How U.S. Tax Policies Are Designed to Keep the Wealthy Rich
Like many people, the extent of my knowledge about taxes has to do with inputting my information into TurboTax or H&R Block’s free tax software and either being pleasantly surprised at my tax refund or despairing about how much I owe. Our convoluted tax system in America means that we outsource the preparation to professionals—or, increasingly, software—and the extent of our interest extends to how the rules affect us individually, rather than seeing the bigger picture.
In 2020, a graduated income tax amendment (known as the Fair Tax) was on the ballot in Illinois. The proposed amendment would repeal the flat tax rate, which taxed everyone the same percentage, opening the door for a tax rate that changed based on your income. If you belong to the 97% of Illinoisans that make less than $250,000, your taxes would have likely decreased (Chicago Sun-Times). (You can check how it will affect you personally at the Illinois Fair Tax Calculator.)
Unfortunately, the amendment was not ratified (Chicago Tribune). While Americans now discuss wealth inequality, in general, more often, we sometimes overlook how taxes contribute to that disparity. Tax policy is one of the primary reasons that the 1% of most wealthy people in America doubled their total income share between 1980 and 2007 (Journal of Economic Perspectives). More recent data shows that even after the Great Recession, income concentration has continued to rise at the top (Center on Budget and Policy Priorities).
Nearly every state government, including local governments, collects more taxes from poor families than from high-income families relative to their incomes, and more taxes are generally collected from middle-income families than high-income families.
Our federal tax policies are geared towards letting the already wealthy accumulate more wealth and pass it down to their children. Many people who consider themselves middle-class benefit from tax-preferred 401k pension plans, tax-deferred 529 college savings accounts, and mortgage deductions. Such policies and problems might look like a divide between the rich and the poor—issues of class, rather than race. But in America, “investigators of inequality…have documented that the rich tend to be White and the poor tend to be people of color” (Northwestern Journal of Law & Social Policy).
Compared to white Americans, a far smaller percentage of Black and Brown people own their homes or possess such accounts. They do not benefit from such tax breaks. Meanwhile, income disparities between Black and white people have increased since 1979. On average, white households are 10 times richer than Black households and eight times richer than Latinx ones (Northwestern Journal of Law & Social Policy). A shocking 2016 study from the Federal Reserve and Duke University shows that in Boston, the median wealth of a white family was almost $250,000, while the median wealth of a non-immigrant Black American family was $8 (Federal Reserve of Boston). Eight dollars.
This is why a progressive income tax matters. In Illinois, the average income of the top 1% of families is over 65 times larger than the average income of the bottom 99% (Illinois Economic and Policy Institute). Yet the poorest 20% in Illinois pay 14.4% of their income in taxes, while the wealthiest 1% pays 7.4% (Shriver Center on Policy and Law). Illinois and other states with flat taxes are part of the Terrible Ten, “states that tax their poorest residents — those in the bottom 20% of the income scale — at rates up to six times higher than the wealthy” (Institute on Taxation and Economic Policy).
So if you cheer when you get your tax refund, make sure to also remember that taxes don’t affect everyone equally. Our tax policies are designed to benefit the rich. A progressive income tax is only a small reform in a system that needs an entire haul, but it is a tangible, if limited, way to fight against wealth inequality. And, as always, while fighting for policy change, we can also directly make a change on the ground. If you are able, commit to redistributing some of your income or wealth every month.
• On average, the 20% of Americans with the lowest incomes pay a state and local tax rate 1.5x higher than the 1% of Americans with the highest incomes (Institute on Taxation and Economic Policy).
• Tax inequity is one of the driving factors in wealth inequality in America (Journal of Economic Perspectives).
• White households are, on average, 10x wealthier than Black households and 8x wealthier than Latinx ones (Northwestern Journal of Law & Social Policy).
• In Illinois, voting for the Fair Tax would support tax equity.