Reimagining the Tax System to Strengthen Family Wellbeing

One of the nation’s foremost experts on tax and fiscal policy shares strategies to transform our federal tax system so all families can thrive.

All parents and caregivers should have the resources needed to ensure their children and families can thrive. But there are barriers built in front of some of us that create unequal opportunities. Our country’s economic system prevents resources from reaching all families, and we often under-resource and under-value the role that care plays in helping all of us. These systems can be reimagined so there are more opportunities for all families to thrive. 

One way to move toward economic inclusion for family wellbeing is by identifying and examining how systems—like the federal tax system—may impact children and families in significant and harmful ways. By better understanding the harm to families, we can shape new laws and social practices that support the wellbeing of all families.

Ahead of Elaine Maag moving from the Urban-Brookings Tax Policy Center to the U.S. Department of the Treasury to work on tax policy in its Equity Hub, she spoke with Parita Patel about racial and wealth disparities, the tax system, and policies that can improve the wellbeing of families.

The Tax Policy Center (TPC) produces independent, timely, and accessible analyses of current and longer-term tax issues. Its goal is to help the public, the media, and policymakers make informed decisions about critical fiscal issues and support better policy outcomes. It is comprised of nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government.

Hello Elaine! You have been sharing research that increasingly shows the presence of racial bias in the federal tax system. Can you please help us understand how identifying these racial disparities can lead to policies that improve the wellbeing of families?  

Let’s focus on audits. In response to recent research, the IRS announced it will refocus audit priorities away from taxpayers with low incomes. Audits are an important component of tax administration because they can ensure information is reported correctly according to tax laws and verify the reported amount of tax is correct.

Although the IRS does not use a person's race to determine whether a particular return will be selected for audit, research suggests that certain goals of auditing result in Black taxpayers being audited at higher rates than White taxpayers. For example, focusing audits on households claiming refundable credits appears to disadvantage Black taxpayers. Not only are Black taxpayers more likely to have income in the qualifying range for refundable credits, which results from systemic discrimination in the labor market, but they are also more likely to have family structures that lead to errors in claiming credits. This includes higher rates of cohabitation where the person supporting the family may not be related to the children, so they cannot claim them for the Earned Income Tax Credit.

If, on the other hand, the goal of audits was to audit the returns with the largest tax understatement, we would not see Black taxpayers get audited at higher rates than others.

Recent work from the Tax Policy Center focuses on ways the federal tax system worsens wealth inequalities and racial disparities. Can you please share some ways the federal tax system could be reimagined to alleviate inequities?

In this interactive feature, the team at TPC highlighted how certain federal income tax policies and audit practices interact with racial inequities based on findings from prior research conducted by TPC, the U.S. Department of the Treasury, and others. While the feature is not an exhaustive exploration of the ways in which taxes can reinforce structural racism, one way the federal tax system could be reimagined to alleviate inequities is to understand that, relative to White households, a larger share of income in Black and Hispanic families originates from wages from employment and a smaller share from capital gains from home sales or dividends from companies in which stocks are owned. These capital gains and dividends are effectively taxed at lower rates than wages. As a result, the tax system is both reinforcing and perpetuating existing wealth gaps. Analysis by the Tax Policy Center shows that increasing the tax rates on long-term capital gains and dividends could be one way that the federal tax system can be reimagined to help alleviate this existing inequity. 

For 52 years, the Robert Wood Johnson Foundation has operated under the fundamental belief that everyone in America should have a fair and just opportunity to thrive. But, as a nation, we’ve walked away from profound policy achievements, like the 2021 expanded Child Tax Credit (CTC), which gave families greater levels of wellbeing and brought child poverty rates to historic lows. The data shows that the expanded CTC decreased material hardships experienced by families and helped children thrive.

Elaine, your work examines ways to redesign the tax system to make it easier for families with children to access and administer its resources. As you know, at the Robert Wood Johnson Foundation, we are focused on dismantling the structural racism that permeates society with the ambitious goal of building the future we all want for our children and grandchildren. What aspects of a redesigned CTC could dramatically move the needle for children, caregivers, and families?

In a typical year, about 19 million children in families who are eligible to receive the full CTC receive less than the full $2,000-per-child credit. This includes half of children who are Black or Hispanic and one-quarter of children who are Asian or White. This is largely because families need at least $2,500 of earnings during the tax year to claim the CTC when filing federal income tax returns. The CTC then phases in relatively slowly, and only part of it can be received as a tax refund—the rest must be used to offset taxes owed.

In 2021, the American Rescue Plan temporarily expanded the CTC, making it fully refundable, which allowed more low-income families with children to get the full credit. In 2021, Black and Hispanic families received credits on par with White and Asian families and experienced larger drops in poverty and other hardships.

Additionally, the CTC could be redesigned to recognize different types of family arrangements, such as shared custody situations, allowing it to be split among multiple caregivers. And, as it was in 2021, the CTC could be delivered to families throughout the tax year rather than as a single payment after federal income tax returns are filed.

About the Author

Parita Patel, senior program officer, brings extensive philanthropic experience in the public and private sectors—and her knowledge of the power structures that change society—to support the Foundation’s efforts in helping all families enjoy a fair and just opportunity for health and wellbeing.