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Fact check: How do average tax rates vary by race and income in the United States?
Executive Summary
Federal tax liabilities vary by race largely because income composition and asset ownership differ across groups, not because the tax code explicitly taxes by race. Recent analyses show Black and Hispanic filing units tend to face lower average federal income tax rates than white units at lower income levels, while disparities shrink or reverse at top incomes where capital income and deductions are concentrated [1] [2].
1. What the recent studies actually claim — the headline findings that matter
Recent work quantifies average tax rates (ATRs) across race–income groups using expanded income measures and statistical matching to produce race-tagged profiles. The authors report that Black and Hispanic filing units pay roughly 1–4 percentage points less than white units in the bottom five income deciles, while Black units pay slightly more (0.3–0.5 points) and Hispanic units up to 4 points more in the highest decile. These differences shrink substantially after controlling for filing status and number of dependents, and much of the remaining high-income gap is explained by differences in income composition — notably greater capital and non-wage income among white filers [1] [2].
2. Why those gaps appear — the mechanics of tax law and household economics
The tax code’s progressive brackets, preferential treatment for capital income, and itemizable deductions create different ATR outcomes when groups have different portfolios of income and household structure. White households report a larger share of taxable capital income and deductible items such as mortgage interest and retirement savings, which raises taxable income at the top but also enables tax preferences that alter ATR calculations. Conversely, refundable credits like the Earned Income Tax Credit and Child Tax Credit lower ATRs for lower‑income filers, and Black and Hispanic households disproportionately receive these refundable credits because their income is concentrated in wages rather than capital [2] [3].
3. Data and method caveats — how analysts attach race to tax records
Tax returns do not include race, so researchers statistically match survey demographic data to tax records or use expanded income measures to estimate ATRs by race. This approach — used by the CBO and academic teams — produces valuable estimates but carries measurement uncertainty: matching errors, survey nonresponse, and different definitions of expanded income can shift magnitudes. The CBO explicitly notes these limitations while presenting initial race-tagged estimates; independent academic work reaches similar directional conclusions but uses alternative decomposition techniques to apportion gaps to vertical progressivity versus horizontal differences in income composition [4] [1].
4. How different analyses interpret the same patterns — decomposition and policy framing
Researchers split the observed Black–white ATR gap into components attributable to tax schedule progressivity versus horizontal differences in income sources and household composition. One decomposition attributes roughly 61% of the gap to vertical progressivity and 39% to horizontal factors, indicating both the structure of marginal rates and group-level income composition matter. Policy discussions diverge: some frame the findings as evidence the tax system is progressive and reduces burdens on lower‑income minorities through refundable credits, while others emphasize that tax preferences for capital and wealth accumulation compound racial wealth gaps over time, suggesting targeted reforms might be needed to address long-run inequality [1] [5].
5. What’s missing and what policymakers should weigh — tradeoffs and open questions
Existing analyses capture current ATR differentials but leave open how tax policy interacts with broader drivers of racial inequality, such as labor market segregation, differential access to capital, intergenerational wealth, and housing policy. Estimates rely on one tax year snapshot and statistical matching; they do not fully trace dynamic wealth accumulation or state and local taxation differences that could offset or amplify federal patterns. Policymakers must weigh the tradeoff between progressive credits that lower ATRs for low-income households and reforming preferential capital tax treatment that disproportionately benefits wealthier, whiter households if the goal is to reduce racial wealth gaps [3] [6].