Taxes

Examining Treasury’s Review Of Racial Bias In The U.S. Tax Code

Professor Steven A. Dean of Brooklyn Law School discusses Treasury’s Equity Action Plan and its progress on examining potential racial bias in the tax code.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: bias review, Act 2.

On President Biden’s first day in office, he signed an executive order calling for the federal government to address racial inequalities in agency policies. Shortly after this announcement, the Treasury Department released its own equity action plan designed to examine potential racial bias in the tax code. Two years later, this plan has left many supporters underwhelmed by Treasury’s efforts.

This week’s episode is part of a series we’ve been doing examining how tax rules affect marginalized groups. We’ll include links in the show notes to our previous episodes on the intersection of tax and racial inequality, LGBTQ rights, feminism, diversity and international tax policy, tribal taxation, and wealth and inequality.

So today we’re taking a look at how Treasury’s plan has fared. Joining me now to talk more about this is Tax Notes reporter Alexander Rifaat.

Alex, welcome to the podcast.

Alexander Rifaat: Hi, Dave, good to be here.

David D. Stewart: To start off, could you give us some background on what Treasury’s Equity Action Plan is supposed to do?

Alexander Rifaat: Treasury’s Equity Action Plan is the Biden Administration’s attempt to examine potential biases in economic and tax policy. Amongst the measures that the Equity Action Plan attempts to address is potential racial bias in the tax code. Since the IRS does not collect statistics on race or ethnicity, Treasury would work with other government agencies such as the U.S. Census Bureau for the first time to gather statistics and get a better understanding of any relationship between race and the tax system.

David D. Stewart: All right. You recently spoke with someone about this issue. Could you tell us about your guest?

Alexander Rifaat: I spoke with Steven Dean at Brooklyn Law School. Dean really focuses on that intersection between tax policy and potential racism. Dean has been a high-profile proponent of addressing racial discrimination in the tax code and is coming out with a new book on the subject.

David D. Stewart: What sort of issues did you talk about?

Alexander Rifaat: We looked at Treasury’s Equity Action Plan, where it currently stands, as well as what Dean sees in terms of shortcomings with the plan, particularly when it comes to the collecting of statistics. I think that what you’ll find in this discussion and what was really an overarching theme was in terms of where the discussion is currently on racism and the tax code, there isn’t a one-quick-fix solution that proponents have in mind. But instead they’re building a trust within Treasury and government institutions to be able to find an optimal solution.

I think what you’ll see in discussion is looking at the current standing of Equity Action Plan, looking at what Treasury’s trying to do in terms of addressing the issue, ways that it can improve, and looking from there where this issue goes going forward.

David D. Stewart: All right, let’s go to that interview.

Alexander Rifaat: Professor Dean, welcome to Tax Notes Talk.

Steven A. Dean: Thank you so much for having me. Really excited to be here.

Alexander Rifaat: Right off the bat, why is it important to study the link between race and the tax code? How are inequities in the tax system connected to greater issues of economic and social inequality?

Steven A. Dean: I think the real answer there is we don’t know, and the reason we don’t know is we’ve been afraid to look. I think that the view of so many tax experts has been that as long as we don’t ask any questions, we won’t find anything that we’re uncomfortable with. I don’t know that they’ve really been that conscious of the choice to ignore race in this space, but that certainly has been the result.

I think that we’re only now beginning to understand. Of course, some of us have understood for longer than others. Professor Dorothy Brown has been talking about this for decades and only recently has really broken through with her book, The Whiteness of Wealth, that has really just taken the world by storm and has just completely transformed the conversation.

I know that so much of what has happened in the tax space over the past few years has been really the result of her personal and singular efforts to change that conversation. No longer, as it had been for many years. For me as a tax lawyer, I’ve been teaching here at Brooklyn Law School since 2004. I’ve seen her present her work in really important spaces in the tax community, and I’ve heard her silenced and ignored and all but ridiculed for her work.

But now with The Whiteness of Wealth, it’s forced everybody to really grapple with this question. The Treasury Department has been doing it reluctantly, and others have been doing it with a little more gusto, but I think they’re all finding very interesting results. So far, everybody that’s looked at the question, “Does race matter in tax?” has found an unequivocal yes to be the answer. So little has been done that I’m sure there’s much more to learn.

If we want to understand why inequality is such a big problem and why the racial wealth gap is such a big problem, I don’t think we could afford to not ask the question of how the tax system, which has always been about distribution and redistribution of wealth, what effect that has on different racial groups.

I think that one of the moments that really was an epiphany for me, and maybe will be for others as well— so for a little while I took leave from Brooklyn Law School and was running the Graduate Tax Program at NYU where I encountered another incredible scholar, Jeremy Bearer-Friend, who was a visiting assistant professor there but now is a tenure-track professor at George Washington University. I used some of his work and some of his notes in preparing my tax policy class at NYU while I was there.

One of the readings that he’d assigned just completely blew me away. It showed that 401(k)s have a disproportionate effect by race. I would’ve thought before I saw this that that was just simply impossible.

There’s just no way that you could, controlling for income, have the 401(k) system favor some racial groups or others. But the data was just crystal clear. It was crystal clear that because of racism elsewhere in the system, not in the tax law, people had different kinds of jobs. Even when they had the same income as whites, Blacks and Hispanics had much lower access to 401(k)s.

So if we’re deciding how we should support retirement and we think the 401(k) is the answer, wouldn’t we want to know if that was leaving Blacks and Hispanic folks at a big disadvantage in saving for retirement? I think we’d want to know that. I think that most fair-minded people would be as appalled as I was to realize that something they thought was perfectly race-neutral, really giving access to folks who don’t have a lot of advantages to that kind of powerful savings tool, it turns out that we were doing it wrong. We’re still doing it wrong, and we didn’t even know.

Alexander Rifaat: What do you make of Treasury’s Equity Action Plan? As previously mentioned, they created a racial equity committee and recently released their first analysis, which showed white families disproportionately benefit from the tax system. What are they doing right [and] what are they doing wrong in your opinion?

Steven A. Dean: I think they’re doing a lot of things right. I would say they’re doing it far too slowly. I think that waiting two years after Biden had announced the anti-racist executive order at the start of his administration. He then, soon thereafter, went on to do something that I publicly spoke out against as being quite nakedly racist.

In his pitch for one of his first tax measures, he said that they were going to fund some of their spending by going after tax havens, and he named two tax havens at his speech, both majority Black countries, and didn’t name any of the many other majority white countries — not majority white, Switzerland is not majority white, it’s almost entirely white. But in his pitch for this tax measure was implicitly using race as a way to gather support for his effort.

I publicly spoke out against that. Soon after that when he addressed Congress, he named Switzerland as well. So credit to him and his team for doing the right thing there. But it took years for them to form their advisory committee.

If you’re taking years to form an advisory committee, you’re not taking the issue seriously. I think that would be the biggest issue for me that they’re taking measures, and they’re taking important measures, but they’re going much too slowly. They could be doing a lot more.

The taxpayer advocate [and] other parts of Treasury could be sending out testers. There’s a famous study that economists produced decades ago, but it’s been reproduced since then, where they send out fake resumes to a bunch of Fortune 500 companies and they send out the same resumes with Black-sounding names and white-sounding names.

They’ve always found that the results are dramatically different. The experience and everything else is the same, so there’s nothing you could deduce from their experiences that would explain the differences, but if you use Black-sounding names like Lakeisha and Jamal and white sounding names like Emily and Greg — of course, I should disclose that even though my name is Steven Dean, I am Black. I think I certainly benefit from that white-sounding name phenomenon myself, and on the radio nobody can tell I’m Black.

But I think it’s important to realize that the fact that the IRS doesn’t collect race information is a silly, quite frankly, reason to claim that there can be no racism in the administration of tax. I would’ve very much liked to see, not merely this very careful, slow — and, sure, if you take two years to create your advisory committee, you’re probably going to do a pretty good job, and they did. But I would prefer them to maybe move a little faster and to maybe move a little faster in trying less-careful measures to figure out whether there’s any racial bias in the code.

Their very careful analysis of tax expenditures to see whether they have a racially disparate impact, that’s fine, but that doesn’t tell you whether the important questions that, again, Jeremy Bearer-Friend has been asking, “Is there racial bias in the administration of the tax code, and could there be?” We haven’t even really begun to look at that. Of course, there’s an important study just came — I think it was spearheaded by a laboratory at Stanford — that found, in fact, that there is racial bias in audits.

This is something that Treasury themselves could have been doing and certainly could have done in less than two years to at least find some evidence of what has to be true. It simply can’t be true that tax law is the only space in the world where race doesn’t have an impact and where racial bias won’t have an impact.

I will tell you something else: There is no doubt — because every time that I speak out about this, I get racist emails. You would think that no racist would listen to this podcast, but I will predict that when this podcast is posted, I will get some nasty racist emails. If people are bothered to send nasty, racist emails after I appear on this incredibly nerdy, and don’t take that the wrong way, podcast, that’s a pretty good indication that there is something that we need to focus on and address and think about.

Alexander Rifaat: Many tax policy experts, and those of the IRS, including former Commissioner Charles Rettig, have argued that a lack of statistics on race and any sort of reports linking higher audit rates to minority groups is simply a consequence of the complexity of certain credits, such as the earned income tax credit, and not a person’s skin color. What do you make of that?

Steven A. Dean: Well, I would say two things. I understand that argument and there is certainly some truth in it, but I’ll say two things.

One, it is certainly true that the structure of the earned income tax credit is essentially a trap, right? If you wanted to design a tax credit that was designed to get people in trouble, you couldn’t do much better than the earned income tax credit. Some of the reasons that it is so complicated and some of the reasons that it is so easy to get wrong are some of the biased assumptions built into it. It’s certainly true that most people assume that the EITC is a Black tax provision and it is targeted at Blacks, which is not true. More white people claim the credit than Black people certainly.

But it’s designed in a way that no other tax credit is designed. It is designed in a way that is very limited and limiting and very easy to get wrong. Some of those design features reflect racial bias. You would never include some of those requirements to get the mortgage interest reduction, a point Dorothy Brown has made. And if you included requirements like those for the EITC in other tax provisions, more people would get it wrong. I think that’s certainly true.

But it is also true, and I’ve appeared on panels with folks from the IRS, and I’ve heard these kinds of stories from them — I have heard these from their own mouths that these stories that sound like they’re coming directly from the 1980s, people claiming the EITC are willfully trying to avoid and abuse the system simply because that’s how they are. There is a real sense to me, and I think this is what the recent study shows.

And this is something that the ProPublica expose a few years ago that showed the 10 most heavily audited counties are Black and poor. I had a student this semester come up to me and say that their grandparents lived in one of these counties and in fact were audited. A Black student came up and told me that story. She was really struck by that when I told my class that.

So I think the structure of the EITC is almost designed with a sense that it is going to get people in trouble, it’s going to police them. The EITC is an example of the overpolicing of Blacks, I think, and then the administration of it because there is a sense that Blacks that are using it are up to no good.

I think when the IRS commissioner was asked about the ProPublica story, why these 10 counties were so heavily audited, the response was, “Well, that’s just where all of our auditors are.” I thought to myself, “That’s quite a coincidence.”

I think that there are a lot of people acting in good faith. I think almost everybody acts in good faith. But even some of those people acting in good faith I don’t think quite understand all of their motivations, all of their actions. I think many people who mean well actually do a lot of harm unintentionally.

Alexander Rifaat: You brought up the word policing. In a panel discussion last year, you said something I found interesting. You said, “There needs to be a tax law equivalent of a body camera to address inequities in the tax code.” What do you mean by that?

Steven A. Dean: I think one of the points that I really want to emphasize is that the report Treasury released, not the Stanford report that I think went further and did more interesting things than the Treasury report is doing, is something that is very careful and very overdue.

The idea that they’re actually going to use available data, which is something that economists do routinely, to investigate the impact of the tax code on race I think is really important. But there are a lot more back-of-the-envelope approaches that could be taken to examine bias in the tax law. The Stanford study I think is doing a very careful statistical version of this.

But if there weren’t body cameras on a lot of police officers, a lot of the stories that we know to be true about what has happened with the policing of Black Americans we wouldn’t believe, right? We sometimes don’t believe our eyes when we watch these body cameras of incredibly abusive police behavior, and we don’t want to believe it. I know police didn’t like them, and I want to believe that nobody would ever do this, but if not for these body cameras, I think everybody would say — not everybody, but a lot of people would say — “A policeman would never do that. There is no way an officer of the law would behave in the ways that we have seen officer of law behaving definitively on camera.” And of course, cameras do lie; you can edit them, you can leave out context. But they’re an important part of our oversight of what police do.

I don’t think that you’re going to put body cameras on IRS auditors. I don’t think that is ever going to happen or would be helpful. But there are interventions of that kind that aren’t just studying the statistical frequency with which Blacks are pulled over. One of my favorite stories is that Senator Tim Scott, R-S.C., I think was pulled over seven times in one year, which I don’t know how many senators get pulled over that often, but it does make you wonder.

The numbers are important; I get that. But without some way of teasing out the stories, I think numbers tell an important story, but we need to understand the reality of what it’s like to get a correspondence audit when your name is Lakeisha. What does that feel like? What does that look like? How are the auditors behaving? When the IRS sends out a notice to somebody named Lakeisha or Jamal, it is clear that they’re sending that to a Black person. They don’t need to know the taxpayer’s race to know that they are then auditing a Black person.

The same true for zip codes. They can tell the race of people that they’re dealing with without having that person tell them their race. If they were to send a notice to me, which I fear they might do now that I’ve had this conversation with you, they would not know unless I told them, and I have on this podcast, that I’m Black. I live in a neighborhood that’s pretty diverse but is not overwhelmingly Black. I have a name that is extremely white. That’s how it is. I think we need to understand not just the numbers that we’re starting to see.

Dorothy Brown has, I think, argued persuasively and powerfully in her book that race matters. We’ve seen Treasury acknowledge that race matters. But I think certainly the way that I’ve heard Treasury talk about this, they seem quite convinced that class matters but race doesn’t. They’re saying that the reason that more Blacks are audited than whites is that more filed the EITC. The recent Stanford study showed that that is only a quarter of the story, so there’s much more.

But we really need to understand not just the data; we need to understand what goes wrong. What’s the other three quarters? And if we have the tax laws equivalent of body cameras — listen, I think there are many people out there more creative and smarter than I am, and many of them work at the IRS. I think they would know what we need, and I think we should allow them to tell us. We should allow them to figure out what is happening. Again, when I speak out about this, people reach out to me and tell me things. I’ve had Black people who used to work at the IRS who left because of a sense of unwelcomeness is a delicate way to put it.

I think we need to understand those stories as well as the data that we’re now beginning to see, which we’ve seen years ago when Dorothy Brown first started asking for this and was told that it didn’t matter. She’s like, “OK, I’ll just do it myself.” And she did, and that’s incredible. But now we’re seeing Treasury actually doing some of the work that should have been done years ago, and that’s good. It’s not bad that you’re doing it. It’s good, but it’s late and it’s not enough.

We see now the Stanford study is pushing the envelope further and making clear that it is not just about class; it’s about race. The Stanford study was clear that the excessive auditing of Black Americans is not just about income level. It’s not just about the kinds of returns they file. It’s more than that. It’s not just about class or income. It’s also definitely and definitively about race.

Alexander Rifaat: What do you see as the optimal solution going forward? You mentioned Dorothy Brown, who actually serves on the Treasury’s Equity Committee. She has previously said that she worries about putting race or ethnicity question on tax forms simply because it may lead to higher audit rates for minority communities.

Steven A. Dean: Yeah. I would say that I am never going to disagree with Dorothy Brown. I think that that is not a healthy thing to be doing given how tremendously right she’s proven to be about so many important things. I think that’s probably fair. I think it’s probably fair to, at this early stage, not do something as radical as ask taxpayers for their race.

One of the things that I try to do to address questions of, “Is racism in tax laws?” — I serve on a lot of boards of tax organizations. I’m on the National Tax Association’s board. One of the things that they’re trying to do is figure out how to make that organization, which I actually joined early on as an academic and then sort of drifted away, from not feeling welcome, how to make it more welcoming to different kinds of folks.

One of the things that we tried to do was collect [demographic] information from members of the National Tax Association. They’re sometimes reluctant to do that, and I get that. I think taxpayers would be made nervous. Part of the story, part of what we need to do, is really understand what is going to make taxpayers want to be part of this.

So an important feature of our tax system is something we call tax morale. We have a voluntary tax system, and we need taxpayers to believe that not only are they being treated fairly, but they’re being treated fairly in comparison to their neighbors. The way that I’ve explained this to people when they worry sometimes about how folks will feel if the IRS ramps up their enforcement efforts, what I try to explain to folks is that there are a lot of Black taxpayers out there. You don’t want to make them feel more vulnerable by, say, offering up their race on a tax form. But I think many of them instinctively know that there is bias out there in the tax law and in tax enforcement.

It’s not enough to just say, “Don’t worry about it,” because they do. Listen, nobody will be happier than me, although we already know that’s not true, if that Stanford study had come back and said, “There is no bias in auditing of taxpayers. All the bias that is there is simply a function of the disproportionate number of Black taxpayers that file EITC returns and so on.” That would’ve been great, and then all we’d have to do is figure out how to make our tax system less biased systematically to make the EITC less of a trap for the unwary. That’s something we could have done.

But now that we know for a fact that there is bias, we have to make sure that we’re not not making the matter worse, but we have to actually make them feel better. We have to reassure them that we’re being sensitive to questions of race in tax enforcement.

I don’t think adding race to the [Form] 1040 is going to help them feel reassured. And, frankly, we don’t need it. We now know that statistics can show racism in enforcement. There are other ways that we can fill in those gaps without asking taxpayers to tell us, but we have to figure out what to do.

This is the idea of putting body cameras on police officers I don’t think that makes everybody feel perfectly safe, but I think it makes a lot of people feel more safe that there is at least some possibility of accountability, that somebody in theory is watching our interactions with the police. I think improving Black taxpayers’ tax morale matters. Maybe that’s the simplest way to say it.

I don’t know what the best way is to improve Black taxpayers’ tax morale, but I think we should want to do that. I think we as a community, not just Black tax lawyers, but I think all tax lawyers, should want to improve the tax morale of Black taxpayers. The EITC, the way it’s structured, the overpolicing of it, the ProPublica study, what we’ve seen in the Stanford study — none of that is going to reassure Black taxpayers, and we have to find some way to reassure them.

I think that’s our obligation; that’s our duty, is to figure out what that is. It’s not going to be, again, putting body cameras on IRS agents — that’s just silly — but there has to be some way to have some accountability to improve Black taxpayers’ tax morale.

Alexander Rifaat: Well, Professor Dean, it’s been a fascinating discussion. Thanks so much for coming on our show.

Steven A. Dean: I really appreciate the time. Thank you.

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