPR. It is tax week in America. And, you know, a couple of months ago, there was this pretty eye-popping slash troubling discovery in the world of taxes. And it came from a study by a bunch of university researchers and a couple of people from the U.S. Treasury Department. I'm Dan Ho. I'm a professor here at Stanford. Daniel Ho was part of this team, part of this study, which decided to take a look at IRS audits. Specifically, who the IRS audits. And the big thing that we found in the paper,

it's a really disturbing finding, is that Black taxpayers are three to five times as likely to be audited as everyone else. Three to five times more likely to be audited by the IRS if you are Black. This finding was a big deal, made headlines. It was also a bit of a puzzle because the IRS does not collect data on taxpayer race. They're not allowed to even do that. We don't think that what is going on here is any evidence of explicit bias. After all, IRS doesn't observe race and ethnicity of the taxpayer, but really stem from sort of existing institutional priorities and selection processes for how audits get surfaced.

Specifically, this disparity has to do with something called the Earned Income Tax Credit. The Earned Income Tax Credit is a program really meant to assist lower-income wage earners, particularly lower-income wage earners that have dependents. So if you don't earn a lot of money and you have a kid, you are very likely eligible for this break on your taxes. And the IRS does disproportionately audit this pool of taxpayers. And this pool of taxpayers, it is disproportionately black. Yeah. However, we don't know specifically how they choose who to audit. They don't make that public, you know, in part because that would help tax dodgers also dodge tax audits. But, Daniel says, it is easy to imagine some factors that may lead the IRS to do more audits of people who claim this earned income tax credit.

Right. Like, for one, it's cheaper and easier to audit low-income people, like someone claiming their earned income tax credit. In those cases, all the IRS has to do is send a letter, like a piece of mail to you, that basically says, Hey, are you sure you qualify for this tax credit? Can you send us a bunch of documentation? If a taxpayer does not respond, they're deemed ineligible for that credit. And that happens at fairly high rates, either because taxpayers are in fact ineligible or because it can be a significant burden on taxpayers to try to find that documentation to respond to the IRS and engage with that audit process.

And also, I imagine if you're just a poor person, right, you get an envelope, maybe you are housing unstable. Maybe you have like, it's just like there's a million ways in which that mail might never not ever cross your field of vision, even if it was sent to you. Exactly. You know, there's this term that some researchers have used when talking about this audit by mail thing. The term is a doom loop. So you can imagine a situation where the IRS sends out mail audits. Some chunk of people who really do qualify for the earned income tax credit, they don't see that audit letter or they mess up their documentation or whatever. But to the IRS, this just looks like a successful audit catching a problematic taxpayer. So then the next year, the IRS might send even more mail audits and so on and so on. This is the doom loop. And, you know, again, we do not know for sure how the IRS does its audits, but it is true that as the budget for the IRS has been cut, the agency has shifted towards these cheaper audits of lower income taxpayers. So much so that in the most recent years, nearly 50% of audits are of taxpayers who claim the earned income tax credit. Wow, 50%?

Yeah, it's a really jaw-dropping rate of audits. What's good, y'all? Welcome to Planet Money. I'm Gene Demby. And I am Kenny Malone. And Gene, to celebrate Mark, I don't know what's the right word here, something, something tax week, we are partnering up with you and the Code Switch podcast because you all recently did a whole episode about the history of race and of taxes. Yes, we did. And today on this show,

we're going to talk to the lawyer who inspired Daniel Ho's research to look at the way taxes interact with buying a house, with getting married and going to college and the way that race is braided into all of that. That conversation is after the break. Today's episode comes from our colleagues at NPR's Code Switch podcast, who recently interviewed a Georgetown law professor named Dorothy Brown.

Dorothy is a tax lawyer and wrote a book called The Whiteness of Wealth, How the Tax System Impovers Black Americans and How We Can Fix It. And Dorothy's work, it's sort of the inspiration for that big tax audit study that we talked about earlier with Daniel Ho. And we're just going to let Code Switch hosts Gene Denby and Lori Lizarraga take the story from here. Daniel's study on race and audits kicked off a furor in Washington, but he says all this really started with Dorothy Brown. Yeah, Daniel said Dorothy was a pathbreaker in illuminating how race shapes America's tax system. And what's bananas, Lori, is that Dorothy became an expert on this completely by accident. I wanted a job in law where I didn't have to deal with racism because growing up in the South Bronx, I dealt with racism a lot.

So I knew I wanted to be a lawyer. And I decided, well, I want to do law that has nothing to do with race. I know I'll be a tax lawyer because the only color that matters is green. And here I am. Race is a critical component of tax, and it just hasn't been thought of that way. I wanted to know more about Dorothy's superhero origin story. And she said that her revelation about how much race gets braided into our tax policy came about when she sat down to help her parents do their taxes. So I asked Dorothy to set the scene.

Yes. So, you know, as a result of having an accounting degree, I did my, you know, I have a good child. I did my parents tax returns. returns. And every April, every time I did their tax returns, I was struck by the idea that I thought they paid too much in taxes that I couldn't figure it out. So my mother was a nurse in a nursing home, and my father was a plumber for the New York City Housing Authority. So each of them made roughly equal amounts of income, and each of them made half of what I made. So, you know, I would, whenever I did their taxes, this issue came up, but I had a real job, right? So I didn't have time to sit and think about why they were paid too much in taxes. But it always nagged at me. And

fast forward, when I was a law professor, I actually had time. So I decided to just start reading race publications, to start reading about race and to put my tax lens on the race data to see if I could make the connection that way. Because there's lots of race data, but not viewed through a tax lens. And I came across a study put out by the Commission on Civil Rights on the Economic Status of Black Women. And I'm reading it, and it says that married Black women contribute 41% to household income. And that was my eureka moment. That means nothing to anybody else. But to these tax eyes, oh my gosh. My mother and father earned roughly equal amounts. father earned roughly equal amounts. And what our tax law does to those married couples is cause their taxes to increase when they marry. So when I saw that, I said, that's why my parents are

paying so much money in taxes because they're married to each other. If they were single, living in a household, their tax bill would not have been as high as it was because they were married. Okay. So, Dorothy's lightbulb moment came about when she realized that couples earning the same or similar wages get hit harder when they file their taxes jointly, right? Yes. Sometimes getting married and filing jointly can bump a two-income couple into a higher tax bracket. And that could also phase out some benefits and some credits. But we know that historically, Black married couples were way more likely to have two-income earners because, well, you know,

racism. Black people were paid less for their labor. Both spouses needed to work to make ends meet. So all those Black married couples were being paid less and paying more in taxes. Listen, listen, this is what made my brain explode out of my ear when I was reading Dorothy's book. Like, isn't being married supposed to help your financial situation? I mean, marriage is such a huge part of the discourse around black economic stability. There was even a policy by the George W. Bush administration trying to get black folks to get married because the argument was it would help black people build wealth and to catch up with white folks. And Dorothy and I got into all of this in our conversation about how the marriage benefit in taxes has really been a marriage penalty if you're black. In fact, you know, one of the reasons people on the right argue blacks are

living in poverty is because we're not married, right? Then what you find out is, yeah, but we're married, our taxes go up. So that's not, marriage isn't helping us. And how it works is there are certain couples that get tax cuts when they get married. Those are the single wage earner households where one spouse works in the paid labor market, and the other spouse stays at home. We don't tax the value of the stay-at-home services. We just tax the wages of the paid labor spouse. Those are the married people who get a tax break from marriage. When you have two spouses working and contributing roughly equal amounts, their tax bill goes up. They'd be better off living together, as the right would say, in sin and paying less taxes and building wealth. And so there's a point in the middle

20th century in which married white women start entering the workforce too, right? And so you would think that this penalty that married double income partners are facing would hit white people too, right? Oh, you've nailed it. When I first started doing this research, there was always a category of married white couples who looked like married black couples in terms of their spouses contribute roughly equal amounts. That number was small in the beginning and then grew over time. That number was small in the beginning and then grew over time. And then came the Trump tax cuts, which Dorothy says suddenly fixed some of those marriage penalties that more white couples were now experiencing too. So what the 2017 tax cuts did was eliminate the marriage penalty for married couples who make less than $600,000, except for the earned income tax credit couples. Those couples are still hit by the marriage penalty.

But if you're outside of the earned income tax credit household, you're not paying a marriage penalty because of the Trump tax cuts. So one of the arguments you make in the book is that the tax code has historically worked specifically against black folks. Can you explain how that has happened? Yes. So in the beginning, only the rich people paid taxes. And then basically we had World War II. We had to move from only the richest Americans to basically everybody else.

So you had this expanded tax base. But think about it. So you had this expanded tax base. But think about it. Black Americans are paying taxes, too, to a federal government that excludes them from New Deal provisions. And nobody's offering to give us our money back, right? We're paying for second-class citizenship. We're paying for separate but equal, right? So we're paying for discrimination.

During the New Deal, the FHA, the Federal Housing Administration, began insuring home mortgages, but it would only insure those mortgages in white neighborhoods, turning redlining into federal policy. And when the GI Bill came along with World War II, it was implemented in ways that kept Black veterans coming back from the war from receiving benefits. So we're paying taxes, that's funding the government, coming back from the war, from receiving benefits. So we're paying taxes, that's funding the government, that's making sure that my parents weren't eligible for an FHA-insured loan, or my grandparents, right?

That we're making sure that returning Black veterans didn't have access to home loans. But those Black veterans, when they were working, was paying taxes into a system that was disadvantaging them. And it was paying for a system that was propping up the expanded homeownership rate. So from 1940 to 1950, we saw a minority of white homeowners become a majority of white homeowners with the assistance of federal policy

and with black taxpayers helping to foot the bill. So, for example, think about the tax subsidies for homeownership that came in, well, that have been in the code since the beginning. And then there's a certain provision if you sell your home at a gain that came in 1951. Well, in 1951, the majority of white Americans were homeowners. So they could benefit from that provision. We have never had a point in time where the majority of black Americans were homeowners. So any tax subsidy for homeownership is a tax subsidy designed for white Americans. So, I mean, it seems like it's basically impossible to extricate homeownership from taxes, right?

Yeah. The wisdom goes, you know, buy a home, you get a bunch of tax breaks. Yes, yes. That helps you build family wealth. It's really central to the way, as you know, like the way we talk about fixing the wealth gap is like getting black people into homeownership.

Sure, but it starts with the backdrop of where you started, that there's this idea that because white Americans were able to build wealth through homeownership, black Americans can mimic that. And black Americans cannot mimic being white, which is what really is the reason why white Americans have built homeownership wealth. and why white Americans have built homeownership wealth. Where we live is in different neighborhoods. So most black homeowners live in racially diverse or all-black neighborhoods. Most white homeowners live in all-white neighborhoods.

And since the majority of homebuyers are white homeowners or prospective white homeowners, their preferences make the market. They're not interested in buying homes in all black or racially diverse neighborhoods. They're only interested in buying homes in neighborhoods with very few black Americans. So if you are the only black homeowner in an all white neighborhood, then that's a really good financial investment for you. You're going to build wealth the way your white peers do. But it's going to come at a price. Your white neighbor may call the cops on you. If you have children and you send them to school, they're going to get tagged as delinquents, even though they're engaging in the same behavior that

their white peers are. So there's all this racism you're going to have to deal with. Whereas if you buy in an all-black or race-diverse neighborhood, you don't have those issues. But you have issues of being able to sell your home or being able to borrow against it so that you could put your kid through college, right? So homeownership for Black Americans does not work the same way as it does for white Americans. It just isn't the same as, well, it worked for them, it should work for us. I want to turn to student loan debt. Yes. So a lot of discourse around student loan relief, student debt relief,

has centered on the racial justice angle that, you know, black folks carry a bigger debt burden because we have so much less household wealth than white families. And so when we go to college, we have to take less household wealth than white families. And so when we go to college, we have to take out more loans to finance college. But you say that how much debt that people are carrying because of their race is also shaped in a bunch of invisible ways by tax policy. So how are taxes part of that story? So, you know, one of the biggest breaks is an interest deduction for student loans. The problem is it's capped at $2,500. And when you look at the average debt load of a college graduate, it's higher for Black Americans

than white Americans. So they usually have more debt and they're capped out, right? So the $2,500 does not allow most Black taxpayers their full interest deduction. Right. And it's worse if two black college graduates get married when they were individual filing. They each had a twenty five hundred dollar cap. When they get married, they both have a total twenty five hundred dollars. Wait, I'm sorry. Yes. Why? Hello. Why would they, why would that go? Why wouldn't that just be, I mean, I guess their credit becomes. But it's like the idea that you don't make an accountability for two people being married with student debt is ludicrous, right? That's a tax policy angle that could be fixed, right? But, you know, so the worst of all possible worlds is for two black college graduates to get married.

Right. Because they've got this high debt load and then they can't take the interest deduction. So I'm imagining a scenario where two black college graduates get married, can't take an interest deduction on their debt. Yes. Buy a house. Right. Yes. Right. And then they also are dealing with their marriage penalty because they probably make some. Yes. So I'm like, oh, my God. I once had a student say, so, Professor Brown, are you saying that we shouldn't get married? I said, do not go home and tell your grandmother that. I did not say that. All these students come to a tax law class and they come out of class like a professor told us not to get married, not to buy a house.

And that college is going to be might be a drag on our earnings down the line. It's like, oh my God, what did I sign up for? And the most depressing chapter in my book was the college chapter. Because that's when I came across the statistic that said 60% of Black students who start college don't graduate. That's me. And they leave with huge amounts't graduate. That's me. Yeah. And they leave with huge amounts of debt. It was heartbreaking. That statistic, that statistic just blew me away. So I'm a Black college dropout, and I still carried a big debt. You know, I went to a Black

college and didn't finish. How does the tax system show up in the way I find my taxes? How does that affect our financial outlooks? Right. You know, there's research that shows the student debt load is a drag on black folks and therefore increases the racial wealth gap. That by forgiving student debt, you'd make quite a dent in the racial wealth gap. debt, you'd make quite a dent in the racial wealth gap. So you just named like all these ways, these sort of landmines built into our tax policy, like our economic system. Is there a way, can we quantify how much that means over generations for Black folks? Like the way that this drag that tax policy exerts on Black people and non-White people more broadly. Do we know how much that is?

The easy answer is no. The easy answer is no. But I could imagine at some point, Gene, some economist having an answer to your question. This is how much, this is the quantification of it. And part of why I wanted to make the book accessible and I wanted, is I wanted other people to pick up the charge, right? So my

book focuses on Black and white. I want other people to focus on Hispanic Americans. I want AAPI, Indigenous Americans, all kinds of systemic racism that's built into the code where taxpayers of color are disadvantaged, not just Black taxpayers. So I'm excited about the other research that's been done. After the break, the research that Dorothy has already inspired, that research by Daniel Hill about race in IRS audits, causes a little drama on Capitol Hill. on Capitol Hill. If you're a big bank, borrowing money from the Fed is kind of like borrowing money

from your uncle. And your uncle might even be saying, look, it's fine. Seriously, it's no big deal. But deep down, you don't believe him. Well, it's embarrassing. Thanksgiving, you know. Right.

A closer look at how the Fed tries, but not too hard, to get banks to its discount window. There's sort of a kind of sort of lender of last resort. Lender of you're having kind of a hard time right now, buddy. Exactly. That's in our latest bonus episode available now. Be sure to check it out if you're a Planet Money Plus listener. And thank you for supporting NPR. Check it out if you're a Planet Money Plus listener.

And thank you for supporting NPR. All right, y'all, it's worth me and Lori jumping back in right quick to remind you that it was Dorothy's research that led to the study that Daniel Ho and a team of researchers released in January. So much so that Senator Ron Wyden, the head of the Senate Finance Committee, put Daniel Warfel, the new head of the IRS, on the clock to get to the bottom of these racial disparities. This is something the IRS has to address. If you're confirmed, what will you do to uncover the reasons for the racial disparity in audit selection, and what will you do to correct it? Right now, not being at the IRS, I don't yet have a good sense of what the issue is. Let's do this. Will you commit within 60 days of being confirmed that you will get back to us and give us the underlying reasons in your view why there is this discrimination

and what you'll do to correct it within 60 days? I will absolutely, as soon as I get to the IRS, talk to those individuals that are working this issue and report back to you on what we're finding. 60 days. Understood, Senator. All right. Just as we were finishing up this episode, the IRS announced an $80 billion plan to modernize the way that it collects taxes. And part of that plan is meant to find ways to analyze whether the IRS is discriminating in its auditing.

Which sounds vague. Like the IRS is making a plan to look for the racial discrimination Daniel Ho and his team already found. But I will say in terms of the larger plan, we are hearing the IRS actually acknowledging racial disparities in a way that we haven't before. Which, you know, I guess does give me some hope that some of these disparities will actually begin to be addressed. And it's all kind of wild that Dorothy was responsible for lighting the match that started all of this. Right? Like, she went into law specifically to stay away from race.

That's why she went into tax law. And now, race and taxes, that's kind of her legacy. So, you know, every April 15th, the tax code which disadvantages Black taxpayers while advantaging white taxpayers increases the racial wealth gap. So we could solve the racial wealth gap tomorrow, but it would be started again next April 15th. So we cannot solve the racial wealth gap without making sure it's not perpetuated by our tax policies. And people tend not to draw the connection between those two. It's the silent wealth killer for Black families. This episode was produced by James Sneed with help from Olivia Chokodi.

It was edited by Dalia Mortada and Courtney Stein and engineered by James Willits and Brian Jarboe. And we would be remiss if we did not shout out the rest of the Code Switch Massive. not shout out the rest of the Code Switch massive. That's B.A. Parker, Beryl Williams, Leah Dinella, Kumari Devarajan, Karen Grigsby-Bates, Christina Kala, Alyssa Jong-Perry, Jess Kung, and Steve Drummond. Our art director is Ellie Johnson. Thanks again to our colleagues at Code Switch

for this episode. You can hear more, including a very fun Dungeons & Dragons episode by subscribing to Code Switch wherever you get your podcasts. I'm Gene Demby. I'm Lori Lizarraga. Be easy, yo. Call your dad. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.