Lawrence Zelenak (Duke), Examining the Internal Revenue Code for Disparate Racial Impacts, 168 Tax Notes Fed. 1807 (Sept. 7, 2020):
In this article, Zelenak considers how a legislature committed to racial justice should respond to a convincing statistical demonstration that a particular provision of the Internal Revenue Code has disparate racial impacts. He says there are several steps between a demonstration that a provision (for example, the charitable deduction) disproportionately benefits white taxpayers in nominal terms, and the conclusion that it should be repealed or reformed to eliminate the disparate impact. He argues it is necessary (1) to establish a normative baseline from which the current provision departs, (2) to determine the race-based distribution of the ultimate benefits and burdens of the provision (as contrasted with the provision’s nominal impacts), and (3) to determine that a focus on the provision (rather than a broader or narrower focus) is at an appropriate level of analytical granularity. He concludes that the most important use of evidence of disparate racial impacts of tax provisions will almost certainly be as an argument for repealing or reforming a provision that constitutes bad tax policy even apart from its racial effects.
The case for government collection of data on the racial impacts of federal income tax provisions, as set forth by Bearer-Friend, is compelling. The government already collects race-based data on virtually every other important activity of the federal government, and in any event more knowledge is always a good thing. The harder question is what changes in the law, if any, should follow when the data reveal racial disparities.
Taking the charitable deduction as an example, there would be several difficult steps between the future IRS production of data showing that the nominal benefits of the charitable deduction are enjoyed disproportionately by white taxpayers, and the conclusion that the tax preference for charitable giving should be repealed or reformed to eliminate the disparate racial impact. First, there is the need to establish a normative baseline from which current law departs. In particular, this will involve arguing against Andrews’s claim that a charitable deduction belongs in an ideal income tax.58 Second, it is necessary to consider the ultimate racial distribution of the benefits of current law rather than just the nominal distribution. Do donors ultimately capture the benefit of the deduction, or does most or all of the federal tax expenditure end up benefiting charitable organizations and their beneficiaries? The ultimate racial distribution of benefits may not be to the disadvantage of people of color, even if the nominal distribution is. Third, one must propose a reform package that improves racial equity when the package is considered in its entirety. As Hemel and Rozema demonstrate, this may require something other than using the revenue from repeal of an objectionable tax preference to finance an across-the-board rate cut. Finally, the granularity question must be addressed. This requires consideration, for example, of whether it is necessary to eliminate any subsection or sub-subsection of the EITC that disproportionately burdens (or fails to benefit) Black or Hispanic families, even if the overall racial impacts of the EITC are commendable. Taken together, these are significant challenges.
It does not follow, however, that there should be no policy changes in response to new and better data on disparate racial impacts in the code. BearerFriend points out one example of what might be considered low-hanging fruit. Referencing findings that EITC-eligible Hispanic parents are less aware of the existence of the credit than other parents, and so claim it less often, Bearer-Friend accurately describes increasing awareness of the credit among eligible Hispanic parents as “a policy intervention that is neither complex nor particularly controversial.” It is not particularly controversial because — far from requiring a change in the substantive law — it is designed to bring real-world results closer to the results called for by the substantive law. But the most important use of evidence of disparate racial impacts of tax provisions, as explained earlier, will almost certainly be as an argument — sometimes outcome-determinative — for repealing or reforming a provision that constitutes bad tax policy even apart from its racial effects. “This is bad tax policy, and the burden of the bad policy falls disproportionately on people of color,” may succeed with Congress where a simple “this is bad policy” would not.