[Senate Hearing 117-383]
[From the U.S. Government Publishing Office]
S. Hrg. 117-383
COMBATING INEQUALITY: THE TAX CODE AND
RACIAL, ETHNIC, AND GENDER DISPARITIES
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
APRIL 20, 2021
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
48-847-PDF WASHINGTON : 2022
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COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland RICHARD BURR, North Carolina
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania TIM SCOTT, South Carolina
MARK R. WARNER, Virginia BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts BEN SASSE, Nebraska
JOHN BARRASSO, Wyoming
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 2
WITNESSES
Brown, Dorothy A., Asa Griggs Candler professor of law, School of
Law, Emory University, Atlanta, GA............................. 4
Desai, Mihir A., Ph.D., Mizuho Financial Group professor of
business, Harvard Business School; and professor of law,
Harvard Law School, Harvard University, Cambridge, MA.......... 5
Rao-Potlapally, Himalaya, managing director, Black Founders
Matter Fund, Salem, OR......................................... 8
Hawkins, Shay, co-founder and president, Opportunity Funds
Association, Washington, DC.................................... 10
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Brown, Dorothy A.:
Testimony.................................................... 4
Prepared statement........................................... 41
Responses to questions from committee members................ 44
Crapo, Hon. Mike:
Opening statement............................................ 2
Prepared statement........................................... 46
Desai, Mihir A., Ph.D.:
Testimony.................................................... 5
Prepared statement........................................... 47
Hawkins, Shay:
Testimony.................................................... 10
Prepared statement........................................... 83
Responses to questions from committee members................ 86
Rao-Potlapally, Himalaya:
Testimony.................................................... 8
Prepared statement........................................... 90
Responses to questions from committee members................ 93
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 94
Communications
Baker, Vania K................................................... 95
Balcerak, Amy.................................................... 96
Bruckner, Caroline............................................... 97
Buzatu, Anne-Marie Yarbrough..................................... 100
Center for Fiscal Equity......................................... 105
de Bruin, Sylvia................................................. 110
Dymkowski, Christine............................................. 111
Holt, Elizabeth.................................................. 113
Lee, Nicholas Matthew............................................ 114
Moskowitz, David................................................. 116
Professional Managers Association................................ 116
Public Citizen................................................... 119
Stop Extraterritorial American Taxation (SEAT)................... 121
Walther, Ronald.................................................. 123
Williams, Susan P................................................ 124
Windsor, Genelle................................................. 125
COMBATING INEQUALITY:
THE TAX CODE AND RACIAL,
ETHNIC, AND GENDER DISPARITIES
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TUESDAY, APRIL 20, 2021
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:01
a.m., via Webex, in the Dirksen Senate Office Building, Hon.
Ron Wyden (chairman of the committee) presiding.
Present: Senators Stabenow, Cantwell, Carper, Cardin,
Brown, Bennet, Casey, Whitehouse, Warren, Crapo, Grassley,
Thune, Toomey, Scott, Cassidy, Lankford, and Daines.
Also present: Democratic staff: Sarah Schaefer, Senior Tax
Policy Advisor, Small Business and Pass-Throughs; Joshua
Sheinkman, Staff Director; and Tiffany Smith, Chief Tax
Counsel. Republican staff: Gregg Richard, Staff Director; Mike
Quickel, Policy Director; and Don Snyder, Tax Counsel.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. This morning the Finance Committee will
examine issues of racial justice and tax code inequality in
America. Nobody of good conscience wants there to be a race-
based penalty or a discount on taxes. Everybody ought to pay
their fair share, and everybody ought to have a fair chance to
get ahead. In practice, the U.S. tax code doesn't always work
that way.
If America's busted old tax code excels at anything, it is
rewarding those who are fortunate enough to already have
wealth. The lucky few with the top incomes can go years
deferring their taxes, paying what they want when they want to.
On the other hand, there is no deferral for a black nurse who
pays taxes out of every paycheck, or a Latina small business
owner who pays taxes quarterly.
According to a recent survey, a typical white American
family has eight times the wealth of a typical black American
family. Some of the cornerstone tax policies in America include
well-
intentioned tax incentives for home ownership, education, and
retirement savings. Those incentives only really work for
people who can afford to buy homes and set aside money for
education and retirement. Those people are much likelier to be
white.
The committee is going to hear a lot more examples like
those today illustrating how the tax code adds to inequality in
America. The fact is, some recent changes have made the
situation worse. An estimated 80 percent of the individual
benefits of the Trump tax law went to white Americans. Even the
benefits that went only to the top 1 percent of taxpayers were
skewed the same way.
The American Rescue Plan enacted in March begins to change
the math of racial injustice and tax code inequality. It
expanded the Earned Income Tax Credit for millions of working
people. It expands the Child Tax Credit and makes sure millions
more working families will receive the full amount available.
Too often, families and individual workers with lower incomes,
particularly black and Latino, haven't had access to those full
benefits.
Those expansions are going to be game changes for workers
and families in Oregon and across the land. They ought to be
permanent, and I am working with members of this committee to
make that happen.
Now, inequality is not just about race. It is about gender.
Women business owners, particularly women of color, are
underrepresented, under-capitalized, and underappreciated. The
share of business revenues that go to women-owned businesses
hasn't budged in 20 years. It is stuck now at 4 percent.
Along with Senator Cortez Masto and Senator Hassan, Senator
Cardin and I are introducing the PROGRESS Act that is going to
help boost that figure. Our bill is all about promoting
investment in women- and minority-owned businesses, and helping
them to grow and to hire more workers.
Finally, policy-makers need better confidential data on how
tax laws affect Americans of different races. Other Federal
agencies collect that type of demographic information, and
policy-makers can use it to improve them. The IRS does not.
The fact is, the tax code is not strictly about government
funding. Congress decided long ago to use the tax code to
tackle major social and economic challenges. The words black or
white or Asian or Latino or Native American do not have to
appear anywhere in the tax code for tax laws to affect those
groups differently. Too often those differences are adding to
inequality.
Now, the IRS needs to meet a higher standard of
confidentiality due to its history and the sensitive nature of
taxpayer information. That said, it makes no sense to blind
lawmakers to the key data that would illuminate injustice in
our tax laws. It is time for more tax data transparency. This
committee is going to make sure that happens in a manner that
fully protects the privacy and confidentiality of each
American's taxpayer information.
I am looking forward to discussing those issues and more
today. There is a lot for us to cover. I want to thank our
witnesses.
[The prepared statement of Chairman Wyden appears in the
appendix.]
The Chairman. Senator Crapo?
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you very much, Mr. Chairman, and
welcome to our witnesses. I look forward to hearing your
experiences, thoughts, and ideas today.
There are questions of whether the tax code by itself leads
to differing impacts across race, gender, age, or geography, or
whether it is the underlying income, wealth, asset-holding, or
job type disparities that principally cause these differing
results. Underlying disparities are key, and it is important to
know about them. There are a variety of disparities in measures
of income, wealth, and assets across many dimensions. Examining
the disparities using statistics shows a variety of results,
along with changes in results over time. The Pew Research
Center, for example, recently identified that income inequality
for Asian Americans rose to become the highest among racial and
ethnic groups.
Underlying causes of these disparities are not entirely
clear, since causality is difficult to establish. As a result,
there are different views. Some views focus on government
policies, while others stress inequities in opportunities for
education and asset building, along with changing patterns of
family formation and institutions like marriage.
Today our witnesses will provide perspectives on the income
tax system, barriers to opportunity, policy solutions and
issues that we should consider, along with economics.
Prior to the pandemic, the United States was experiencing
one of the strongest economies across demographics in decades.
With the Tax Cuts and Jobs Act in place and an agenda focused
on smart regulation, we saw progress among many dimensions,
including record low unemployment rates for African Americans,
Hispanics, and others; 50-year lows in overall unemployment;
robust wage gains skewed toward lower-wage earners; record high
household incomes; and record low poverty.
The TCJA included a number of provisions to make the
personal income tax system more progressive, addressing these
inequalities, including doubling the Child Tax Credit, nearly
doubling the standard deduction, and features such as
Opportunity Zones to inject more financial capital into
distressed communities.
It will be interesting and increasingly challenging to
return to an economy as robust as we saw before the pandemic,
with the endless streams of tax hikes and regulation that the
current administration continues to propose.
Going the opposite direction of combating inequality in the
tax code are efforts like trying to roll back the cap placed by
the TCJA on State and local tax, or the SALT deduction. I
expect some of the proposals we will hear about today will have
promise, and others may not actually get to the root of the
problems we are addressing. I am eager to hear more.
Whatever we consider, it will be important that the
policies are developed on a bipartisan basis. No one party has
a monopoly on good ideas, and any work on persistent barriers
to opportunity will ultimately fail if done in a partisan
fashion.
I look forward to our hearing today, Mr. Chairman, and
thank you.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo. I look forward to
working with you and our colleagues on these issues.
Now I would like to introduce our four witnesses.
Professor Dorothy Brown is a professor of law at Emory
University School of Law, where she teaches tax. She is a
nationally recognized scholar in the areas of race, class, and
tax policy.
Dr. Mihir Desai is an economist and professor of finance at
Harvard Business School, and a professor of law at Harvard Law
School.
Our next witness, Ms. Himalaya Rao, is the managing
director of Black Founders Matter Fund and is a fellow
Oregonian.
Our final witness is Mr. Shay Hawkins, president and CEO of
the Opportunity Funds Association. Mr. Hawkins previously
served on the Finance Committee as the Staff Director for the
Subcommittee on Energy, Natural Resources, and Infrastructure,
of course with our colleague Senator Tim Scott.
Thank you all for coming. As is customary, your prepared
statements will automatically be made part of the record.
Please use your 5 minutes to summarize.
Please proceed, Professor Brown.
STATEMENT OF DOROTHY A. BROWN, ASA GRIGGS CANDLER PROFESSOR OF
LAW, SCHOOL OF LAW, EMORY UNIVERSITY, ATLANTA, GA
Ms. Brown. Thank you. Thank you for inviting me to share
these views on how our tax system perpetuates racial
inequality.
In my testimony today, I will draw on research in my book,
The Whiteness of Wealth: How the Tax System Impoverishes Black
Americans--And How We Can Fix It. I plan to discuss three tax
policies that are more likely to provide tax breaks for white
Americans than black Americans when they engage in the same
activity.
But if there is one thing that I hope you remember from my
testimony today, it is that racial inequality is baked into how
our tax laws operate, not because the Internal Revenue Code has
separate rate schedules by race, but because American taxpayers
bring our racial identities onto our tax returns. That not only
harms most black taxpayers, but inevitably some white taxpayers
as well.
Understanding how this racial disparity happens is
difficult, because the Internal Revenue Service does not
publish statistics by race. I have had to become a detective of
sorts.
Another piece to unraveling the racial disparities is
understanding the role of history. Many of our current tax
provisions date back to a time when separate but equal was the
law of the land. I begin with the joint return that entered the
code in 1948.
The joint return is a tax cut for marriages where one
spouse earns roughly all of the income, while the other spouse
works in the home. Census Bureau data I analyzed show that
white married couples were more likely to be found in marriage
bonus households than black married couples.
That means that when white Americans marry, they are more
likely to get a tax cut, but not black Americans. Married black
Americans are more likely to be found in two equal wage earner
households, and do not get a tax cut. In many instances, the
joint return has led to married black couples paying higher
taxes. And there has always been a percentage of married white
couples who also need two incomes to make ends meet. My
solution is a return to individual filings and a repeal of the
joint return.
The second provision is the exclusion of gains on the sale
of homes for up to half a million dollars if you are married,
or $250,000 if the taxpayer is single. The tax treatment for
gains dates back to 1951. Losses on the sale of homes, on the
other hand, are not deductible.
Research shows us that the greatest appreciation in our
homes comes when we live in neighborhoods which are
overwhelmingly white with very few black neighbors. As the
percentage of black homeowners in the neighborhood increases,
the value of the homes decreases. Most white homeowners live in
mostly white neighborhoods, while most black homeowners live in
racially diverse or all-black neighborhoods. As a result, white
homeowners, but not most black homeowners, are more likely to
sell their homes at a large tax-free gain.
Research also shows that the homeowners most likely to sell
their homes at a non-deductible loss are black. Tax subsidies
for home ownership create white tax winners and black tax
losers. The Federal Government should stop subsidizing a racist
home ownership market.
The final area I want to highlight is the tax break for
employer-provided retirement accounts. The tax break traces its
roots to 1942. Amounts set aside in retirement accounts by
employees--and if there has been an employer match, amounts set
aside by their employers--are not taxable to the employee until
their expected withdrawal at retirement.
If any amounts are withdrawn prior to the age of 59\1/2\,
they are subject to an additional tax penalty. Black Americans
are less likely than white Americans to work for employers that
provide retirement accounts. And further, black workers,
regardless of income, are more likely than all other racial and
ethnic groups to take an early withdrawal and pay a tax
penalty.
Given that less than half of white workers, a little over a
third of black workers, and a quarter of Hispanic workers in
the private sector participate in their retirement accounts,
tax subsidies should be withheld until the private sector
increases their employee participation rates.
In The Whiteness of Wealth, I discuss many other areas
where our Federal tax policies disadvantage black Americans,
but they all lead to the conclusion that our tax laws need a
fundamental overhaul that places racial equity at the center.
I look forward to your questions.
[The prepared statement of Ms. Brown appears in the
appendix.]
The Chairman. Which you will hear in a few minutes.
Our next panel member will be Professor Mihir Desai, an
economist and professor at Harvard Law School. Sir, welcome.
STATEMENT OF MIHIR A. DESAI, Ph.D., MIZUHO FINANCIAL GROUP
PROFESSOR OF BUSINESS, HARVARD BUSINESS SCHOOL; AND PROFESSOR
OF LAW, HARVARD LAW SCHOOL, HARVARD UNIVERSITY, CAMBRIDGE, MA
Dr. Desai. Thank you for the opportunity to participate in
these hearings. I want to use this opportunity to make five
points that are elaborated in my written testimony.
There is a staggeringly persistent and large correlation
between race and income, savings, wealth, and mobility.
Addressing these correlations should constitute an essential
ambition for all policymakers. The tax system, in an effort to
isolate the ability to pay, employs income and the returns to
wealth to raise revenue in an efficient manner.
The returns to wealth are often granted preferential
treatment relative to labor income in order to encourage
certain behaviors, or to offset the lock-in effect associated
with the realization-based system.
Looking at certain preferences in isolation will yield the
conclusion that these preferences have a disparate impact on
racial subgroups. This statement, as far as it goes, is
incontrovertible. Indeed, it is unsurprising when one considers
the correlations discussed already.
The remaining three issues raised by this result are far
less straightforward. Specifically, is this analysis complete?
What should we take away from this analysis? And might such an
analysis lead us astray?
The result that specific provisions, when considered in
isolation, impact racial subgroups differentially is a
qualified one and can be highly incomplete when handled
loosely. In particular, when analyzing the intersection of tax
policy and racial justice, three errors should be avoided.
The first issue is that analysis of tax policy should trace
through the incidence of benefits or taxes beyond the claimants
of any particular benefits. The ultimate beneficiaries of tax
policies are rarely only nominal claimants. I provide an
example in my testimony of the LIHTC, an important provision
that would yield nonsensical results if analyzed in the manner
described above.
The second issue is that revenue neutrality is an important
discipline on tax analysis. Isolating a preference to benefit
the subgroup is not enough to assert that it should be
repealed, because that preference exists in a larger system
that requires financing. The discipline of revenue neutrality
can yield counterintuitive results. My testimony provides an
example of how the repeal of the mortgage interest deduction
could result in a less, rather than a more progressive system.
The third issue is that the broader tax system must be
considered in examining the impact on racial subgroups. Given
the correlations of wealth and race identified above, it is not
surprising that preferences for the returns to wealth may have
a disparate impact on racial subgroups.
It would also not be surprising if progressive income tax
rates and refundable tax credits would also have a disparate
impact on racial subgroups in a distinct direction. Said
another way, it is critical to consider the totality of the tax
system if one is to assess the racial impacts of the system.
Given data I provide on the progressivity of the tax
system, it would be unwise to extrapolate from an analysis of
savings preferences to the whole tax system. Tax analyses that
consider race can also go astray. When seeking solutions to
these problems, analysts have dismissed tax credits and
progressivity in support of radical solutions, including
blowing up the tax code and starting from scratch.
These claims can be self-defeating for the cause of racial
justice because they underemphasize the role of current
provisions in advancing the agenda of racial justice. The real
promise of this hearing, and of an increased emphasis on race,
ethnicity, and gender, is to reorient our policy debate away
from its current obsession with inequality broadly, and toward
a sharper focus on those in our country in deep need.
Over the last 20 years, academic studies that claim sharply
rising levels of income and wealth inequality have become
accepted as fact, and undergird much policy discussion today.
Related studies claim that the tax system does little to
address inequality, and that novel instruments are required to
address these issues. These studies and the obsession with
rising inequality are problematic for many analytic reasons
that cast the results in doubt.
Moreover, they are problematic because they orient
attention to the very rich and away from the other parts of the
income distribution, particularly the bottom quintiles of
income distribution. It is curious that many of the efforts do
not mention or measure the Earned Income Tax Credit in their
discussions of economic justice, despite its role as a critical
anti-poverty program.
In this sense, the broader inequality debate obscures the
readily available solutions for racial and economic justice--
the EITC and more progressive rate structures--and focuses our
attention incorrectly on issues of corporate taxation, the
possibility of wealth taxation, greater middle-class tax
relief, and broad-based entitlements.
Expanding the EITC in two directions, with a refundable
minimum credit, and with a larger childless EITC, would be
enormously beneficial to the causes of economic, racial, and
gender justice. Over time, providing more income to those at
the bottom income distribution will allow them to begin saving
and building wealth.
Reparations would seem best suited to address the question
of the racial wealth gap. It is worthwhile noting that
comparable efforts at reparation, including those for Japanese
Americans, payments to Holocaust survivors, the Truth in
Reconciliation Commission, and local American efforts such as
those in Rosewood, FL, did not employ the tax system. That is,
I believe the reparations debate should be initiated in earnest
and could address the racial wealth gap in interesting ways.
But there is no clear, obvious reason to operate it through the
tax system.
The true payoff of this hearing will be if the underlying
correlation of race with income, wealth, savings, and mobility
regains its status as a question of central importance to the
future of the country.
I very much hope you all find the courage and wisdom to
address these questions as directly as one can in the tax code
and otherwise.
[The prepared statement of Dr. Desai appears in the
appendix.]
The Chairman. Professor, thank you; thank you very much.
And wisdom is certainly in need on Capitol Hill right now, and
we thank you for being here.
Our next witness is Ms. Himalaya Rao, one of my neighbors
in Portland. And we are so glad that you are here, Ms. Rao, and
please proceed.
STATEMENT OF HIMALAYA RAO-POTLAPALLY, MANAGING DIRECTOR, BLACK
FOUNDERS MATTER FUND, SALEM, OR
Ms. Rao. Thank you so much, Chairman Wyden, Ranking Member
Crapo, and members of the committee. Thank you so much for the
opportunity to present to you today.
My name is Himalaya Rao, and I am the managing director of
the Black Founders Matter Fund, which is a venture capital firm
based out of Portland, OR, investing in black entrepreneurs
throughout the United States.
We are an early-stage fund, which means we invest right
alongside, or right after angel groups, which is really early
in our founders' journey. They may have some initial traction
like a minimum viable product (MVP), or some initial customer
validation, but we are really the ones who are giving them both
the capital and the resources to be able to grow and scale
their businesses.
As you might notice, I do not look like someone who would
be the typical face of someone in venture capital. There are
very few women in this space, and even fewer women of color. I
am also a first-generation immigrant to this country, and my
career actually started out in the Bronx as a school social
worker working with children and families--so, very far from
venture capital. No one in my immediate family has actually
gone into business, so I went to get my MBA so that I could
learn the language on how to navigate this space effectively.
And it was there in my MBA program that I first was
introduced to entrepreneurship and venture capital. And to me,
venture capital is the perfect merger between social work and
business, because every single day I get to be part of the
redistribution of wealth from very wealthy individuals to
founders on the ground who are working tirelessly to create new
and innovative solutions to small and systemic problems.
When I started out my career, I positioned myself as a
venture capital consultant. And in the first few years, I had
the opportunity to work across seven different funds. This gave
me a unique vantage point to be able to see how different firms
operate in this space. But it also made me realize that even
when there is a huge amount of willingness to invest in diverse
founders, there are significant barriers to actually achieving
that outcome which, for the most part, haven't changed in the
last 10 years.
And so, as I reflected on what those challenges are, I
reduced it down to three central issues that I have elaborated
in my testimony, which I will present to you today.
The first is that investors engage in a pattern-matching
behavior to evaluate startups. So what that means is that we
utilize our past experiences to determine the propensity for,
if a founder or a venturer has the ability to be successful.
And that is an entirely normal way for humans to process
information, but it really poses a threat to equity in this
space. And that is because historically venture capital--and
entrepreneurship--has only been an option for a small subset of
wealthy white men.
So, if you think about it like an algorithm, all the inputs
we are using to determine what success looks like are based on
an incomplete data set that is also not representative of the
types of ventures or founders that are present today in the
United States.
The second issue is that we also engage in homogeneous
groupthink. Oftentimes in this space, there are a lot of
initiatives to try to promote demographic diversity. And while
that is absolutely critical and foundational to creating
representation in this space, we also often overlook the
absolute necessity to include people with different values,
different socioeconomic statuses, and different education, to
create a true environment where there are people with different
lived experiences, and therefore the inclusion of people who
have different ideas about what success can look like.
And the final issue is that there are not currently enough
on ramps for different types of individuals to become investors
and participate in this space. I have laid out several key
recommendations in my written testimony, like tax incentives,
investor reeducation, student loan credits, and changes to
legislation on who can participate in this space.
I encourage the committee to consider ways in which we can
support the greater participation along three stakeholders.
That would be BIPOC founders, BIPOC emerging fund managers, and
BIPOC investors, to be able to then create a better environment
where investors and fund managers like myself can be better
representatives of founders and Americans at large.
We all have implicit bias in our decision-making process,
but if we can create a broader sense and a broader level of
representation and participation in this space, we can actually
start to create a more equitable space for all founders to have
equal access to capital and growth.
Thank you again for giving me this platform to advocate for
founders and the inclusion of diverse and BIPOC founders.
As a first-generation immigrant, I believe that our
differences are what make us and this country continue to stand
at the forefront of innovation. I am honored to be a part of
that solution, and invite any questions you might have.
Thank you.
[The prepared statement of Ms. Rao appears in the
appendix.]
The Chairman. Ms. Rao, thank you very much for excellent
testimony. I also want to note at this point that your
highlighting the shortcomings of algorithms in some of these
issues is critically important.
I am the sponsor, along with Congresswoman Clarke and my
colleague Senator Booker, of the Algorithm Accountability Act.
So we are going to want to follow up with you on your important
points there.
Our final witness is an alum of the Senate Finance
Committee, Mr. Shay Hawkins, formerly with our colleague, Mr.
Scott. Welcome, sir.
STATEMENT OF SHAY HAWKINS, CO-FOUNDER AND PRESIDENT,
OPPORTUNITY FUNDS ASSOCIATION, WASHINGTON, DC
Mr. Hawkins. Thank you so much, Chairman Wyden, Ranking
Member Crapo, and members of the committee. It is a pleasure
for me to be with you today. This is my third time I have
testified before Congress, but my first time testifying before
the Senate. So I thank you for having me.
I am the co-founder and president of the Opportunity Funds
Association. And this morning I would like to share a few
success stories from Opportunity Zones. I would like to discuss
ways to build wealth through expanded retirement savings. I
would like to remind the committee of the ways tax reform made
the tax code more equal. And finally, I would like to suggest a
couple of policies to get investment capital into the hands of
minority entrepreneurs.
Prior to co-founding OFA, I served as Tax Counsel to
Senator Scott, where I helped him champion Opportunity Zones.
And in Opportunity Zones we are seeing wealth being built
through diverse projects and diverse leaders.
Quinn Palomino was born in Vietnam right at the end of the
Vietnam War. She grew up in refugee camps that the U.S. had set
up at Fort Chaffee, AR. Today, Quinn leads Virtual Partners, a
global private equity firm that was active in social impact
prior to Opportunity Zones, but has raised $100 million across
four Opportunity Funds to build a combination of commercial
real estate and affordable housing nationwide.
Two weeks ago, I was in Panama City, FL, where Jorge
Gonzalez of the St. Joe Company broke ground on a waterfront
hotel and stand-alone restaurant on the Panama City Marina.
This project will create 150 direct jobs for current residents
and rebuild a portion of Panama City that was completely
devastated during Hurricane Michael.
Alex Bhathal, managing partner of RevOZ, a leading real
estate investment firm specializing in Opportunity Zones, will
cut the ribbon on an 11,000 square foot office project. This
facility will house San Bernardino County's Children's
Department of Behavioral Health, providing mental wellness care
to some of the most vulnerable and underserved members of that
community.
We can also build wealth through retirement savings.
According to the Federal Reserve, the bottom 50 percent of
American families hold less than 2 percent of total U.S. wealth
and have a median retirement savings balance of zero. This
committee did great work towards helping to mitigate that when
this committee developed the SECURE Act.
Another promising way to address this challenge was
outlined in a recent paper from the Economic Innovation Group
by a bipartisan pair of economists, Teresa Ghilarducci and
Kevin Hassett. The authors propose a new program modeled after
the highly successful Thrift Savings Plan. This would be aimed
specifically at helping lower-income workers build wealth and
retirement security. If it is properly designed, a program like
this could go a long way towards narrowing the racial wealth
gap.
And finally, Congress should do no harm. In tax reform, we
placed a cap on the State and local tax deduction. We doubled
the Child Tax Credit. We doubled the standard deduction. And we
put a limitation on the home mortgage interest deduction.
And so particularly, when we are looking at the State and
local tax deduction, we should not lift that cap.
Representative Alexandria Ocasio-Cortez recently called SALT
``a gift to billionaires.'' And I cannot say that I agree with
the Representative often, but on this issue the math is on her
side. And uncapping SALT is a non-
starter for those concerned with income inequality in the tax
code.
I also look forward to discussing ways that we can use the
tax code to draw money into the hands of minority
entrepreneurs, and I will address that in the Q&A.
Thank you.
[The prepared statement of Mr. Hawkins appears in the
appendix.]
The Chairman. Let me begin, if I might, with you, Professor
Brown. Let's see where you are, Professor Brown; very good.
Your testimony makes clear that by giving tax breaks to
those who are already wealthy, the tax code perpetuates
longstanding inequality.
It seems to me it is even worse than that. The black family
with the exact same pay stub as a white family is less likely
to own stock than the white family. Can you briefly describe
your research with respect to stock ownership by black
households, and how that plays into their ability to benefit
from the capital gains tax rate?
Ms. Brown. So research shows that black Americans, pretty
much regardless of income or wealth, are less likely to own
stock than white Americans. In fact, there was a study of the
top 5 percent of black wealthy Americans, and it showed they
were less likely to have stock than white Americans. And the
benefit of owning stock in the current tax code is, tax rates
are much lower.
So if I had a choice, I would rather have my wages taxed at
the low preferential rate that currently stocks are taxed at.
So because black Americans are less likely to own stock, they
are less likely to take advantage of that tax break.
The Chairman. Now, it seems to be compounded by the fact
that billionaires do not need to sell their capital assets.
They can avoid paying any tax at all in the deferral loopholes
in the tax code.
Does the ability to defer taxes on capital assets,
sometimes indefinitely, add to the racial wealth gap, in your
view?
Ms. Brown. Absolutely, because what a wealthy parent can do
is buy stock, have it appreciate significantly, and not sell
it. When they die, they leave it to their child as an
inheritance, and the child gets it tax-free with a stepped-up
basis, which, you know, means something to those on the
committee, but people hearing it may not know. So let's say my
parents--well, not my parents--let's say some parents bought
stock at $10,000, and when they die, their stock is worth
$100,000. Their child inherits the stock, $100,000, tax-free.
The next day, the child sells the stock for $100,000. They have
no taxable income because our tax laws give them a $100,000
basis equal to the fair market value. So that taxable gain will
never be taxed by anyone.
So yes, wealth is transmitted through gifts and
inheritances, and white Americans are more likely to receive
that than black Americans.
The Chairman. Thank you very much, Ms. Brown.
Let me turn to my Oregon neighbor, Ms. Rao, if I might. We
are interested in your highlighting what you consider to be the
top challenges for minority and female entrepreneurs in
obtaining capital. And we are introducing some legislation
today that is going to begin to speak to this, but I would be
interested in what you think the top challenges are to getting
capital.
Ms. Rao. Thank you, Senator. So one of the top challenges
that I noticed in my career in venture capital is that, even
when there are platforms for black and brown founders to be
able to pitch their ideas, there is a lack of representation on
the investor side to be able to understand and articulate the
strengths of those individuals who are pitching.
And so early in my career, what I started to do was to be
the translator between those black and brown founders and
investors. And so investors are looking at a fixed set of
criteria in order to consider a company investment, and what I
would do is to be able to formulate the ideas of black and
brown founders in a way that captures what investors are
looking for.
And I believe that with greater representation of different
lived expierences on the investor side, that there will also be
a greater propensity towards seeing what different models of
success can look like, and thereby increase capital assets to
black and brown founders.
The Chairman. Now today, several of my colleagues--Senator
Cortez Masto, Senator Hassan, Senator Cardin, and I--will be
introducing two new tax incentives, trying to flow benefits
into the hands of minority and female business owners.
The first is a tax credit for hiring, first, an employee--
an incentive to hire that person. And the second is an
investment credit to encourage investments in the smallest of
the small businesses, those owned by individuals earning less
than $100,000 per year.
In your view, would these credits help with the challenges
that you are describing for women- and minority-owned
businesses?
Ms. Rao. Thank you, Senator. I absolutely agree that the
two proposals that you mentioned will help to funnel in capital
and, more importantly, will help to increase the participation
of different types of investors, to be able to funnel in money
into different types of businesses.
Oftentimes, that representation is overlooked, and I do
think that both those proposals for the first employee credit,
as well as the investor credit, will help to incentivize
participation.
The Chairman. Well, thank you, Ms. Rao. My time is up, but
we are really appreciative of having an important Oregon voice
on this. We know we have a lot of heavy lifting to do in this
area, and we look forward to working with you and all of our
very good witnesses today.
It is now Senator Crapo's turn.
Senator Crapo. Thank you, Mr. Chairman.
I am going to go first to you, Professor Desai. We have
heard a lot lately about income and wealth inequality. And it
is a very critical issue. Some have recently claimed that the
Federal tax system may have become regressive, despite the
longstanding and overwhelming evidence to the contrary.
In fact, even progressive economist and former Treasury
Secretary Larry Summers commented recently on some of the
recent analysis, saying that it is, quote, ``substantially
inaccurate and substantially misleading.''
A question that I have for you is, we have heard today that
there is inequality caused by the joint filing allowed for
people who are married, by the mortgage interest deduction for
people who own homes, and for those who are investing in their
retirement savings. So you have marriage, home ownership, and
retirement savings as the target for changes in the tax code.
If those changes were made, if those deductions were
disallowed and removed, I understand that that would cause
those who are married, and those who own homes, and those who
have retirement savings, to pay more taxes. But would it reduce
the burden on those who do not, on those who are truly at the
lower income quartile and do not have as much access to home
ownership and retirement savings?
Dr. Desai. Thanks, Senator Crapo. So yes, first I think, on
this industry of folks who are suggesting that the tax system
is regressive and it has become less progressive over time, I
provide evidence in my testimony that suggests that is just
wrong. And I think it is very problematic. You know, it is
problematic because it shifts attention away from what we
should be thinking about. It makes us think that we can solve
our problems by taxing billionaires, and by supposedly getting
hundreds of billions of dollars that are in offshore tax
havens, neither of which I think is true. It is distracting to
the plight of people on the bottom two quintiles.
It is very important for wealthy Americans and corporations
to pay their fair share, but fundamentally I think this is
distracting. And in that process, we lose sight of the
instruments that will actually help us and help the folks who
we really, I think, want to try to help on the bottom two
quintiles.
To your question about the specifics on marriage, and home
ownership, and retirement accounts, you are exactly right to
say that perhaps narrowly this could help in some way. But in
the context of the overall tax system, one has to ask, well,
where would those revenues go? How would they be used? Who
would benefit from them? And maybe more importantly, it does
not really address the underlying problem which was, I think,
in the colloquy between Senator Wyden and Himalaya, about
building wealth at the lower end of the income and wealth
distribution. That I think is a much more interesting
discussion than the discussion of looking at particular
preferences on savings and suggesting they have a disparate
impact on racial subgroups.
Senator Crapo. Well, thank you. I agree with you. And my
next question will be directed at you, Mr. Hawkins. But before
I give it, I really think we ought to be focusing on things
like strengthening and enhancing the EITC, strengthening and
enhancing Opportunity Zones, strengthening our access to
retirement savings so that people can get into the business of
putting some money away for retirement savings.
And Senator Warner and I worked on a piece of the capital
access in one of the last bills, where we helped to give
significant expansion to our Community Development Financial
Institutions, encouraging and incentivizing access to capital
in those areas. Those are the kinds of solutions that it seems
to me we should look at.
Mr. Hawkins, my question for you is, the Tax Cuts and Jobs
Act did a number of things to simplify and increase
progressivity of the personal income tax system, and I am going
to just list a few: doubling the standard deduction; expanding
the Child Tax Credit; expanding the alternative minimum tax
exemption; enacting Opportunity Zone incentives; passing the
SALT deduction; capping the mortgage interest deduction; and
limiting the exclusion for
employer-provided fringe benefits.
Do you agree with the Joint Committee on Taxation analysis
showing that the TCJA made the personal side of the income tax
code more progressive? And do you think that any of the list of
provisions I just identified, including the cap on SALT
deductions, should be rolled back?
Mr. Hawkins. You know, it is clear. I do agree with the
Joint Committee on Taxation. It did make the tax code more
progressive. And none of those items that you mentioned should
be rolled back, particularly the SALT cap. I mean that is
objectively oriented toward the absolute 1 percent, and should
absolutely not be repealed.
Senator Crapo. Thank you. Thank you, Mr. Chairman.
The Chairman. Members to ask questions, we have our
colleague Senator Stabenow and then Senator Scott.
Senator Stabenow?
Senator Stabenow. Well, thank you very much, Mr. Chairman.
And thank you to everyone for really important testimony today.
This is such an important topic. It is interesting to me that
when we discuss tax policy, and just as an editorial comment,
our colleagues, our friends on the other side of the aisle,
view tax policy, tax cuts, really as a primary solution to so
many issues, but will only talk about this one, and tax policy
is not viewed as a part of the solution, which I find
interesting.
As chair of the Democratic Policy and Communications
Committee, last year at the beginning of the pandemic, after
the first couple of months, I released a report on the
disparities, the impacts of the pandemic on minority
communities, in health care, which were obvious, and housing
and small business, and who our essential workers were. But we
did not really focus on tax policy, which is why I think this
is such an important discussion.
I wonder, Professor Brown, if you would want to talk any
more about the tax code and your efforts and seemingly neutral
terms and items that actually create disparities. I know you
have spoken about this, but in the context of the last
questioning on whether or not this tax code is important to
address, if you might just say a few words about that.
Ms. Brown. Thank you so much. I think it is important that
we focus on racial disparity impacted by our tax laws, and I do
not think it is enough to say you cannot do it in isolation.
Because my argument is that we should not do it in isolation.
We should look at everything.
And what is really important is, my research shows this is
not a function of class. It is not only that black Americans
pay more taxes because they are disproportionately poor, it is
black Americans at all income levels. If we want to talk about
wealth building, who is better able to build wealth? Those with
higher incomes.
But our tax laws disadvantage black Americans at all income
levels when we are doing the same thing our white colleagues
do. So I think it is important to talk about race and taxes,
and I applaud the committee for this hearing.
Senator Stabenow. Thank you so much. And also I would throw
this question, Professor Brown, to you as well, but also Dr.
Desai. Recently President Biden signed an executive order
creating a cross-agency group with a mandate, as you know, to
address systemic racism in the U.S. Government, which would
include gathering data to track the effects of policies on
disadvantaged groups.
And although the government analyzes discrimination, again
in lending and housing and employment and so on, it generally
does not focus on tax policies. And so what challenges do you
and other researchers face in studying the effects of tax
policies on households and businesses, and what steps can
Congress take to ensure on the front end that tax policies do
not enforce or exacerbate wealth disparities?
Ms. Brown. So, as I said in my testimony, I have had to
become a detective of sorts, because I could not go to the
statistics of income at the IRS and see which taxpayers paid
and which got exemptions. So it has been really hard. It has
taken me a couple of decades. I am glad we are on the other
side of it, and I hope going forward that it changes.
So, yes, there is the executive order that put together a
data group, but we have to see what fruit that bears. I think
Congress, going forward, could make a point of putting together
a racial impact statement, for example, for any proposed tax
provision to see how we would expect it to impact Americans by
their racial identities.
Senator Stabenow. Thank you.
Dr. Desai?
Dr. Desai. Yes, thanks for that question. And I think, you
know, Professor Brown has done decades of research on this, and
it has been difficult. I think the issue today is about
collection of data and analysis of data.
So the first thing on the analysis of data is, we actually
know many things from her research and many other researchers
about disparate holdings of wealth, about income levels, that
one could use to make this analysis happen. So I am not sure
there is a need for additional collection of data.
Second, I just think it is worth, again, saying that we
would want to think about the totality of the tax system in
doing that analysis.
And then finally, I would say my big concern would be kind
of the politicization of the analysis done by the JCT and
others, which is so valuable for tax policies. And in
particular, for many provisions--I give the example of the Low-
Income Housing Tax Credit--it would be very, very difficult to
analyze the racial impact. And it will require really heroic
assumptions. And the collection of additional data will not
necessarily help with that.
So I think this is an incredibly important agenda. But to
me, I think a lot of the data is in place to do what we need,
if we want to do that.
Senator Stabenow. Thank you. Thank you, Mr. Chairman.
The Chairman. I thank my colleague for her good questions.
And I think, Professor Brown, what you are saying is, it is
time for a bit more tax transparency to make it a little bit
easier for those in the detective business. I thank you for
your important points.
Our next colleague will be Senator Scott.
[No response.]
The Chairman. Is Senator Scott here?
[No response.]
The Chairman. Okay; our next colleague will be Senator
Cantwell, followed by Senator Thune.
[Pause.]
The Chairman. All right; next we have Senator Carper, and
then Senator Toomey.
Senator Carper?
Senator Carper. Yes, Mr. Chairman. Good morning.
The Chairman. Good morning.
Senator Carper. Good morning, and hello to all of our
witnesses. Thank you very much for joining us today.
When I was Governor in Delaware from 1993 to 2001, what we
focused on for those 8 years, among other things, we focused on
how do we strengthen the basic building block of our family
structure. And that is what we did for 8 years, and we created
something called the Family Services Cabinet Council. We
started literally from birth. And we--I think we made great
progress. The current Governor has picked up the Family
Services Cabinet Council. He used to be a member of my cabinet,
and we still have the Family Services Cabinet Council, seven
departments within State government that work together to help
families through the life of kids and families.
One of the things that I have always focused on, as some of
my colleagues know, is root causes--not just the symptoms of
problems, but root causes. And I asked my staff to dig up some
information looking at the number of children who live in
single-parent homes in our country, and to do that by race;
also, to analyze what percentage of families are led by solo
parents. It is pretty interesting information when we think
about root causes.
And I do not think we are focusing as much on root causes
as maybe we could or should. Out of all solo parents, 42
percent of those are led by a Caucasian--42 percent of the
families with solo parents are Caucasian--28 percent are black;
24 percent are Asian; and 3 percent are Hispanic.
And there is a different way to ask the same question. The
question is something like this: with respect to percentages of
children who live in single-parent homes by race--I will say it
again--percentage of children in single-parent homes by race,
15 percent are Asian; 24 percent are Caucasian; 42 percent are
Hispanic or Latino; and 64 percent are African American.
And I think those sets of data are worth our consideration
as we focus on not just the symptoms of problems, but how to
deal with them as we think about root causes.
I also asked my staff to help me actually analyze the ways
we try to help lower-income families--Latino, white, black,
Native American, whatever--and the ways that we are trying to
help incent work and to help in capital formation.
And among the programs that we were looking at were the
Earned Income Tax Credit--which has been discussed here--hugely
important; retirement programs that actually allow people who
have very low income to sign up almost from Day 1 when they
start their employment, the kind of stuff they do in Oregon, as
the chairman knows, in a very good program out there;
Opportunity Zones; the CHIP program, the Children's Health
Insurance Program; tax breaks to incent marriage; child care
funding. And we are doing a whole lot of that, actually,
through the ARP: student debt repayment assistance; Affordable
Care Act, the tax credits in the Affordable Care Act; the money
that we are providing for food banks across the country through
all of our COVID packages.
WIC, the WIC program, and SNAP, that used to be food stamps
and now it is SNAP; Medicare Part D, drug assistance for folks
on Medicare; Medicaid expansion. We used to be down about 70
percent. Now we are up to like 130 percent for Medicaid
expansion States.
Child Tax Credit, which we have expanded in the most recent
package; GI bill. When I was coming home from Southeast Asia
and enrolled in the business school at the University of
Delaware, the GI bill was about $250 a month. Today, the GI
bill provides tuition free and a housing allowance for GIs and
their families, anywhere from $1,000 to $2,000 a month.
Delaware Tech in my State, they have a C program. Anybody who
graduates, I think, with a C-plus or more from Delaware high
schools can go to Delaware Tech tuition-free for 2 years. And
Delaware State University--which is the third-ranked HBCU in
America out of all the public HBCUs--Delaware State University
is ranked number three.
They have a scholarship program, I think it is worth about
$4,000 a year in tuition assistance. The majority of folks who
receive that are students of color. I mention those things just
to toss out a little bit of background, to put this in context
as we think, not just about the symptoms of problems and how we
deal with those.
I want to come back to Opportunity Zones. I would ask our
friend, our last witness, to just go back and just tell us
again what more can we do to improve and better target
Opportunity Zones so that they actually do help minority
families, minority businesses?
Mr. Hawkins. Well, thank you, Senator. You know, one thing
that we can do to help target Opportunity Zones to minority
businesses--there are three levels of benefit associated with
Opportunity Zones. And one level is to allow for a 100-percent
step-up in basis on the capital gains on the business that was
started within an Opportunity Zone.
And so, for the purposes of that benefit, we can allow non-
capital gains to be invested. If folks want to hold the
investment for 10 years plus, and then move forward and sell
that business, then they will be able to sell that business
capital gains tax free.
In the original Investing in Opportunity Act, the
legislation which Opportunity Zones are based off of, that was
a feature. And for scoring purposes, it was difficult to put it
in in tax reform. However, allowing non-capital gains to be
invested long-term for 10 years plus, with a 100-percent step-
up in basis if that business is sold, would bring a lot more
capital into Opportunity Zones, and a lot more into the hands
of minority entrepreneurs who are less likely to have access to
investors with capital gains tax liability.
The Chairman. We are going to have to move on, Senator
Carper.
But I know our next questioner, Senator Scott, will
probably be interested in the very question you have been
talking about. So we will continue this dialogue.
Senator Scott. Thank you, Mr. Chairman. Thank you to
Senator Carper for making it easy for me to transition into my
questioning on Opportunity Zones of Mr. Hawkins.
Mr. Hawkins, I was going to ask you a question about
Opportunity Zones later on during the process here, but let us
just continue the conversation that Senator Carper was so
gracious to begin.
I will say without any question, if you look at the
commitments, the dollar amount commitments from the private
sector to some of the most distressed communities in our
country through the Opportunity Zones legislation, it is over
$70 billion in my understanding. Is that about right, sir?
Mr. Hawkins. That is about right. What you have seen is
about $15 billion that has been committed to the Opportunity
Fund, the actual vehicle that makes the investments, and then
that money is then levered up when it is invested into the
actual Opportunity Zones, sometimes two, three, four to one.
Senator Scott. Would you also agree, Mr. Hawkins, that
Opportunity Zones, while one of the more important parts or
aspects of the legislation is to bring private capital into
distressed communities, another very important feature is not
to gentrify those neighborhoods? And thus far, we have seen in
the single digits gentrification. Is that still accurate?
Mr. Hawkins. That is still accurate. So about 2 to 3
percent of the designated Opportunity Zones that Census tracks
that were eligible for this type of investment were on an
Opportunity Zone trend prior to being designated as an
Opportunity Zone. And so we have seen that gentrification so
far in the designated zones is no more severe than it was in
the trends that existed prior to being designated.
Senator Scott. That is incredibly important, because I have
said this several times: if the definition of creating better
communities is to run people like me out, as a person who grew
up in poverty in a single-parent household, if the definition
of improving a neighborhood is to push me out, that does not
work for me.
So I am very pleased and excited to hear that Opportunity
Zones continue to produce more opportunities for typically
majority minority areas in a way that does not necessarily lead
to gentrification.
Mr. Hawkins. Absolutely. And one of the key things that we
need in order to maintain that trend is we need--I would love
to see you reintroduce your IMPACT Act, which provides
reporting and transparency for what is happening in Opportunity
Zones. And so in that way, we will understand the direct jobs
that are created, and the economic impact on the communities
that have been designated. And you all will have the tools to
make any adjustments to Opportunity Zones that are necessary to
make sure that the existing residents of Opportunity Zones
benefit.
Senator Scott. Well, thank you very much, Mr. Hawkins, for
that last comment. Because it is really important for us to be
able to measure the success of the zones. And one of the ways
that we do that is by having the reporting requirements that
require all funds to report on their activity. And that kind of
information will help us understand if we are actually helping
the community, or if we are only helping investors. Because my
goal is to help the community first and, by default, let
investors benefit from doing good and making a decent--not a
great, but a decent ROI.
Finally, Mr. Hawkins, as you know and I know, but others
may not know, you served as my tax counsel during the tax
reform. And I am thankful that you helped us write that tax
bill and, frankly, I am happy to report that doubling the Child
Tax Credit, working on lowering the small business burden by 20
percent, lowering the corporate tax from 35 to 21 percent, all
those features have had a tremendous impact on lowering
unemployment, closing the income gap, closing the wealth gap.
And frankly, I saw a report that the lowest level of poverty in
the country's history since they started tabulating in the
1950s was 2019 or so, or pre-pandemic.
Mr. Hawkins. Sure. Oh yes; absolutely. And if you look at
the different aspects--one of the things I always joked about
when I was working for you was actually I loved having a boss
who actually in his past career had signed the front of a
check, not just the back. And so I thought so much about how
the 20-percent reduction in the pass-through rate would have
benefited you when you were at Allstate, and that those
businesses that you passed on to other minority entrepreneurs
will benefit from that pass-through deduction. So there is so
much that was done in that bill that benefits minority
entrepreneurs and that makes our tax code more fair. I am very
proud of the work I was able to help you with.
Senator Scott. Well, thank you, Mr. Hawkins.
And, Mr. Chairman, thank you for your timeliness of having
Senator Carper go right before me so that we could continue the
conversation on Opportunity Zones. That is pretty good
leadership.
Thank you, Mr. Hawkins.
The Chairman. I was not able to go foreordain it, but I am
glad that our members are getting recognized. The next two will
be Senator Toomey and Senator Cardin.
Senator Toomey. Thank you, Mr. Chairman. Thanks for having
this hearing. I hope that there is a universal acknowledgment
that there has never been--and certainly in the tax reform we
did--any pernicious racial intent in the sense of trying to
benefit a given group at the expense of another. Such a
suggestion would be untrue and, frankly, offensive.
The idea behind the tax reform, which is the dominant
discussion about the tax code as it is today, one of the
central ideas--there were several--but one of the central ideas
was to lower the after-tax costs of deploying capital, with the
notion that if we did that, we would get an increase in the
deployment of capital that would help improve productivity
because, really, capital is the tool that is necessary for
workers to become more productive. And that would enhance the
economy overall, but especially for middle- and lower-income
workers who would benefit from that.
And that of course is exactly what happened. I think it is
very, very important to underscore that it was almost
immediately after we passed the tax reform that we had the best
economy of my lifetime. Now you might think that is just a big
coincidence. I do not think so. I think it worked exactly as we
had hoped. The capital investment did in fact create a boom.
Workers became more productive.
And, Mr. Hawkins, I do not know how closely you have looked
at this data, but if you have, could you comment on the
acceleration of wages which reached an extraordinary level just
before the pandemic hit in 2019, and the wage gains that were
strongest for the lowest-income workers?
In fact, isn't it true that since wages were growing
fastest for low-income workers, we were narrowing the income
gap? We were narrowing the racial disparities in incomes by
virtue of the powerful economic growth we had?
Mr. Hawkins. Absolutely. And so we saw wage growth--I mean,
that wage growth is a direct result of a tightening labor
market. When you have record employment rates for Asians, for
Hispanics, for African Americans, for women, when you have
these record employment rates, it tightens the labor market and
employers have no choice but to pay more to draw people to
their firms.
Senator Toomey. Right, right.
Mr. Hawkins. And we were pleased to see that a
disproportionate amount of the benefit of those wage gains came
at the lower end of the income spectrum.
Senator Toomey. Right. So I would just suggest--and I wish
this were not controversial--but I would suggest we try to get
back to the best economy of my lifetime. I would suggest we get
back to record low unemployment. I would suggest we try to get
back to narrowing the income gap. Those are really good things,
and we were there just a little over 1 year ago.
But if we unwind the pro-growth features in our tax reform,
we are not going to get back to those days. And instead--
actually one of the central ideas that some of our Democratic
colleagues have, is to do something that is the exact opposite
of helping low-income workers, by eliminating or dramatically
lifting the SALT cap, the deduction for State and local taxes,
of $10,000. That is already a lot. You know, if you have
$10,000 in State and local taxes, you probably have more than
the median income in the United States. If you get rid of that
cap entirely, the benefit flows overwhelmingly, massively, to
the top 1 percent. It is a big subsidy from working Americans
to the richest Americans.
Mr. Hawkins, do you see it differently? Or is that what
lifting the cap on the SALT tax would do?
Mr. Hawkins. It is exactly what it would do. And that is
how I see it. That is how the Brookings Institution sees it.
You know, they noted that if the cap was lifted, 96 percent of
the benefit of the SALT cap repeal would go to the top
quintile; 57 percent would go to the top 1 percent; and 25
percent would benefit the top .1 percent. And those people in
that category would get a tax benefit of nearly $145,000.
And so there is no intellectually honest argument to raise
the SALT cap if your goal is to eliminate income inequality in
the tax code.
Senator Toomey. No, it certainly makes it worse. And
finally, let me just point out, it is not only in how it
affects people, but it is the nature of the deduction. This is
an arbitrary subsidy for people who choose to live in high-tax
jurisdictions. That is what it is.
In those jurisdictions, you often get more services. If you
choose to pay for those services, whether it is trash removal
or whatever else it might be, you pay for it in the form of a
property tax very often, where constituents in a place that
does not have as high a tax may just have to contract
separately.
When they contract separately for those services, they do
not get to deduct that payment. But if you increase the SALT
tax deduction, they can.
So I think I have been through most of my time, Mr.
Chairman. Thank you.
The Chairman. Okay; Senator Cardin?
Senator Cardin. Thank you, Mr. Chairman. And let me thank
all of our witnesses. I particularly want to thank you for your
leadership in regards to dealing with the inequities in our tax
code.
There are two aspects to this. Professor Brown, I
appreciated your analysis of the discriminatory nature of the
tax code itself as it relates to many of the provisions. But it
is compounded by the challenges we have had on discretionary
domestic spending, where we have not been able to move forward
on a lot of important issues, and we use the tax code as an
effort to try to make up for those inequities.
I want to just share with you a meeting that I had with the
Industrial Area Foundation--that is our BUILD organization
locally--talking about affordable housing and economic
development and the challenges we have today. And I pointed to
the fact that, yes, I would like to see things on the
discretionary spending side, but we also need to recognize that
we have tools available under the tax code, and we need to make
those tools even more effective.
We talked about the Opportunity Zones, but I want to
mention the New Markets Tax Credits that I partnered with
Senator Blount to make permanent. That was very helpful in
Baltimore, not to mention many of the areas of revitalization,
including Remington Way, that would not have been possible
without the New Markets Tax Credits I just mentioned, the
historic tax credits that have been very helpful, and we are
trying to improve the historic tax credits.
I want to thank Senator Portman. We are working together on
the Neighborhood Investment Act, a new effort to deal with the
appraisal gaps in lower-income communities in efforts to
renovate their homes and the housing stock in low-income
communities. These are all areas of effort to try to improve
the effectiveness of these tools.
The point that was brought up to me by the BUILD
organization is that there is not one tool available that can
make the renovation of a community feasible under the tax code.
They have to put together so many of the different tools and
private-sector development, et cetera.
So, Professor Brown, I would just like to give you an
opportunity to talk about how we can improve the tax code in
dealing with the housing crisis we have in America by fine-
tuning the tools that are currently available, including the
Low-Income Housing Tax Credit that Senator Cantwell has been so
actively engaged with, in order to try to deal with inequities
through the tools available.
Ms. Brown. So I would say that with the subsidizing
activity, whether it is home ownership, or whether it is
affordable housing, we have to think about who we are going to
help and who we are going to hurt, right?
So the problem with affordable housing transcends the code
in this sense. There are so many requirements that are anti-
affordable housing; there are developers who want a certain
return on their investment and are reluctant to invest in those
neighborhoods. And if you want to encourage that, I do not know
if the best way is through the code or direct spending.
So you want to also talk about existing home ownership
rates among low-income Americans. One of the biggest barriers
to home ownership with respect to black Americans is the down
payment. And there is nothing the code can do to provide a down
payment. Direct spending could, but nothing in the code.
So there is often a mismatch between the goal that you
want, which is to spur investment in distressed communities,
and the chosen means, which is Opportunity Zones, which tend to
benefit wealthy white developers as opposed to the members of
the community.
Senator Cardin. And I agree with you. But if you look at
the trends over the last several decades, you see the amount of
public support for affordable housing under the tax code
increasing, whereas under direct spending, it has been reduced.
I certainly do not want to reduce the tools we have
available under the tax code. I would like to increase the
opportunities under direct spending. That is not always
politically possible. So I think we have to look at what is
reality.
One additional point, if I might, and that is the paid
preparers. I mentioned that at our last hearing. The low-income
families are the ones being victimized the most under changes
in the tax code, especially the Earned Income Tax Credit, and
we have, as you know, no regulatory power right now under IRS
to regulate paid preparers.
I think it is in the interest of low-income communities,
the consumer interests, that we give that power back to the
IRS. I do not know, Professor, if you want to comment on that
or not?
Ms. Brown. Yes, I definitely think that is a start. But
really the big problem is the complicated nature of the Earned
Income Tax Credit. So the community of Earned Income Tax Credit
recipients has a higher percentage who use paid tax return
preparers than the rest of the population. That is because the
EITC is just too complicated, and Congress could take some
steps to simplify it.
Senator Cardin. Thank you.
Thank you, Mr. Chairman.
The Chairman. We are having some IT problems. Senator
Grassley, are you out there?
[No response.]
The Chairman. All right, then we will go next to Senator
Brown, and then Senator Cassidy.
Senator Brown?
[No response.]
The Chairman. Senator Cassidy?
Senator Cassidy. Good. Thank you.
Professor Brown, a couple of things. I want to make sure
the Democrats will speak--hopefully, my Democratic colleagues
will speak to some of the Republican witnesses, but I want to
speak to some of the Democratic.
My Democratic Senate colleagues have made repeal of the
SALT tax provision kind of like one step over the line, but it
sounds like you would disagree with your advocacy for this
since, as Mr. Hawkins pointed out--by the way, great to see
you, Mr. Hawkins; we used to sit next to each other. As Mr.
Hawkins points out, the benefit of that accrues to the
extremely wealthy principally, and those folks typically are
not African Americans. So would you disagree with my Senate
colleagues as regards the risk in repealing the SALT tax?
Ms. Brown. Yes, and I would say to you--you have perhaps
read my testimony closely. That is exactly what I would do. And
here is the thing. Right now we have about----
Senator Cassidy. I have just 5 minutes. I have to go on. I
just wanted to get that for the record. Thank you.
Ms. Rao, I am just curious. I am not challenging, but your
testimony suggests an inability of women and others to raise
money, people of color. I notice that Ms. Pelosi, the Speaker
of the House, we see that she has raised $815 million in
political contributions in 2002. That is a lot of money.
Could you add a sense of why she can raise so much money,
and yet your testimony is along the lines of, it is difficult
for someone like you to raise money. It does not seem as if
there has been a barrier, if you will, for her.
Any thoughts on that?
Ms. Rao. Sure. Thank you, Senator. I think one of the
fundamental differences is that for people of color and women,
they need to reach a certain level of notoriety, or a certain
level in which they are seen as someone who is credible, before
they can reach that access to capital, whereas, founders who
are white do not have to reach that level of credibility before
they are able to access.
So to your exact point, I think that it has been easy for
some individuals, some women, to be able to raise capital. But
for the vast majority of women, for myself as a woman of color
who is raising a venture capital fund, who does not come from
generational wealth, it has been extremely difficult.
Senator Cassidy. I get that. If someone graduated now and
she is 24 years old and she graduates, or 26 and she graduates
from Harvard Law, or she has a Harvard MBA, or a Stanford MBA,
do you feel as if that would be the ticket, the contact that
she would need to have, et cetera, that would allow her to
raise more successfully?
Ms. Rao. I think that there are certainly
intersectionalities between race and education and
socioeconomic status. As I pointed out in the testimony, that
will allow and enable some women and some people of color to
advance further, and maybe quicker. But my point in that is
that maybe we need better representation of different types of
diversity, and----
Senator Cassidy. I get that. I get that. I accept that,
believe me. But it does seem as if, if you subtracted out the
role of gender and race and you inserted, say a Barak Obama
graduating from an Ivy League school, that maybe you would have
the range of contacts that others would have.
I have to move on. I apologize.
Professor, one more time--and by the way, Shay Hawkins, I
loved your testimony. I am going to pin it on my bulletin
board. So much so that that is why I am talking to the others.
Professor, one, I agree with you about the step-up basis. I
once wondered why did the Kennedy family continue to have so
much wealth, when I do not see any of them doing the same
entrepreneurship that Joe Kennedy did way back when--loosely
defining entrepreneurship. And then I realized that it is that
stepped-up basis for the inheritance and their foundations.
So again, we have a point of agreement there as well. But
let me ask you about something that Dr. Desai mentioned,
alluded to--and I may not get this right, Dr. Desai, so I
apologize. You focus on the privileges, if you will, of folks
with more income in the tax code, but Dr. Desai--whether he
said this or not, this is what I drew from it based on my own
experience--pointed out that many other programs have an
inverse effect.
I am a doctor. I worked in Louisiana's Charity Hospital
System for the uninsured, the poor, and the majority of my
patients, 80 percent, were African Americans. They were on
Medicaid. More were on TANF, more in public schools supported
by tax dollars as opposed to non-African American children who
were having to pay for their own education in parochial or
private schools.
In your analysis, do you look at the mirror image where
there are a heck of a lot of benefits that accrue to those of
color or those who are less well-off, disproportionately? Not
because it is necessarily designed that way, but inherent in
addressing the issues such as health care for the uninsured,
you are going to capture more of those folks who are, again,
less well-off no matter what their color, but
disproportionately they are of color?
Ms. Brown. I am not sure I am tracking the question. That
was a long one.
Senator Cassidy. If you look at it, African Americans are
more likely to be on Medicaid, more likely to receive EITC, not
in absolute numbers but as a percent of their total population.
And so that is a benefit which accrues to those who are of
color, which is financed, if you will, by those who would not
be of color.
Does your analysis look at that?
Ms. Brown. So I would say, my response would be, when we
think about white Americans who may pay less in taxes but are
reliant on a court system, I do think there is a connection
between taxes and services. But I think at the basis would be
the information----
Senator Cassidy. I have to stop you there, because that is
off point. And I will finish with this, Mr. Chairman. If we are
going to say that the benefits of the exemptions benefit those
who make more money and they just happen to be white, then it
is probably fair to say that the benefits of these social
safety net programs accrue to those of color; frankly, not
because they are of color, but because they meet the need
otherwise. But the mirror image does seem to be something which
your research appears to ignore. And whether Dr. Desai meant
that when he alluded to it, I do not know, but that is how I
took it.
Thank you, Mr. Chairman.
The Chairman. The time of my colleague has expired.
Senator Brown?
Senator Brown. Thank you, Mr. Chairman. I really appreciate
it.
Mr. Hawkins, it is good to see an Ohioan before this
committee. I appreciate our work together on civil asset
forfeiture when you were working in the Senate with my friend,
Senator Tim Scott. So I thank you for that.
Professor Brown, my questions are mostly for you. Thank you
for being here today and for calling attention to the
intersection of racial equity and tax policy. You have done
that I think better perhaps than anybody in the country. They
are far more connected than most people think. I am glad we are
having this hearing to examine that.
Not only do we need a tax code that would be far more
equitable, we need an IRS that administers and enforces that
tax code fairly. When the IRS Commissioner was before this
committee and Chairman Wyden just a week ago--or actually when
he was here the first time last summer--I asked if he could
assure us that IRS audit rates do not disproportionately affect
black and brown tax filers. He said, yes, he could assure us
that audit rates do not have a disproportionate effect. But
given that IRS does not collect race data, and that the Census
Bureau does not generally share data with IRS, I question
whether the IRS really knows the extent to which its
enforcement activities have a racially disparate impact.
So my question is this, Ms. Brown. What are your thoughts
on this? What would responsible IRS guard rails be to prevent
disproportionate impacts? What would they look like to you?
Ms. Brown. Well, they would look different than what we
see, right? So we saw, or ProPublica published research that
shows the significant percentages of black EITC claimants in
the south that are being audited. So we would want to collect
more data on EITC audits so that we could compare them to the
tax-paying population to see if there were any differences.
It all goes back to data. That is really important, and not
withstanding what I have heard, we do not have the data.
Senator Brown. Do you have ways you can suggest to this
committee that IRS adjust their practices?
Ms. Brown. Do I have ways? Well, yes. It would be not
overly auditing low-income taxpayers, and auditing high-income
taxpayers. That would be one place to start.
Senator Brown. Let me--thank you. I do not mean to
interrupt, but let me--well I guess I do mean to interrupt, but
I apologize. Let me delve into that. One of the most important
parts of the American Rescue Plan that Congress passed in
March--and I remember after voting that day sitting next to my
friend Senator Casey on the Senate floor, saying this was the
best professional day of my life because of what we did with
the Child Tax Credit, the Earned Income Tax Credit, and all the
things that Senator Casey did with children.
But we expanded it, unlike the enormous giveaways included
in the 2017 tax law, which overwhelmingly went to wealthy and
white tax filers. EITC and the CTC went mostly to low-income
whites and black and brown tax filers, Asian tax filers.
For example, the expansion of the CTC is estimated to help
poverty, we know this, by more than 50 percent, reducing
poverty by almost that much. The same holds true for EITC. In
Ohio, 15,000 workers of color over 25 who cannot get any of the
EITC under current law will benefit from this expansion.
So we have talked much about EITC. We also, as the chairman
does, talk about CTC. So should Congress--my question, Ms.
Brown, and I think I know the answer, but that is how we do
things--should Congress make the Child Tax Credit, the EITC,
permanent?
Ms. Brown. Yes.
Senator Brown. I figured you would say that. The last thing
is, I want to ask the panel about the tax gap. Just a ``yes''
or ``no'' on this one.
We know of $400 billion that is legally owed to the IRS
each year but not collected. This tax avoidance robs our Nation
of much-
needed revenue. It undermines trust in government.
Who benefits the most from inadequate enforcement of our
tax law? Who stands to lose the most from the revenue we lose?
Just real quickly, we just have 1 minute left. Give me a very
concise answer, starting again with you, Ms. Brown, if you
would.
Ms. Brown. So I would say the wealthy white taxpayers who
are currently not being audited stand to gain the most from the
dysfunctional system that we have now that targets
disproportionately blacks' EITC.
Senator Brown. Dr. Desai?
Dr. Desai. I think more enforcement resources for the IRS
is a terrific agenda. I do not think it is entirely clear where
that gap is, and who would end up funding it. But I think
greater enforcement dollars is a wonderful agenda.
Senator Brown. Mr. Hawkins?
Mr. Hawkins. Greater enforcement dollars is absolutely a
wonderful agenda. And it is something that would make sense and
make our tax code more fair.
Senator Brown. Ms. Rao?
Ms. Rao. This is not--I am not a tax expert, but certainly
greater incentives for participation as an investor certainly
would increase the representation that is seen in venture
capital.
Senator Brown. Thank you all for your conciseness.
Mr. Chairman, thank you.
The Chairman. Thank you, Senator Brown. Now in order of
appearance, Senator Bennet, Senator Lankford, and Senator
Casey. I do not see Senator Bennet, so that would mean our next
two would be Senator Lankford and then Senator Casey.
Senator Lankford?
Senator Lankford. Mr. Chairman, thank you. To all of our
witnesses, thank you very much for your work on your testimony
and for bringing all these different ideas to our conversation
today.
Mr. Hawkins, I want to ask you about Opportunity Zones as
well. You spoke about and wrote about democratizing Opportunity
Zones investment. Can you go a little deeper into that for me?
Mr. Hawkins. Sure. And so Opportunity Zones basically have
three levels of possible benefit. You know, once you have a
capital gain and you reinvest that capital gain in an
Opportunity Zone, first you get a 10-year, up to a 10-year
deferral of that capital gains tax liability.
Second, if you invest for longer periods of time, 5 or 7
years, then you get what is called a step-up basis, or a little
bit off that tax bill. You are still going to owe, but you get
a little bit off that tax bill.
And the last benefit refers to the investment in the zone.
So, if I invest in, let's say a Shay Hawkins version of
Facebook, or something like that, what it says is, if I hold
that investment for more than 10 years, then I get a 100-
percent step-up basis, or no capital gains tax liability when I
sell that company in 15 or 20 years.
So what we can do is, for the purposes of that 100-percent
step-up in basis, for holding that company for 10, 11, 15, 20
years, we can allow non-capital gains to be invested for that
purpose and get the benefit of that 100-percent step-up in
basis.
And so what it would do--you know, if there are 10,000
people in a community who want to come together and give $100
to make a $1-million investment, to pool their money, people
would not have capital gains normally and then participate in
the Opportunity Zone and benefit in one additional way, not
just with increased property values, not just with increased
access to goods and services, not just with increased jobs that
come with the Opportunity Zone, but also they could participate
in the investment.
Senator Lankford. Okay; that is helpful as well.
I have worked extensively on trying to be able to get
access to retirement money for an emergency fund without a tax
penalty in the process. It is something I have worked on for
quite a bit, and I continue to work on a good proposal.
I want to incentivize more people to be able to save for
retirement, but I also want to reduce the penalty that people
pay if they have to pull that out. If your refrigerator goes
out, or your car has damage, or whatever it may be, very few
people have an emergency fund. And so they never save for
retirement because they think they cannot get access to it in
case of an emergency.
But to be able to get some access to that--there has been
some debate on how big that is, because you want to incentivize
people to save for retirement. It cannot be just an emergency
fund that you are pulling from, because you are trying to
incentivize retirement savings, as well as being able to help
people. But you have to also get access to those dollars so
that people do not pay a 10-percent tax penalty if they have to
get to it.
The question I want to ask you is, what would you suggest
as the dollar amount that would need to be there that people
could get access to for an emergency fund and still incentivize
the saving for retirement? How big should that dollar amount be
that they are allowed to get for their emergency fund out of
their 401(k)?
Mr. Hawkins. You know, it is going to vary for different
families, but, I think it would need to be set--certainly you
are looking at thousands of dollars. I would imagine that in
the $3,000 to $5,000 range would be a threshold that would make
sense for most families. Because I mean, if you are looking at,
it could be a basement flooding or any other type of emergency
you can think of, when you look at how low the savings rates
are for the people in the lower 50 percent of the American
income scale, when you look at how low those rates are, with an
average retirement savings in that group of zero, they are
going to be reluctant, as you said, to set that money aside and
say, no, they cannot get their hands on it in the case of a
temporary emergency.
Senator Lankford. Does anyone else have an opinion about
what that dollar amount should be, both to incentivize
retirement and then to also allow people to get access to some
of that money for an emergency? Does anyone have a dollar
amount that you would prefer?
[Pause.]
Senator Lankford. I am going to take that as a ``no'' then
from the panel. Panel, thank you very much for contributing on
this.
Mr. Chairman, I will give you 18 seconds back.
The Chairman. Thank you for your thoughtfulness, Senator
Lankford.
Senator Casey?
Senator Casey. Thank you, Mr. Chairman, and thanks for this
hearing.
I am going to direct my questions to Professor Brown. I
hope she does not mind that I will have all my questions for
her. But we are grateful for her scholarship and grateful for
the new book that she has in the works that is being done on
the issues we are talking about today.
I wanted to start with, maybe, at least two questions about
data, and then also a question about child care.
Professor Brown, your significant research regarding
identifying these racial disparities in the tax code is
critically important. Can you discuss the types of data you
wish the IRS collected that would help with this research and
how you worked around the limitations of not having it
collected?
Ms. Brown. Yes. I would like to see the specifics of income
data talked about by race: what percentage of taxpayers have
this exclusion; what percentage of taxpayers benefit from that
deduction. So I would basically like all the 1040 information
for individuals to give race, as it were, to tell us what
percentage take advantage of which tax breaks.
And what I had to do was look at other data sets. So there
was a question earlier that talked about what percentage of
Medicaid recipients were black. Well, why do we know that?
Because some government agency publishes it. The IRS needs to
publish tax data as well. So I worked around it by looking at
different disciplines, and getting proxies. The Census Bureau
has proxies for tax return data.
Senator Casey. And like anything else--I do not know who
said this--but the old expression is, what gets measured gets
managed.
Ms. Brown. Right.
Senator Casey. We have gone too long, obviously, without
data. And any changes with respect to tax data will of course
take some time. I just wanted to ask you this question about
data.
In your view, is it possible for Treasury and IRS to
undertake gender and racial impact analysis by adding or
inputting statistical data?
Ms. Brown. So first of all, the IRS has published gender
and age studies already. They have done the work with respect
to gender. I certainly think there is the capacity--not
capacity in terms of people who can do it, but the agency
should be able, Treasury, IRS, should be able to get this done.
Senator Casey. And do you think that that could be
included, that statistical data could be included with a
reasonable degree of certainty as a part of the policy
analysis?
Ms. Brown. I do. I absolutely do.
Senator Casey. I want to ask you as well about child care.
We know how critical it is, not only in the midst of a
pandemic, but child care is essential to our national economic
infrastructure. It is especially critical now for working
families.
We have made tremendous progress in ensuring that all
families that are eligible can benefit from the Child and
Dependent Care Tax Credit through the Rescue Plan. As Senator
Brown mentioned, the great advancement in expanding the Child
Tax Credit that he worked so hard on with the chairman and
others, but also the great expansion of the Child and Dependent
Care Tax Credit, is something so many of us have been pushing
for years.
This credit is now fully refundable. Parents can get up to
half of the cost of child care. According to the National
Academies of Science, these improvements, making the tax
credits fully refundable, both the Child Credit as well as the
Child and Dependent Care Credit, can reduce child poverty
tremendously, by half or more, if you include both of them. And
that increases earnings and employment. And I think especially,
and just proportionately, this will help African American
families.
In your view, what are some of the most important
investments that we can make through harnessing the tax code to
support economic security?
Ms. Brown. So, when I think about--well, first I would say,
tax income from capital at the same rate as income from wages.
So there is no reason to prefer capital to labor. The tax
breaks--or put a different way, why should workers not have the
choice to pay the low preferential rate because they earn
income as opposed to having their money work for them? So that
is one of my big-picture suggestions.
Senator Casey. Thanks very much, Professor, I appreciate
it.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Next will be Senator Daines.
Senator Daines. Thank you, Mr. Chairman. And I would like
to join my colleagues in highlighting some of the changes we
made in the tax code in 2017 that helped address inequality and
disparities. In fact, we lowered rates across the board,
doubled the standard deduction, doubled the Child Tax Credit,
capped the SALT deduction, capped the mortgage interest
deduction, and much more. And we know these policies worked
because we saw those results in that pre-pandemic economy.
In fact, if you look past 2017 at just before we hit the
pandemic, we saw record-low unemployment rates for African
American workers, Hispanic workers. Labor force participation
was growing. Poverty rates hit an all-time low. Incomes were
going up for all workers, but they were growing faster for
workers at the bottom of the income scale. And to return to
that robust economy, we do not need to increase taxes across
the board. We need to build on some of the gains that we made
with the Tax Cuts and Jobs Act.
Turning to my questions, I have always been concerned with
how the tax code looks for Main Street businesses. And that is
why that 20-percent deduction we had for pass-throughs, like
sole proprietorships, partnerships, LLCs, was such a critical
part of tax reform.
And that is why I introduced the Main Street Tax Certainty
Act with Senators Cassidy, Scott, and Portman, to make that
section 199A, that 20-percent tax deduction for the pass-
through businesses, permanent. Identical legislation was
introduced in the House on a bipartisan basis.
My question for Mr. Hawkins: you mentioned in your
testimony that minority-owned businesses are more likely to be
organized as a pass-through entity versus a C corp. Is it safe
to say that making the 199A 20-percent tax deduction permanent
will help minority entrepreneurs and help grow our economy?
Mr. Hawkins. Absolutely, Senator. When you look at the
structure of most minority small businesses, they are going to
be sole proprietorships, typically partnerships or LLCs. And so
the legislation that you introduced to make that 20-percent
deduction permanent will have a strong targeted effect on
benefiting minority small business owners.
One good example--one good example that I am very proud of
in my home town of Cleveland, OH, there is a minority- and
veteran-owned small business, Bridgeport Group. They take
advantage of that 20-percent deduction. And they are also using
Opportunity Zones to expand their supply chain logistics
business to serve Cleveland's world-class health-care market.
And so, I come in contact with minority business owners who
have a direct benefit from that, from that deduction, and I am
excited to see the bipartisan support that we saw with the
introduction on the House side, and----
Senator Daines. Mr. Hawkins, let me follow that up. The
Cleveland example is a great example. So is it safe to say then
that it would help minority entrepreneurs if we made the
deduction permanent? Would it also hurt them if it were to be
scaled back or eliminated, as the Biden administration and
certain members on the other side of the aisle have proposed?
Mr. Hawkins. Absolutely. You know, like I said, the
president of the Bridgeport Group, Andre Bryan, is an example
of someone who will be harmed if we roll it back.
Senator Daines. Thank you.
Professor Brown, some of my colleagues on the other side of
the aisle think that Congress should eliminate the $10,000 cap
on the State and local tax deduction that was put in place by
the Tax Cuts and Jobs Act.
Given that 96 percent of the benefits from eliminating the
SALT cap would go to the top quintile, with 57 percent going to
the top 1 percent, do you agree that eliminating the cap on
this deduction would be bad policy?
Ms. Brown. I believe all itemized deductions should go,
including the State and local tax. So I believe the mortgage
interest deduction should go, the State and local taxes should
go.
Senator Daines. So you would support eliminating that
provision made there on SALT that would actually go--57 percent
going to the top 1 percent?
Ms. Brown. No, no. I do not want any taxpayer to be allowed
to itemize deductions, given that only 10 percent of Americans
do it. So I think you and I are saying the same thing----
Senator Daines. Okay; you want to eliminate all deductions.
You want to keep the SALT cap. Okay; got it.
On marginal tax rates, there is a long history of
bipartisan--I see I am out of time here, so I am going to--out
of respect for the chairman managing the hearing here, I will
end there.
So thanks, Mr. Chairman.
The Chairman. Thank you, Senator Daines.
Senator Grassley is next, followed by Senator Cantwell.
Senator Grassley. Thank you, Mr. Chairman, and I have a
question, to start out with, for Professor Brown.
I appreciate your candor that you had with Senator Cassidy
on your opposition to eliminating the $10,000 SALT deduction
cap. It is clear that repealing that cap would overwhelmingly
benefit the wealthy. In fact, according to the nonpartisan
Joint Committee on Taxation, over half of the benefit from
repeal would go to taxpayers with income exceeding $1 million.
So the question is kind of like this: would you have
similar concerns that you expressed to Senator Cassidy about
SALT, about tax subsidies for high-end car ownership? I will
give you an example: the $7,500 Federal tax credit for the
purchase of expensive electric vehicles, given that such a
subsidy would benefit the wealthy, because Americans often
drive such cars as a status symbol.
Ms. Brown. So I have not studied it, but my gut says I
would not support that.
Senator Grassley. Well, thank you for that.
For Mr. Hawkins: the Tax Cuts and Jobs Act provided
significant tax benefits to low- to moderate-income families.
It also focused on pro-growth policies, leading to an increase
in investment and higher productivity, rising wages. There is
ample evidence that prior to the pandemic it was working: the
best economy in 50 years. In fact, wage growth was strongest
for low-income, low-wage workers.
As a result, the Federal Reserve survey of consumer finance
income inequality declined between 2016 and 2019. Lower-income
Americans also saw similar gains in wealth as they did in
income. Moreover, black and Hispanic families experienced some
of the largest wealth gains. Median net worth rose 33 percent
for black families, 65 percent for Hispanic families, compared
with a 3-percent gain for white families.
Mr. Hawkins, do you agree that pro-growth tax policies are
essential if our goal is to improve the well-being of low-
income Americans and reduce economic disparity?
Mr. Hawkins. Absolutely, Senator Grassley. When you are
looking at what happened from the Tax Cuts and Jobs Act, what
you saw was a bill that ignited the economy. And as that
economy heated up, the labor market tightened. And as the labor
market tightened, you saw rising wages on the lower end of the
income scale.
And again, as you mentioned, there was record employment
again for the black community, record employment for the
Hispanic, Asian community, record employment for women. And so
that is really the key: to ignite the economy, tighten the
labor market, and get wages rising.
Senator Grassley. I do not know whether I am running out of
time, but this is my last question. This is for Professor
Desai.
The tax code includes several tax benefits targeted at low-
income households. This includes refundable credits such as the
Earned Income Tax Credit and the Child Tax Credit. But
according to the Congressional Budget Office, low- and
moderate-income workers can experience exceedingly high
marginal effective tax rates as the benefits phase out,
regardless of their positive purpose.
These marginal effective rates can exceed the top statutory
tax rate of 37 percent, and in some cases exceed 100 percent.
So to you, Professor, how would you expect these high marginal
tax rates to effect low-income individuals who may be
considering working more hours, or increasing their earning
potential through education?
Dr. Desai. Yes, exactly, Senator Grassley. You are right
that the phase-outs associated with some of those credits do
become manifest in higher marginal tax rates as individuals
move up the income spectrum. And that is a problem.
Having said that, it is also the case they are a natural
part of any phase-out. And in fact, any effort to use credits
in the ways that I think they should be used will feature this.
So to ameliorate it, one would want to think a little bit about
using maybe demi-grants a little bit more, and also making the
phase-out a little less, both of which could remedy the
problems associated with higher marginal tax rates.
Senator Grassley. Thank you, Mr. Chairman. Thank you,
Professor.
The Chairman. Thank you, Senator Grassley.
Senator Cantwell is next.
Senator Cantwell. Thank you, Mr. Chairman. Thanks for
holding this important hearing, and thanks to all the
witnesses.
I want to look at the question a little differently on the
issue of just access to capital. Last year, startups raised 13
percent more from venture capitalists than they did the
previous year, so that total was $150 billion. And yet we know
that the share of money going to women and minority businesses
is just a pittance.
We know that 2.2 percent of all venture capital raised in
2020 went to women-funded companies, and just 1 percent--1
percent--went to investment in tech startups going to black
entrepreneurs.
So we know this is a problem, and we know we need to do
something about it. In Washington, we see this disparity, with
just 35 percent of all small businesses owned by women and just
3 percent black-owned, according to our recent analysis in our
area.
But the question becomes a priority of--I know the Black
Founders Matter Fund is trying to take this issue head-on. This
is an organization that is trying to support entrepreneurship
out of black-owned businesses.
So what I think--Ms. Rao, what do we need to do for venture
capital to play a bigger role in building wealth in these
communities, and diversity? And what has been your experience
in trying to raise venture capital funds?
Ms. Rao. Thank you so much, Senator.
So first off, I really want to reiterate what you just
said, which is that there is an extreme disparity when it comes
to founders being able to raise capital. I think that we can
all point to outliers of people who are well-known and
nationally recognized, like Nancy Pelosi and Barak Obama, or
even Beyonce, who could start a company and raise money within
minutes, but that is not the experience that average people of
color or women receive when they are going about starting out.
A perfect example of that actually is Jewel Burks, who had
an amazing acquisition by Amazon. We interviewed her, and she
said that in her first raise she went for over a year trying to
raise that capital. And it was a successful acquisition in the
end, but as you can see, there are different barriers that
women of color, women founders in general have to face when
they are doing pitches in front of investors. And that is
because there is a lack of representation, and there is
absolutely a homogeneous groupthink process.
So in order for venture capital to be able to actively
participate in creating a more equitable society, there are a
couple of things that need to happen. One is a reeducation of
investors in understanding how to evaluate different subsets of
founders. I think that that educational piece is critical to
being able to promote equity.
The second piece is inclusion of tax incentives as well as
other programs and scholarships to be able to allow different
types of people to be at the decision-making table. Because we
all have our own implicit biases, and we can course-correct
that with education, as well as understanding how to invest in
different types of companies. The traditional venture
capitalist is investing in B2B SaaS, but how do we invest in
other types of businesses that may be
minority- and women-owned businesses?
And so how can we adequately be able to invest in the
different types of businesses is one. But, two, having
different types of people who represent different lived
experiences at the decision-
making table is fundamentally one of the best ways to be able
to create equity in this space. That is something that
Professor Brown mentioned. We do not have the same level of
access to education and resources, and even when we do, we do
not have the same level of decision-making power and are
impacted in different ways.
Senator Cantwell. Well, I see my time is almost expired, so
I would love it if you could send me some recommendations as it
relates to tax policy incentives that you think would help in
this particular area.
But, Mr. Chairman, this is such an important time period
for this discussion, because we know, even from the SBA, that
people were getting left out--businesses were not getting the
same access to capital from our traditional sources. So these
private-sector sources also are problems. So I hope we can look
at incentives.
Thank you very much.
The Chairman. A very important point, Senator Cantwell.
Next in order would be Senator Thune and Senator
Whitehouse.
Senator Thune. Thank you, Mr. Chairman, and thank you for
having this hearing. And I want to thank all our panelists for
being here today.
If I might just start by pointing out that some of the
progress that we have made since passage of the 2017 tax law, I
think illustrates that if you provide incentives, the right
incentives, people invest and you get growth in the economy.
You get better-paying jobs and higher wages, which is exactly
what has happened.
And you know, a number of the changes that we made in the
tax code in the 2017 act were very progressive. We lowered tax
rates, expanded tax brackets, doubled the standard deduction,
expanded the Child Tax Credit. And if you look at the results
of what has happened since, we have had the lowest overall
unemployment rate in more than 50 years. This is pre-pandemic,
February 2020: 3\1/2\ percent, record low unemployment rates
for blacks, for African American workers, and for Hispanic
workers, and robust job growth.
And in fact, if you look at where a lot of the income
growth has occurred, it has benefited lower-income workers the
most. In fact, some pretty remarkable statistics. The income
growth in 2019 was the most broad-based ever recorded in a
single year. And the poverty rate fell the most in half a
century.
So, in terms of what we are doing, I do not think we ought
to be radically changing. In fact, I think that what we were
doing was working pretty well. And that is why I think, as we
talk about these issues at a hearing like this, trying to
figure out how we address income inequality, I think we need to
remember that the best way to do that is to get growth in the
economy.
When the economy is expanding and growing, it is creating
those better-paying jobs and raising wages for American
workers.
So let me just, if I might, ask Mr. Hawkins and Professor
Desai, can you discuss how the economic growth from the Tax
Cuts and Jobs Act expanded opportunities for America's lowest-
income workers? And to best protect these gains, are there
particular tax proposals that you think would be
counterproductive to low-income workers?
Mr. Hawkins. So, Senator, I see the gains from the Tax Cuts
and Jobs Act for lower-income workers coming in three forms.
Number one is in higher employment among folks on those levels.
And so, second you are going to see higher wages amongst folks
on the lowest levels. And third, you are going to see lower
poverty amongst folks on the lowest income levels. And so,
those three things coming together, really spoke to a lot of
what you guys set out to accomplish with the Tax Cuts and Jobs
Act.
And so, in terms of counterproductive measures, obviously
raising the corporate rate will be counterproductive because
corporations do not pay the taxes. They just pass those taxes
on to workers in the form of fewer job opportunities, on to
shareholders, and then finally on to consumers.
To raise the corporate rate will be counterproductive.
Eliminating the 20-percent deduction for pass-through entities
again will be particularly damaging to minority business
owners, small business owners, because a disproportionate
amount of their businesses are going to be pass-throughs--as
opposed to corporations--sole proprietorships, LLCs, and
partnerships.
Dr. Desai. I would just add a couple of things to that
commentary by Mr. Hawkins. First, I think if one is interested
in the bottom quintiles of the population, the most direct ways
to assist them include expanding the Earned Income Tax Credit,
the Child Tax Credit--some of the ideas that I have bounced
around in my written testimony.
I think, to reiterate what Mr. Hawkins said, I think it
would be useful to be careful about heavily raising taxes on
corporations, and in particular on their global activities. I
think the notion that somehow there are a lot of revenues to be
gained, easy money to be gained by changing corporate rates, I
think is not well-founded and, moreover, it will not redown to
the benefit of American workers because we know that when
corporations, the American corporations succeed around the
world, they succeed at home.
So I think we need to kind of get away from the idea that
somehow corporations are the ones who are not necessarily
carrying their fair share. I think that whole way of thinking
about the world, as Mr. Hawkins alluded to, does not actually
reflect the fact that more than half the corporate tax is borne
by workers rather than capital.
Senator Thune. Thank you.
The Chairman. Thank you, Senator Thune. We have had
Senators going back and forth. At this time, let's let Senator
Whitehouse go and then Senator Bennet. Is that acceptable to
you, Senator Bennet?
Senator Bennet. Sure; thanks, Mr. Chairman.
The Chairman. Okay. Senator Whitehouse then Senator Bennet.
Senator Whitehouse?
Senator Whitehouse. Thanks, Mr. Chairman. I appreciate this
hearing, and I just wanted to flag the problems of tax
spending. A couple of things about it.
First, it is big. The IRS collects about $3.5 trillion in
income and payroll taxes each year. And the Joint Committee on
Taxation, using CRS numbers--actually, sorry, vice versa--CRS
using JCT numbers estimates the tax expenditures for 2021 would
cost $1.53 trillion. So there is a lot of money going out the
back door of the tax code. It is big.
It is also lasting. If you come in and get an
appropriation, once the appropriation is spent down, you are
all done. You have to come back and get another. But if you can
bake something into the tax code, it is there for you and for
your interests forever.
So it is big, and it is lasting, and it also, I believe,
tends to be regressive. As Professor Brown has pointed out, tax
expenditures tend to disproportionately benefit the very
wealthy, allowing those who have access to high-priced tax
attorneys to choose if and when they pay taxes. And of course
you have to be making a lot of money to make it worth your
while to spend money on tax savings.
In that regard, Ms. Brown, I wonder if you could offer a
brief comment on the extent to which Opportunity Zones run
counter to that tax spending problem of being big, lasting, and
regressive, or whether they masqueraded yet another tax
giveaway to wealthy investors.
Ms. Brown. So I think Opportunity Zones do make a giveaway
to wealthy white investors, under the guise of helping
distressed communities. And I think you can find an anecdote or
two where you can say, ``It worked here,'' but there are other
anecdotes that show wealthy investors have influenced which
areas were even named as Opportunity Zones, and they were not
necessarily distressed communities, the way the statute perhaps
should have been written if they were actually interested in
holding people's feet to the fire.
So I think there is a lot of leeway in Opportunity Zones
that make them not as helpful in distressed communities.
Senator Whitehouse. Thank you.
So again, back to tax spending; it is big, it is lasting,
it is regressive. Opportunity Zones probably did not help. And
some of it is foreign.
Ms. Rao, you support small businesses. The Ugland House is
a small five-story building in the Cayman Islands that is home
to well over 18,000 corporate, quote, ``headquarters,'' and
nearly half of them were determined by the GAO to have U.S.
billing addresses.
So when you are talking about small businesses, and you
have 9,000 of them in one little building, that is not exactly,
Ms. Rao, what you have in mind when you are thinking of helping
small businesses get started, is it?
Ms. Rao. No. Thank you so much, Senator. So, while I know
that that exists, actually the founders that I work with in
early stage, especially primarily BIPOC founders, are not
necessarily those who have access to capital. And certainly as
you pointed out, it takes a lot of money to pay those high-
priced lawyers.
Actually, the capital that is used in these rising founders
is used in the talent acquisition race. So a lot of issues that
Founders have in their development of their venture is this
idea that they cannot access great talent. And so they are
utilizing the capital that they receive to be able to work on
their business and to actually scale and grow and be able to
create that differentiation mode.
Senator Whitehouse. So the last question: what income
demographic do you think it is that is taking advantage of
Ugland House and other offshore refuges to avoid paying taxes?
Ms. Rao. I would surmise that it would likely be those, as
Professor Brown suggests, that are already benefiting from the
tax process that they are in.
Senator Whitehouse. Stands to reason. I yield back my time.
Thank you, very much.
The Chairman. Thank you, Senator Whitehouse.
Senator Bennet?
Senator Bennet. Thank you, Mr. Chairman. Can you hear me?
The Chairman. Yes, perfectly.
Senator Bennet. Great. Thank you to the witnesses. I am
very, very grateful that all of you are here today on this
important topic.
The United States has one of the lowest rates of economic
mobility and highest rates of childhood poverty in the
industrialized world. And childhood poverty is
disproportionately experienced by children of color. In 2019,
black and Hispanic children were about three times as likely to
be living in poverty as white children.
Professor Brown, as Superintendent of Denver Public
Schools, I witnessed firsthand the effects growing up poor can
have on a child's development and opportunity for success later
in life.
For those reasons, I wrote the America's Family Act, along
with my colleague Senator Sherrod Brown, and have been pushing
to expand the Child Tax Credit to make it fully refundable for
many years. And I am very pleased that we just passed this
expansion of this part of the American Rescue Plan that will
cut childhood poverty in this country by almost half this year.
Ninety percent of children will benefit from the expanded CTC,
but it will have disproportionately large effects on children
of color, reducing poverty for black children by more than 50
percent, for Hispanic children by nearly the same, and for
Native American children by more than 60 percent.
Professor Brown, I would like to hear your thoughts on the
importance of the expanded Child Tax Credit and how this part
of the American Rescue Plan will make our tax code more
equitable for families of color.
Ms. Brown. That was a sea change. Being able to have low-
income families get fully funded Child Tax Credits was a
significant advancement in the legislature. And I can just--
because I have written about this--I can just think about the
decades where that was not true.
So when we talk about statistics about single families in
poverty, part of why that existed was because before now,
Congress had not allowed Earned Income Tax Credit families to
be fully seeing the benefit of a Child Tax Credit for each of
their children.
Senator Bennet. And I assume that you think it would be
helpful if we could find a way to make this permanent?
Ms. Brown. You are correct. Yes.
Senator Bennet. Thank you; I appreciate that.
And, Dr. Desai, the American Rescue Plan also temporarily
tripled the Earned Income Tax Credit, which you have been
talking about today, for low-paid workers without dependent
children in their home. This change will boost incomes for an
estimated 17 million workers, workers who disproportionately
come from communities of color and are in the early years of
their careers.
How will the EITC expansion promote racial equity and
financial opportunity for young workers? And do you believe
that making this 1-year EITC expansion permanent would help our
tax code better promote racial equity for workers?
Dr. Desai. Thanks, Senator Bennet. Yes, I think the
expansion of the EITC was a wonderful move. I think we could do
more. I think we could make it bigger. I think we could expand
it to the childless. And I think we could make it permanent.
And I think that is the way forward on this general agenda.
I think in particular, as I lay out in my testimony,
thinking about the exclusion of capital gains on primary
residences or retirement buildup, I do not think is as
effective as being laser-focused. And I think this is precisely
why this hearing is so important, because it might reorient our
attention towards these kinds of questions like the Child Tax
Credit. Those are where we have the potential for the greatest
gains for the bottom quintile.
Senator Bennet. I really appreciate that testimony. Mr.
Chairman, I have no idea whether I am out of time or not.
The Chairman. My colleague has a minute left.
Senator Bennet. Okay; I have one last question. Data from
the Small Business Association indicates that people of color
are significantly less likely to own a business than white
individuals in the U.S. Among those who do, more than 90
percent of all black- and Hispanic-owned businesses are owner-
only firms. And owner-only firms tend to have significantly
smaller profits than larger firms with multiple employees on
the payroll.
Do you think the tax code should provide a level playing
field for small minority-owned businesses which already face
greater challenges in securing capital than white-owned
businesses? According to the Joint Committee on Taxation, the
design of the pass-through deduction in the 2017 Tax Cuts and
Jobs Act means the smallest businesses will receive the
smallest benefit.
Professor Brown, do you believe the pass-through deduction
in the 2017 tax law was well-designed to help small minority-
owned businesses succeed compared to their larger, often white-
owned competitors?
Ms. Brown. No, I do not.
Senator Bennet. Thank you, Mr. Chairman. I yield back.
The Chairman. I thank my colleague.
Senator Warren?
Senator Warren. Thank you, Mr. Chairman.
So, nearly every component of tax law has a racial equity
impact, but it is not just about what tax laws are on the
books. It is also about how they're enforced.
So last week, the IRS Commissioner told this committee that
the tax gap--the amount of taxes owed but not paid--could
exceed a trillion dollars every year. The top 1 percent of
Americans account for more than a third, and potentially as
much as 70 percent, of the taxes owed but not paid.
But the IRS's efforts to enforce our tax laws, including
these audits conducted to check whether or not a taxpayer is
following the law, don't focus on these wealthy taxpayers. In
2019, low-income families claiming the Earned Income Tax Credit
made up nearly 40 percent of all IRS audits.
So, Ms. Brown, we audit a lot of lower-income taxpayers,
rather than focusing on the wealthiest people. What does that
mean for the racial impact of our tax enforcement strategy?
Ms. Brown. It means that it is being borne on the backs of
black Americans and not where the true gap is, with higher-
income white Americans who have access to tax attorneys who
apparently the IRS would prefer not to push back against. So
they go after low-income EITC claimants who do not have access
to tax attorneys to push back. It is very unfair.
Senator Warren. That is right. And, Professor Brown, am I
right that you have looked at what the most-audited counties in
America are?
Ms. Brown. Well, ProPublica did research on that, and of
course I am familiar with that, yes. And they are in rural
black communities in the south. And in the south--there is a
disproportionate number of black Americans living in the south.
So they have been black Americans in the south who filed
the EITC who have been targeted, when research shows over 50
percent of EITC claimants are white.
Senator Warren. Thank you. I appreciate it, Professor
Brown. As your research shows, one reason why is implicit bias:
politicians and bureaucrats embracing harmful stereotypes about
black Americans that can lead them to single out EITC
recipients.
But there is another piece here too. After years of
Republican budget cuts, the IRS targets the people who are the
cheapest to audit. And that is low-income taxpayers, many of
them people of color. It is cheap and easy for the IRS to blast
out letters to intimidate EITC recipients, but rich people use
complicated tricks to evade taxes. So those investigations
require time and money and expertise, things that the IRS is
short on.
In fact, a recent report from the Treasury Inspector
General found that the IRS is not even working on the cases of
the highest-income taxpayers who do not file taxes at all, but
who collectively owe more than $45 billion.
So, Professor Brown, if we gave the IRS a big pot of money
and mandated that the IRS spend it on auditing the wealthiest
taxpayers and the biggest corporations--targets where we know
there is a huge amount of money going uncollected--could that
help reduce the racial disparities in the tax system?
Ms. Brown. Absolutely. Absolutely. It would make who pays
taxes a lot fairer.
Senator Warren. Good. So, thank you. You know, there is a
lot we need to do to make our tax system less racist. And one
easy place to start is by making sure that the IRS has the
resources and clear direction to go after the biggest tax
cheats.
I am really glad that Commissioner Rettig supports the bill
that I am working on to provide a new targeted mandatory
funding stream for the IRS so that the agency has a
predictable, sustained, and protected pot of funds dedicated to
ensuring that the wealthy and the big corporations are paying
their fair share. It would give us a better, stronger, and more
equitable tax system for all Americans. Thank you, Mr.
Chairman.
The Chairman. I thank my colleague. Are there any other
Senators who would like to ask any questions?
[No response.]
The Chairman. Okay, hearing none, let me just check. Are we
sure that there are no other Senators who have questions? Okay.
Let me close by saying that today's hearing is the first
hearing of the Senate Finance Committee to look at racial,
ethnic, and gender disparities under the tax code in decades,
if not the first-ever hearing on this critically important
issue.
And it seems to me some important ideas are reflective of
witnesses of differing views coming together. For example,
after this massive cut in tax enforcement in the last decade, I
have heard witness after witness saying you have to beef it up.
And one of the reasons that I asked the IRS Commissioner last
week about the tax gap is that I knew that it was far bigger
than what was actually a matter of official records, and I knew
that the central problem was that too many cheats were getting
away with it without any consequences when they chose to ignore
the law.
So I am going to close by touching on a point that
Professor Brown made hours ago when she said that you have to
be a detective to find data about these critical issues that we
have been talking about. I believe it is long past time to make
it easier to obtain the key tax data that will illuminate the
injustices in our tax laws. I believe this could be done in a
manner that protects the confidentiality and privacy of all
taxpayers, and I am going to be asking Senators on this
committee to work with me to implement this long-overdue and
essential transparency reform.
With that, I want to thank all our witnesses again. Ms.
Rao, you reflected very well on our State this morning.
And with that, the Senate Finance Committee is adjourned.
[Whereupon, at 12:03 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Dorothy A. Brown, Asa Griggs Candler
Professor of Law, School of Law, Emory University
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for inviting me to share these views on how our tax system
perpetuates racial inequality.
In my testimony today, I will discuss three ways that tax policies
are more likely to provide tax breaks for white Americans than black
Americans. The first looks at the tax breaks for marriage. The second
looks at tax breaks for sales of homes. The third looks at tax breaks
for employer provided retirement accounts. But if there is one thing
that I hope you remember from what I will be sharing with you today it
is that racial inequality is baked into how our tax laws operate.
My book The Whiteness of Wealth: How the Tax System Impoverishes
Black Americans--And How We Can Fix It,\1\ reveals how when black
Americans engage in the same activity like marriage, home ownership, or
work, our Federal income tax policies advantage how white Americans
engage in the activity while at the same time disadvantaging how black
Americans engage in the activity. As a result, tax policy causes black
Americans to pay higher taxes than their white peers. The book builds
upon my prior research.\2\
---------------------------------------------------------------------------
\1\ Dorothy A. Brown, The Whiteness of Wealth: How the Tax System
Impoverishes Black Americans--And How We Can Fix It (Crown Publishing
Co. 2021).
\2\ Dorothy A. Brown, ``The Marriage Bonus/Penalty in Black and
White,'' in Taxing America, edited by Karen B. Brown and Mary Louise
Fellows (NYU Press 1996); ``Race, Class and Gender Essentialism in Tax
Literature: The Joint Return,'' 54 Washington and Lee L. Rev. 1469
(1997); ``Pensions, Risk, and Race,'' 61 Washington and Lee L. Rev.
1501 (2004); ``The Tax Treatment of Children: Separate But Unequal,''
54 Emory L. J. 755 (2005); ``Race and Class Matters in Tax Policy,''
107 Columbia Law Review 790 (2007); ``Pensions and Risk Aversion: The
Influence of Race, Ethnicity, and Class on Investor Behavior,'' 11
Lewis and Clark L. Rev. 385 (2007); ``Shades of the American Dream,''
87 Wash. U. L. Rev. 329 (2009); ``Teaching Civil Rights Through The
Basic Tax Course,'' 54 St. Louis University L. J. 809 (2010); and
``Home Ownership in Black and White: The Role of Tax Policy in
Increasing Housing Inequity,'' 49 Memphis L. Rev. 205 (2018).
What my research has revealed is that because systemic racism is
very real, all American taxpayers bring our racial identities onto our
tax returns. Understanding how this happens is made more complicated
because the Internal Revenue Service does not publish statistics by
race, even though it has by gender and age.\3\ The Federal Government
publishes a treasure trove of statistics by race--but not when it comes
to our taxes. That single choice meant that my research might never
have happened had I not become a detective of sorts looking for proxy
data by race that might inform my tax analysis.
---------------------------------------------------------------------------
\3\ Jeremy Bearer-Friend, ``Should the IRS Know Your Race? The
Challenge of Colorblind Tax Data,'' 73 Tax Law Review 1 (2019), https:/
/papers.ssrn.com/sol3/papers.cfm?abstract_id=3231
315.
My research shows that history plays a part here as many of our
current tax provisions date back to a time when separate but equal was
the law of the land, specifically before Brown v. Board of Education
\4\ was decided and before the 1964 Civil Rights Act, the 1965 Voting
Rights Act, and the 1968 Fair Housing Act became law. We should not be
surprised then that our tax policies were created to benefit white
Americans. Another part of how we got here can be explained by the
reality that although legal Jim Crow has been overturned, we live in a
society where race unfortunately still matters. Data from the 2019
Survey of Consumer Finances show that white families have eight times
the wealth of black families.\5\ In 21st-century America, systemic
racism impacts virtually every societal function--including how much we
pay in taxes.
---------------------------------------------------------------------------
\4\ 347 U.S. 483 (1954).
\5\ Neil Bhutta, Andrew C. Chang, Lisa J. Dettling, and Joanne W.
Hsu with assistance from Julia Hewitt, ``Disparities in Wealth by Race
and Ethnicity in the 2019 Survey of Consumer Finances,'' Sept. 28,
2020, https://www.federalreserve.gov/econres/notes/feds-notes/
disparities-in-wealth-by-race-and-ethnicity-in-the- 2019-survey-of-
consumer-finances-20200928.htm.
Tax policies around marriage are more likely to benefit white
---------------------------------------------------------------------------
married couples.
Our joint return operates in such a way that certain marriages get
a tax cut called a marriage bonus, others pay higher taxes called a
marriage penalty and a small percentage see no change in their taxes.
Marriage bonus couples are those where one spouse earns roughly all of
the income while the other is a stay-at-home spouse and works in the
home. Marriage penalty couples are those like my parents--my mother was
a nurse and my father was a plumber--and each worked full-time and
contributed about 50 percent to household income. Census Bureau data I
analyzed show that white married couples were more likely to get a
marriage bonus, while black married couples were more likely to pay a
marriage penalty. But there has always been a certain minority of white
married couples whose marriages look like most black marriages and
therefore pay higher taxes when they marry.
What we know of as the joint return did not exist at the beginning
of our progressive tax system because taxpayers were taxed on their
income as individuals. But in 1927, a rich, white couple Charlotte and
Henry Seaborn along with their lawyers took matters into their own
hands effectively creating a joint tax return for themselves. Henry
shifted half of his income to Charlotte which lowered the overall taxes
they paid. The Internal Revenue Service objected, but the Seaborns took
their case to the Supreme Court which rewarded their self-help with a
win.\6\ That led eventually to Congress creating a joint return in
1948. But even in 1948 a higher percentage of black wives worked
outside of the home than white wives which meant it was entirely
predictable that the joint return would lead to lower taxes for more
married white couples than married black couples.\7\ It is referred to
as equitable when we tax two households with $100,000 of income the
same whether that is the result of two wage earners or one. Systemic
racism in the labor market however means that it often takes two
married black workers to equal one single wage earner. Those households
should not pay the same amount in taxes in a progressive tax system.
---------------------------------------------------------------------------
\6\ Poe v. Seaborn, 282 U.S. 101 (1930).
\7\ Claudia Goldin, ``Female Labor Participation: The Origin of
Black and White Differences, 1870 and 1880,'' 37 Journal of Economic
History, 87-108 (1977).
While the Tax Cuts and Jobs Act temporarily eliminated marriage
penalties for many,\8\ the marriage bonus remains in our tax code today
and continues to disadvantage married black couples. My solution: a
return to individual filing like at the beginning of our modern
progressive tax system.\9\ Not only will it help dual wage earner
couples, but it will also help America's singles as well.
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\8\ Marriage penalties still exist for married couples eligible for
the Earned Income Tax Credit and for high-income households, where
black couples are still more likely than white couples to pay a
marriage penalty.
\9\ Anthony C. Infanti, ``Decentralizing Family: An Inclusive
Proposal for Individual Tax Filing in the United States,'' 2010 Utah
Law Rev. 605 (2010), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1503543.
Hidden within the marriage bonus/penalty discussion is the single's
penalty. A single taxpayer that makes $100,000 of income will pay more
taxes than a married single wage earner couple with $100,000 of income.
According to the 2019 Census Bureau, 56 percent of white Americans are
married, compared with almost 38 percent of black Americans. Most black
Americans are single along with a significant percent of white
Americans. Single Americans are a growing demographic in this country
---------------------------------------------------------------------------
and a return to individual filing will also help them.
Tax subsidies for home ownership are more likely to benefit white
homeowners.
The second area that I want to touch upon are tax subsidies for
home ownership. The majority of white Americans are homeowners while
the majority of black Americans are renters. According to the Census
Bureau in the Fourth Quarter of 2020, the highest rate of home
ownership was for white Americans at 74.5 percent and the lowest rate
was for black Americans at 44.1 percent. As a result, all tax subsidies
for home ownership will disproportionately benefit white Americans the
most and black Americans the least. Home ownership has been
historically and remains an asset tied to racial identity. Recent data
show that roughly 1 in 10 Americans itemize deductions and those are
disproportionately Americans with higher incomes.\10\ The mortgage
interest deduction, which can only be taken if a taxpayer itemizes
their deductions, is becoming increasingly irrelevant to most
homeowners.
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\10\ Tax Policy Center Analysis of 2018 Tax Return Data, https://
www.taxpolicycenter.org/model-estimates/impact-itemized-deductions-tax-
cuts-and-jobs-act-jan-2018/t18-0001-impact-number.
There are other tax subsidies for home ownership however, that
includes the tax treatment when we sell a home at a gain. Gains on
sales of homes can escape taxation for up to $500,000 if the taxpayer
is married or $250,000 if the taxpayer is single.\11\ Losses on the
sale of homes on the other hand are not deductible.\12\ The special tax
treatment for gain dates back to 1951. By 1950, 55 percent of white
Americans had become homeowners--just a decade earlier only 44 percent
of white Americans were homeowners. That explosive white home ownership
growth was aided by low-cost, long-term, fixed interest rate mortgages
insured by the Federal Government that largely excluded black
Americans.\13\ From its origins, the tax break for gain on home sales
was designed to benefit white homeowners.
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\11\ Internal Revenue Code section 121.
\12\ Internal Revenue Code section 165(c)(3).
\13\ Richard Rothstein, ``The Color of Law: A Forgotten History of
How Our Government Segregated America'' (Liveright Publishing Co.,
2017).
Established research shows us that the greatest appreciation in our
homes comes when we live in neighborhoods which are overwhelmingly
white with very few black neighbors.\14\ As the percentage of black
homeowners in the neighborhood increases, the value of the homes
decrease particularly because white home buyer preferences, as the
majority of home buyers, help establish the market prices. While most
white homeowners live in neighborhoods with very few black neighbors,
the majority of black homeowners live in racially diverse or all black
neighborhoods with many black neighbors. As a result, white homeowners
but not most black homeowners are more likely to sell at a large tax-
free gain. Research also shows that the homeowners most likely to sell
their homes at a non-deductible loss are black.\15\ Tax subsidies for
home ownership therefore create white tax winners and black tax losers.
The Federal Government should stop subsidizing a racist home ownership
market.
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\14\ Dorothy A. Brown, ``Home Ownership in Black and White: The
Role of Tax Policy in Increasing Housing Inequity,'' 49 Memphis L. Rev.
205, 214-221 (2018).
\15\ Sandra J. Newman and C. Scott Holupka, ``Is Timing Everything?
Race, Home Ownership and Net Worth in the Tumultuous 2000s,'' 44 Real
Est. Econ. 307, 309 (2015).
Tax subsidies for employer-provided retirement accounts are more
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likely to benefit white workers.
The final area I want to highlight are tax subsidies for work,
specifically employer provided retirement accounts. Retirement accounts
as a tax benefit traces its roots to 1942, when price and wage controls
along with an excess profits tax, encouraged employers to provide non-
wage benefits like retirement accounts. Amounts set aside in retirement
accounts by employees (and if there's an employer-match amounts set
aside by their employer) are not taxable to the employee until their
expected withdrawal at retirement. If any amounts are withdrawn prior
to the age of 59\1/2\ they are subject to an additional tax penalty.
Black Americans are less likely than white Americans to work for
employers that provide retirement accounts.\16\ In the private sector,
for workers aged between 21 and 64, 56 percent of white workers work
for an employer that offers a retirement plan compared with 50 percent
of black workers, and almost 35 percent of Hispanic workers. Almost 46
percent of white workers, almost 37 percent of black workers, and 25
percent of Hispanic workers actually participate in their private
sector employer provided retirement account. Research also suggests
that black workers are more likely than all other racial and ethnic
groups to take an early withdrawal regardless of income and pay a tax
penalty.\17\ One potential explanation could come from research that
shows black college graduates are more likely to send money home to
their parents and other family members in financial distress, while
white college graduates are more likely to receive money from their
parents and other family members that enable them to be able to save
more and build wealth.\18\ Black college graduates have to make their
dollars stretch farther than their white peers which makes it less
likely for them to be able to contribute to their retirement accounts
and more likely to withdraw what they may have been able to contribute.
Given that less than half of white workers, a little over a third of
black workers and a quarter of Hispanic workers in the private sector
participate in their retirement accounts, tax subsidies should be
withheld until the private sector increases their participation rates.
---------------------------------------------------------------------------
\16\ Craig Copeland, ``Employment-Based Retirement Plan
Participation: Geographic Differences and Trends,'' 2013, Employee
Benefit Research Institute, No. 405 October 2014.
\17\ The Ariel/Aon Hewitt Study 2012, ``401(k) Plans in Living
Color,'' at 11.
\18\ Tatjana Meschede, Joanna Taylor, Alexis Mann, and Thomas
Shapiro, ``Family Achievements?: How a College Degree Accumulates
Wealth for Whites and Not for Blacks,'' Federal Reserve Bank of St.
Louis Review, First Quarter 2017, 99(1), pp. 121-37, https://files.
stlouisfed.org/files/htdocs/publications/review/2017-02-15/family-
achievements-how-a-college-degree-accumulates-wealth-for-whites-and-
not-for-blacks.pdf.
The Whiteness of Wealth discusses many other areas where our
Federal tax policies disadvantage black Americans, but they all lead to
the conclusion that our tax laws need a fundamental overhaul that
places racial equity at the center.
Solutions
No single change will be sufficient to address all the ways that
racial inequality is embedded in our tax laws. My recommendation for a
first step however would be to have the Internal Revenue Service
publish statistics by race. In addition, every future congressional
proposal for tax reform should come with a racial impact statement. In
Chapter Six of The Whiteness of Wealth I outline my ideal tax system,
but the point I wish to focus on here is that all income should be
subject to the same progressive rate system. I am generally skeptical
of deductions, exclusions, and loopholes because they tend to leave
behind black Americans. I advocate for a wealth tax credit for all
taxpayers in households with below median wealth. It would
disproportionately benefit black taxpayers because of the racial wealth
gap, but it would also benefit all taxpayers regardless of race and/or
ethnicity with below median wealth. This proposal seeks to directly
help those with the least wealth.
I will note in closing that other organizations have begun to
highlight racial and other disparities found in our tax laws including
the National Women's Law Center's report on Tax Justice is Gender
Justice: Advancing Gender and Racial Equity by Harnessing the Power of
the U.S. Tax Code \19\ and the Center for Budget and Policy Priorities'
How the Federal Tax Code Can Better Advance Racial Equity.\20\ Congress
can and must do better in order to achieve racial equity in the
operation of our tax laws. As I wrote recently in The New York Times:
``Black taxpayers should not be required to finance our own
subordination.''\21\
---------------------------------------------------------------------------
\19\ https://nwlc.org/wp-content/uploads/2019/11/NWLC-Tax-
Executive-Summary-Accessible.
pdf.
\20\ https://www.cbpp.org/research/federal-tax/how-the-federal-tax-
code-can-better-advance-racial-equity.
\21\ Dorothy A. Brown, ``Your Home's Value Is Based on Racism,''
New York Times, March 20, 2021, https://www.nytimes.com/2021/03/20/
opinion/home-value-race-taxes.html.
______
Questions Submitted for the Record to Dorothy A. Brown
Questions Submitted by Hon. Mike Crapo
Question. Income disparities exist across individuals and
households, not all of which should be a reason for a particular tax
policy concern. While there is concern, today's U.S. Federal income tax
system is a progressive system, with more of Federal tax burden borne
by higher-income households than for lower-income households. The Tax
Cuts and Jobs Act included a number of provisions to make the
individual income tax system even more progressive, including doubling
the child tax credit, nearly doubling the standard deduction, and
features such as Opportunity Zones to inject more financial capital
into distressed communities.
There are also genuine policy concerns about wealth disparities
among individuals and households.
Do you believe the income-tax system is the best thing to modify if
the objective is to alter wealth disparities?
Answer. Given my research that shows the income tax system
disadvantages black taxpayers, which impacts the racial wealth gap, I
think reform of the income tax system is a necessary step and the best
way to address the issue.
Question. Your work emphasizes the tax code and economic
disparities primarily between black or African American and white
taxpayers. Others have emphasized the tax code and disparities felt by
Hispanic taxpayers or disparities felt by Asian taxpayers. The common
thread seems to be low income, wealth, and opportunity, and that it is
desirable to look carefully at the tax code and at populations with low
income, wealth, and opportunity.
Your recommendations seem to assert that disparities, and how
persistent they have been, vary across groups, but whomever is facing
low opportunity deserves attention. And I think we can all agree on
that.
Do you believe there to be any extra gain from Congress making tax
provisions dependent of a taxpayer's claimed identity, or whether it is
best to focus on improving opportunity for prosperity independent of a
taxpayer's identity classification?
Answer. Tax law currently impacts taxpayers based upon their racial
identity. Today many black Americans pay higher taxes than their white
peers. Changing that should be paramount for those who believe in equal
opportunity for all.
Question. Wealth disparities that have been analyzed by some of our
panelists include retirement wealth. Congress has worked over time to
remove barriers to retirement savings. Last year, for example, the
SECURE Act was signed into law.
Efforts have focused on making it easier for businesses, and small
businesses in particular, to set up retirement savings plans for their
workers, expanding opportunities for retirement savings for workers,
including those who work part time, and enhancing portability of
pensions given that workers often change jobs.
Meanwhile, over the past few decades, it has become easier for
individuals to set up retirement accounts, and fees associated with
those accounts have fallen.
We still see, however, that take-up of retirement plans can
sometimes be low, even where a plan is offered by an employer and
sometimes even when there is an employer match. And there are
disparities in take-up rates that don't seem to be explainable by
expected factors such as retirement-plan access and job type.
Do you have thoughts and policy ideas that you view as useful to
help increase savings for retirement over a worker's life cycle,
particularly for low-income workers in jobs where employers may not
offer plans?
Answer. As I write about in my book The Whiteness of Wealth, I have
several suggestions: automatic enrollment for eligible employees;
repealing of the penalty for early withdrawal from retirement accounts;
and ensuring that employers notify employees who are not maximizing
their participation in their retirement plans.
Question. One recommendation that you have put forward for
consideration is to remove most deductions, exclusions, and the like
and start over to put a better tax code in place to even out
disparities and assist in providing more opportunity. Many others have
put forward similar recommendations. For example, in the past a Growth
and Investment Tax Plan was put forward during President George H.W.
Bush's presidency to vastly simplify the code and provide greater and
wider opportunities for savings, investment, and wealth building.
President George W. Bush emphasized an American Ownership Society to
similarly expand opportunities.
Challenges arise with fundamentally restructuring the tax system,
but any lasting reform must have bipartisan support.
Do you believe that fundamental changes to the tax system stand the
best chance of long-lived success if done in a bipartisan fashion?
Answer. My research shows that currently black Americans pay higher
taxes than white Americans. That needs to stop. Whichever way reform
can come sooner, is what I believe. If that is through bipartisan
agreement fine. But if bipartisan agreement cannot come--or cannot come
quickly, then actual reform that can help the financial futures of
black Americans must trump the idea of bipartisanship.
Question. There is a long history of bipartisan interest in
removing high effective marginal tax rates associated with the various
silos of low- and moderate-income support programs, which often have
benefit cliffs or steep phase-outs. The nonpartisan CBO has issued
numerous reports on those very high tax rates in the past.
What is your view on how we could make the varied low- and
moderate-income support programs work better systemically to provide
support without having extremely high effective marginal tax rates.
Answer. I have only studied this issue in the context of the earned
income tax credit. I would recommend a repeal of the joint filing
requirement so that the current significant marriage penalties found in
the earned income tax credit would be eliminated.
Question Submitted by Hon. Todd Young
Question. I am greatly concerned by President Biden's income tax
proposal to allow for the unlimited deduction of State and local taxes.
I have heard a number of my Democratic colleagues claim that repealing
the cap on State and local taxes, also known as the SALT cap, is an
important piece of relief for middle-class families. This could not be
further from the truth--in fact, a recent study found that 96 percent
of the benefit from repealing the SALT cap would go to the wealthiest
Americans.
Especially as the Nation continues to recover from a pandemic that
has disproportionately impacted small businesses and working-class
families, do you believe it is wise to move forward with a proposal
that will give middle-class families $10 or less in relief?
Answer. As I have already testified, I am opposed to the repeal of
the SALT cap.
______
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Welcome to our witnesses. I look forward to hearing your
experiences, thoughts, and ideas today.
There are questions of whether the tax code by itself leads to
differing impacts across race, gender, age, or geography, or whether it
is underlying income, wealth, asset-holding, or job-type disparities
that principally cause differing results. Underlying disparities are
key, and it is important to know about them. There are a variety of
disparities in measures of income, wealth, and assets across many
dimensions. Examining the disparities using statistics shows a variety
of results, along with changes in results over time. The Pew Research
Center, for example, recently identified that income inequality for
Asian Americans rose to become the highest among racial and ethnic
groups.
Underlying causes of these disparities are not entirely clear,
since causality is difficult to establish. As a result, there are
different views. Some views focus on government policies, while others
stress inequities in opportunities for education and asset building
along with changing patterns of family formation and institutions like
marriage.
Today, our witnesses will provide perspectives on the income tax
system, barriers to opportunity, policy solutions we should consider,
and economics.
Prior to the pandemic, the United States was experiencing one of
the strongest economies across demographics in decades. With the Tax
Cuts and Jobs Act in place, and an agenda focused on smart regulation,
we saw progress along many dimensions, including: record low
unemployment rates for African Americans, Hispanics, and others; 50-
year lows in overall unemployment; robust wage gains skewed toward
lower-wage earners; record high household incomes; and record low
poverty.
The TCJA included a number of provisions to make the personal
income tax system more progressive, including doubling the Child Tax
Credit, nearly doubling the standard deduction, and features such as
Opportunity Zones to inject more financial capital into distressed
communities. It will be increasingly challenging to return to an
economy as robust as we saw before the pandemic with the endless
streams of tax hikes and regulation that the current administration
continues to propose.
Going the opposite direction of combating inequality in the tax
code are efforts to roll back the cap placed by TCJA on the State and
local tax--or SALT--deduction. I expect some of the proposals we will
hear about today will have promise, and others may not actually get to
the root of the problems we are addressing. I am eager to hear more.
Whatever we consider, it will be important that policies are
developed on a bipartisan basis. No one party has a monopoly on good
ideas, and any work on persistent barriers to opportunity will
ultimately fail if done in a partisan fashion.
I look forward to our hearing today, Mr. Chairman, and thank you.
______
Prepared Statement of Mihir A. Desai, Ph.D., Mizuho Financial Group
Professor of Business, Harvard Business School; and Professor of Law,
Harvard Law School, Harvard University *
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* I thank Suzanne Antoniou for excellent research assistance and
Jacob Bastian, James R. Hines Jr., Wojciech Kapczuk, Louis Kaplow,
Youngme Moon, and Matthew Weinzierl for helpful conversations. All
views expressed, and any errors, remain my own.
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Chairman Wyden, Ranking Member Crapo, and members of this
distinguished committee, it is an honor to participate in these
hearings on ``Combating Inequality: The Tax Code and Racial, Ethnic,
and Gender Disparities.'' I am the Mizuho Financial Group professor of
business at Harvard Business School, a professor of law at Harvard Law
School, and a research associate at the National Bureau of Economic
Research. I have also taught at the Columbia and NYU Law Schools.
While equity is commonly understood as a guiding principle of tax
policy (along with efficiency and administrability), the specific
issues raised in this hearing--the role of race, ethnicity, and
gender--are important considerations that have not received the
attention that they deserve. I applaud your willingness to engage these
questions and, in particular, I'm delighted to share this opportunity
with Professor Dorothy A. Brown, who has done so much to advance the
agenda around race, in particular.
My comments will emphasize race--rather than ethnicity and gender--
but this emphasis merely reflects my limited ability in this
constrained time frame. Race occupies a particular importance in our
history and in this moment so I hope that my emphasis will not be
misunderstood as reflecting the unimportance of ethnicity and gender or
the racial subgroups that I neglect below. Some of my comments will
generalize to ethnicity and gender and others won't. I look forward to
other hearings and other efforts to fully explore these issues.
My remarks are divided into four parts.
First, I want to establish some facts around the correlation
between race and income, savings, wealth, and mobility. Given that the
tax system uses income and the returns to wealth as important inputs to
taxing decisions, it is useful to consider the degree to which the tax
system is ``racist.'' In this first section, I also hope to establish
the degree to which the views that are sometimes loosely grouped
together as ``critical tax theory'' are well-founded and extremely
valuable.
Second, I want to explore the degree to which ideas around taxation
and racial justice can easily be elaborated incompletely. Specifically,
this second section considers how analyses that outline the racial
implications of tax laws should fully incorporate considerations that
are typically ignored.
Third, I want to explore the degree to which analyses of race and
tax policy--and of redistribution and progressivity more generally--may
not just be incomplete but also self-defeating for the causes that many
of us would like to advance--the situation of the least well-off and
the cause of racial justice.
Finally, and more constructively, I want to explore the most
meaningful ways to advance the goals of racial justice through the tax
code. Racial justice is an important goal for many Americans today and
pursuing this goal effectively through the tax code has several
implications, some of which I will outline in this section.
i. race and income, savings, wealth, and mobility--
implications for tax policy
Appendix A provides my understanding of the current data on the
relationship between race and income, savings, wealth, and mobility
with a particular emphasis on housing and the Global Financial Crisis
(GFC). It is far from complete or definitive but it provides a useful
foundation for subsequent questions.
While I encourage the reader to examine Appendix A in detail, the
headline is straightforward and unavoidable: there is a staggeringly
persistent and large correlation between race and income, saving, and
wealth. For wealth, this correlation shows up in median and mean wealth
levels, persists across age levels, has persisted over time, and shows
up in the propensity and the magnitude of holdings of almost all asset
types--with particularly important assets such as retirement assets and
housing showing large differences.\1\ For income, this correlation
shows up in median and mean income levels and the composition of
quintiles of the income distribution and has persisted over time.\2\
Savings rates--an important link between income and wealth--are also
distinctive across races and these differences too have persisted over
time.\3\ Intergenerational dynamics compound these issues as transfers
of wealth across generations are more likely and are larger for whites
relative to blacks.\4\ Similarly, blacks experience less upward
mobility and more downward mobility in income class relative to
whites.\5\ Finally, the impact of the GFC was distinctive across races,
with declining wealth levels and home ownership rates for blacks
relative to whites.\6\
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\1\ See ``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System; Bhutta, Chang, Dettling, and
Hsu (2020); Choi, McCargo, Neal, Goodman, and Young (2019).
\2\ See ``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System; Current Population Survey
Annual Social and Economic Supplement data available at ``HINC-05.
Percent Distribution of Households, by Selected Characteristics Within
Income Quintile and Top 5 Percent,'' United States Census Bureau.
\3\ See 2019 Survey of Consumer Finances public data with estimates
inflation-adjusted to 2019 dollars available at ``Survey of Consumer
Finances,'' Board of Governors of the Federal Reserve System.
\4\ See Bhutta, Chang, Dettling, and Hsu (2020).
\5\ See Chetty, Hendren, Jones, and Porter (2020).
\6\ See Choi, McCargo, Neal, Goodman, and Young (2019); Burd-Sharps
and Rasch (2015).
In an effort to isolate the ability to pay, the tax system employs
income and the returns to wealth to raise revenue in an efficient
manner. The returns to wealth are often granted preferential treatment,
relative to labor income, in order to encourage certain behaviors, to
offset the lock-in effect associated with a realization-based system,
and to promote savings. The wisdom of these preferences is long-
debated and I won't opine on their suitability here.\7\ For our
purposes, it is clear that these preferences intersect with the
correlations discussed above.
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\7\ See Graetz, Schenk, and Alstott (2018), pp. 566-575.
Specifically, looking at certain preferences--such as the partial
exclusion of capital gains on primary residences, the deferral
advantage conferred on retirement savings, and step-up basis at death--
in isolation will yield the following result: these preferences on
returns to savings have a disparate impact on racial subgroups. I think
this statement, as far as it goes, is incontrovertible. Indeed, it is
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unsurprising when one considers the correlations discussed above.
The remaining issues raised by this result are far less
straightforward. Does this result constitute racism in the tax code? Is
this analysis complete? And, what should we take away from this
analysis? \8\
---------------------------------------------------------------------------
\8\ These questions are tackled within the literature sometimes
labeled ``critical tax theory'' which includes, but is not limited to,
Brown (1997, 2009a, 2009b, 2010, 2012 and 2020), Knauer (2014),
Martinez (2018), and Wallace (2020). Zelenak (1998, 2020) offers
thoughtful commentary on this line of inquiry. These questions relate
critically to broader debates regarding the meaning and role of
structural racism in today's society.
The first question is linked to deep questions in law, philosophy
and sociology that are unsettled and highly contested. The question can
be distilled crudely to be one of disparate treatment versus disparate
impact, overt intent versus actual effect, and the underlying meaning
of neutrality. I think it is both true that (a) there is no overt
effort to treat racial subgroups disparately and, as such, it is
racially neutral in its application, and (b) there is an actual effect
of specific provisions when examined in isolation that leads to a
disparate impact on racial subgroups. How one characterizes that
duality in its full complexity is difficult, particularly given the
omissions in such an analysis that I describe below. I would just offer
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that, in this setting, I think broad and pithy labels are unhelpful.
Before turning to the limitations of this analysis (including how
it can be self-
defeating), it is worth acknowledging the significant, overall value of
this line of inquiry. If nothing else, reasserting the importance of
addressing these underlying correlations as a policy agenda is
incredibly useful and should be applauded. Addressing these persistent
and large correlations between race and income, wealth, savings and
mobility should constitute a central ambition for all policy-makers.
That, however, does not mean that the analysis is fully correct nor
does it mean that the tax system is a mechanism that has caused these
correlations, that exacerbates these correlations nor that it should be
the domain for remedying them.
ii. analyzing race in the tax code
Analysis of the type alluded to above--of a preference for certain
returns to wealth relative to labor income--can yield the implication
that these preferences have a disparate impact on racial subgroups. As
with many such assertions in tax policy, this conclusion is a qualified
one and can be highly incomplete when handled loosely. In particular,
if analyzing the role of tax policy in impacting racial justice is a
primary goal, then one would want to avoid three critical errors that
can occur in this space. These three cautionary notes are not
particular to the analysis of race but rather they are part and parcel
of analyzing tax policy generally.
First, any analysis of tax policy needs to trace through the
incidence of benefits or taxes beyond the claimants of any particular
benefit. For example, tracing through the consequence of the low-income
housing tax credit on racial subgroups is not straightforward. The
actual claimants are largely financial institutions. Analyzing the
impact of that benefit on racial subgroups would require one to make
assertions about the division of that benefit on the side of the
claimants (between capital, labor and customers of these banks as
claimants) and on the side of the residents of low-income housing.\9\
This is a very difficult exercise but required for understanding the
racial impact of LIHTC. If one were to pursue a broader racial analysis
of the tax code, these efforts could yield interesting additional
insights but the direction and magnitude of all of these effects will
require heroic assumptions that will not be remedied by collecting data
on race on tax forms. Indeed, data about race on tax forms would not
illuminate this question at all. The point is broad and applies equally
to preferences on the returns to wealth, including on owner-occupied
housing--these preferences will be capitalized into house prices,
attenuating their effects, and may also be manifest in rental yield
ratios and that impact will differ by race given lower home ownership
amongst Blacks. In the case of housing preferences, these effects may
not overturn what an analysis of claimants would suggest but in the
case of LIHTC claimants, it most likely would. The ultimate
beneficiaries of tax policies are rarely only nominal claimants.
---------------------------------------------------------------------------
\9\ See Scally, Gold, and DuBois (2018); Freeman (2004); U.S.
Department of Housing and Urban Development: Office of Policy
Development and Research (2018).
Second, revenue-neutrality is an important discipline on tax
analysis as it insists on considering how any policy change will be
financed, including through borrowing, or spent. This discipline can
yield surprising and counterintuitive results.\10\ One such example
pertains to repealing preferences for owner-occupied housing via the
mortgage interest deduction. While the beneficiaries of the mortgage
interest deduction are concentrated in higher income brackets, if these
policy changes use the revenue from the repeal to reduce taxation in
proportion to overall tax liabilities, then a repeal of the mortgage
interest deduction can be a net benefit to higher-income tax
payers.\11\ In short, isolating a preference that benefits a subgroup
is not enough to assert that it should be repealed because that
preference exists in a larger system that requires financing--the
discipline of revenue neutrality ensures that we think through its
effects more broadly in a standardized way. It also prevents an analyst
from making claims about particular provisions without considering the
context of the broader tax system.
---------------------------------------------------------------------------
\10\ See Griffith (1989).
\11\ See Hemel and Rozema (2017). See the table below from JCT
(2021) for the degree to which the tax system relies on the top 1.3
percent of returns with 21.3 percent of income to provide 70.5 percent
of individual income taxes.
Third, the broader tax system is critical to consider in examining
the overall impact on racial subgroups. Given the correlations of
wealth and race identified above, it is not surprising that preferences
for the returns to wealth may have a disparate impact on racial
subgroups. By that exact logic, given the correlations of income and
race identified above, it would not be surprising if progressive rates
and refundable tax credits would have a disparate impact on racial
subgroups as well. How all of these provisions interact is complex but
it would seem to be clear that a full accounting of the impact of the
tax system--as in the recent JCT document entitled ``Overview of the
Federal Tax System as in Effect for 2021''--would reveal the degree to
which the current tax system is redistributive in a progressive manner.
The degree to which this level of redistribution is appropriate is not
our topic today. But, any analysis of the impact of the tax system on
racial subgroups should include some overall assessment of the effect
---------------------------------------------------------------------------
of the tax system in toto on racial subgroups.
[GRAPHIC] [TIFF OMITTED] T2021.001
.epsThese cautionary notes on studying tax policy and race do not
suggest that efforts to think about race and tax policy are not
worthwhile. To the contrary, these notes simply make clear that
observations about claimants of certain preferences are not a
sufficient method to think through the racial impact of tax policy.
And, tracing through and incorporating the effect on ultimate
beneficiaries, incorporating financing considerations, and framing
these within the overall tax system will be a critical step in any such
analysis.
Finally, some analysts consider collecting data about race on tax
forms a critical next step in furthering this analysis.\12\ Putting
aside the sizable practical considerations that such an effort would
face, there are two additional considerations that apply in this
debate. First, analysis that incorporates existing information about
the distribution of income and wealth could be integrated into analysis
of tax policy without additional collection of information. Such an
effort would be incomplete but given the practical considerations
associated with putting race on tax forms it would seem to be useful to
focus attention where it will likely be most effective. Second, and as
indicated above, collection of data at the taxpayer level won't assist
in the harder questions required to think through racial justice in the
tax code.
---------------------------------------------------------------------------
\12\ See Bearer-Friend (Fall 2019); Brown (2021); Knauer (2014).
---------------------------------------------------------------------------
iii. the self-defeating potential of analyses of race in the tax code
Tax analyses that consider race can also go astray. For example,
analysts that note the differential impact on racial subgroups of the
tax treatment of marriage have suggested flat rates be employed to
resolve the well-understood ``trilemma'' of progressivity, marriage
neutrality, and couple equality.\13\ Analysts in this literature have
also dismissed the role of the Earned Income Tax Credit in the debate
on racial justice by claiming that ``whites disproportionately benefit
from the EITC'' and that ``the greatest beneficiaries of the Earned
Income Tax Credit were white.''\14\ Finally, when seeking solutions to
these problems, analysts suggest radical solutions that amount to
effectively blowing up the tax code and starting from scratch.\15\
---------------------------------------------------------------------------
\13\ See Brown, p. 129 in Infanti and Crawford (2009).
\14\ See Brown (2009a), p. 580; Brown (Fall 2012), p. 54.
\15\ See Brown (2021), pp. 200-225.
These claims can be self-defeating for the cause of racial justice
because they underemphasize the role of current provisions in advancing
the agenda of racial justice. Specifically, undercutting the
progressivity of rates and tax credits that disproportionately benefit
lower-income individuals derails the consensus that should be building
around their expansion. And, suggesting a clean slate for the tax
system naively assumes that the hard-won victories that are embedded in
the tax code that redistribute income and that serve disadvantaged
communities will be somehow mirrored in this idealized future. Radical
reform efforts could just as easily be captured by forces that would
reduce the racial justice of the tax code. More narrowly, as one
example, rather than abandoning all savings incentives, we should
consider narrowing some and expanding others. Idealized and radical
reforms can be enjoyable intellectual exercises but they can also be
distracting diversions from the hard work of revising the tax code in
---------------------------------------------------------------------------
the real world.
In a related vein, a singular focus on racial justice can also lead
us astray. Perry and Romer (2021) advocate for the cancellation of
student debt without means-
testing specifically because it would address the racial wealth
gap.\16\ First, their contemplated reform does not impose revenue-
neutrality raising the questions above on what taxes would be raised to
finance this reform. More importantly, such a reform would be
remarkably regressive, as demonstrated by the work of Catherine and
Yannelis (2021).\17\ I don't mean to judge that particular reform, but
it is worth noting how any tunnel vision about a particular issue
obscures important collateral consequences that must be considered in
any serious policy analysis.
---------------------------------------------------------------------------
\16\ See Perry and Romer (2021).
\17\ See Catherine and Yannelis (2021).
This potential to be led astray is manifest more broadly in tax
policy discussions today. The real promise of this hearing and of an
increased emphasis on race, ethnicity and gender is to reorient our
policy debate away from its current obsession with inequality broadly
and toward a sharper focus on those in our country in deep need. Over
the last 20 years, academic studies that claim sharply rising levels of
income and wealth inequality have become accepted as fact and undergird
much policy discussion today. Related studies claim that the tax system
does little to address inequality and that novel instruments are
---------------------------------------------------------------------------
required to address these issues.
First, it is little acknowledged how contested and controversial
these underlying studies are. Various new studies have called into
question the magnitude of these changes using the same data and using
alternative data.\18\ Specifically, these inequality studies contain
important assumptions about the distribution of tax avoidance, the
changing role of pass-throughs and business income in measured changes
in inequality, and are interpreted as factual when, in fact, they
feature many contested imputations and assumptions. My reading of this
literature suggests that while inequality has increased modestly over
the last several decades, it is far exaggerated in the popular
imagination because of inattention to these considerable questions.
These studies, and the obsession with rising inequality, are
problematic for several reasons. They orient attention to the very rich
(the top 0.1 percent or the top 400) and away from other parts of the
income distribution. As one example, they distract attention from the
fundamental role of pass-throughs in altering measured income
distribution and the taxation of capital and labor income. More
perniciously, they distract attention from the important questions of
what we can and should do for the bottom quintiles of the income
distributions by emphasizing what is happening to the top 400
taxpayers.
---------------------------------------------------------------------------
\18\ See Auten and Splinter (December 2019); Auten and Splinter in
Furchtgott-Roth (2021); Auten and Splinter (May 2019); Smith, Yagan,
Zidar, and Zwick (2019); Smith, Yagan, Zidar, and Zwick (December 22,
2019); Smith, Zidar, and Zwick (April 2020); Bricker, Krimmel,
Henriques, and Sabelhaus (Spring 2016).
More dangerously, these studies pretend that the tax system that we
have does little to no redistribution and that levels of redistribution
have been declining.\19\ The Congressional Budget Office makes clear
that average tax rates have been evolving over the relevant period and
that the tax system is doing more redistribution than in the past.\20\
Advocates for more redistribution who deny this reality don't serve
their cause via their obfuscation.
---------------------------------------------------------------------------
\19\ See Saez and Zucman (2019).
\20\ See Gale (2019) and Splinter (December 2020).
Rather than consider the success in reducing average tax rates for
the bottom quintile and raising the average tax rate for the top
quintile, this literature encourages us to refocus our attention on the
purported hidden hundreds of billions in offshore tax havens. Those
estimates of hidden billions are vastly exaggerated. Most broadly, they
feed a common and mistaken narrative today--that somehow responsible
fiscal policy is just about getting the rich and corporations to pay
their fair share via novel instruments including a wealth tax and
multilateral cooperation on corporate tax policy.\21\ And, they allow
the middle of the income distribution to feel that they are getting
cheated by the tax system and they too deserve more relief.
---------------------------------------------------------------------------
\21\ See Desai, Mihir A. (March 2021); ifo Institut--Leibniz-
Institut fur Wirtschaftsforschung an der Universitat Munchen e.V.
(March 2021).
[GRAPHIC] [TIFF OMITTED] T2021.002
.epsIn the process, these efforts obscure what the real agenda
should be--how should we get more resources to the bottom two
quintiles, which should be the goal of those seeking greater economic
justice. It is curious that many of these efforts don't mention (or
measure) the Earned Income Tax Credit in their discussions of economic
justice despite its role as a critical anti-poverty program. Similarly,
it has become fashionable to discuss a universal basic income or to
generously extend the Child Tax Credit well beyond the bottom two
quintiles rather than expand the Earned Income Tax Credit in a
significant way. The scholarship on low-income families is clear--
expanding Child Tax Credits is far less beneficial than expanding the
EITC, expanding the EITC dominates any idea of UBI, and the EITC is a
powerful tool in promoting all kinds of good outcomes.\22\ In this
sense, the broader inequality debate obscures the readily available
solutions to issues of racial and economic justice--the EITC and more
progressive rate structures--and focuses our attention incorrectly on
issues of corporate taxation, the possibility of wealth taxation,
greater middle-class tax relief and broad-based entitlements. To be
clear, ensuring that the very wealthy and corporations comply with tax
laws and that they pay their appropriate share is critical and could
provide some incremental revenue but these obsessions have come to
eclipse many more important issues.
---------------------------------------------------------------------------
\22\ See Hoynes (2019); Hoynes and Rothstein (March 2016); Hoynes
and Rothstein (2019); Bastian (2020); Bastian and Michelmore (2018);
Bastian and Lochner (January 2021); Bastian, and Jones (April 2021).
---------------------------------------------------------------------------
iv. moving forward
As I stated previously, the real promise of this hearing and of an
increased emphasis on race, ethnicity and gender is to reorient our
policy debate away from its current obsession with inequality broadly
and toward a sharper focus on how the tax system can serve those who
need the most help. This requires pragmatic thinking, adherence to
tested policy tools and data-driven analyses that consider what will
impact the welfare of the populations that we most need to focus on.
With that frame, it seems clear that expanding the EITC in two
directions would be enormously beneficial to the causes of economic,
racial and gender justice.\23\ The EITC for 2021 by earned income,
drawn from JCT (2021) is provided below:
---------------------------------------------------------------------------
\23\ See Appendix B for more information on the EITC.
[GRAPHIC] [TIFF OMITTED] T2021.003
.epsOne could provide a refundable credit amount of $4,000 at all
income levels so that it would be unconditional, effectively shifting
these curves, including the plateau region, up. This would preserve
work incentives but do the work of the child credit in a more targeted
way. Second, one could expand the childless EITC to make it more
meaningful.\24\ This change could be financed through the progressive
rate structure. The notion described above that this would not help
black women disproportionately is not correct. According to the
American Community Survey, white women are a lower share of EITC
recipients than they are of the overall share of the population and
they constitute the same share of women under the poverty line and
those under the poverty line that qualify for the EITC. The slightly
lower marriage rate and slightly higher number of children of black
women relative to white women suggests that EITC benefits will be
larger for blacks as well. And, Jones (2014) indicates that take-up
rates for blacks are slightly higher than for whites.\25\
---------------------------------------------------------------------------
\24\ See Hoynes and Rothstein (March 2016) for elaboration on this.
\25\ See Jones (July 11, 2014).
Expanding the EITC does not have the drama of tearing up the tax
code, eliminating all savings preferences or demonizing corporations
and the very wealthy. But, it would appear to be the simplest and most
straightforward way to improve the racial justice of the tax code on
the terms described by analysts who have led this effort to incorporate
race into an analysis of tax policy. Similarly, the recently authorized
child credit expansion, though not sufficiently well targeted from an
income perspective in my view, is projected to provide the largest
reduction in black child poverty in the history of antipoverty policy-
making, clear evidence that race-neutral policies can be very effective
---------------------------------------------------------------------------
at improving outcomes for black Americans.
Such expansions may not directly address the concerns over the
racial wealth gap. But, over time, providing more income to those at
the bottom of the income distribution will allow them to begin saving
and building wealth. More broadly, it is worth acknowledging how
difficult it is to provide wealth to the bottom of the income
distribution in the context of our current income tax. It is
conceivable that targeted saving incentives with sharp phase-outs could
also help, though it is not clear a priori what the magnitude or sign
of the change in racial wealth gaps will be, given the current
inability to target these incentives based on race.\26\
---------------------------------------------------------------------------
\26\ See Appendix C for a crude exploration of policies that treat
ethnic subgroups differently and a particular experiment with gender in
India.
Reparations would seem best suited to address the question of the
racial wealth gap.\27\ It is worthwhile noting that comparable efforts
at reparations--including those for Japanese-Americans, payments to
Holocaust survivors, the Truth and Reconciliation Commission in South
Africa, and local American efforts such as those in Rosewood, Florida--
did not employ the tax system (other than the question of whether those
reparation payments would be taxable). That is, I believe the
reparations debate is a very important one to initiate in earnest and
it could address the racial wealth gap in interesting ways--but there
is no clear, obvious reason to operate it through the tax system.
---------------------------------------------------------------------------
\27\ See Desai, Page, Antoniou, and Fan (2021) for a history on
reparations, the example of the Tulsa Massacre, and information related
to the current reparations debate in the U.S. at https://
courseware.hbs.edu/public/tulsa/.
Most broadly, this hearing will succeed not by emphasizing how and
why the tax system may or may not exacerbate racial justice. The true
payoff of this hearing will be if the underlying correlation of race
with income, wealth, savings and mobility regains its status as a
question of central importance to the future of the country. Even if I
disagree with particularities of their analysis, I wholeheartedly
appreciate and admire the efforts of Professor Brown and others to
emphasize these issues. And, I very much hope you all find the courage
and wisdom to address these questions as directly as one can, in the
tax code and otherwise.
Appendix A
The Correlation Between Race and Income, Wealth, Savings, and Mobility
Income
Before-tax family income
- The median before-tax family income of white, non-Hispanic
households in 2019 was 70 percent greater than that of black,
non-Hispanic households. From 1989 to 2019, the median before-
tax family income of white, non-
Hispanic households has been consistently greater and ranged
from 69-164 percent greater. [``Survey of Consumer Finances,
1989-2019,'' Board of Governors of the Federal Reserve System,
https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racec
l4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.004
.eps- The mean before-tax family income of white, non-Hispanic
households in 2019 was 106 percent greater than that of black,
non-Hispanic households. From 1989 to 2019, the mean before-tax
family income of white, non-Hispanic households has been
consistently greater and ranged from 85-141 percent greater.
[``Survey of Consumer Finances, 1989-2019,'' Board of Governors
of the Federal Reserve System, https://www.federalreserve.gov/
econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:
all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.005
.epsIncome quintiles and top 5 percent of income
- In 2019, 56.3 percent of those in the lowest income quintile
were white alone, not Hispanic and 22 percent were black alone.
In the highest quintile, 74.8 percent were white alone, not
Hispanic and 7 percent were black alone. In the top 5 percent,
78 percent were white alone, not Hispanic and 5 percent were
black alone. [Current Population Survey Annual Social and
Economic Supplement data available at ``HINC-05. Percent
Distribution of Households, by Selected Characteristics Within
Income Quintile and Top 5 Percent,'' United States Census
Bureau, https://www.census.gov/data/tables/time-series/demo/
income-poverty/cps-hinc/hinc-05.html.]
[GRAPHIC] [TIFF OMITTED] T2021.006
.eps- In 2002, 64 percent of those in the lowest income
quintile were white alone, not Hispanic and 20 percent were
black alone. In the highest quintile, 82 percent were white
alone, not Hispanic and 6 percent were black alone. In the top
5 percent, 84 percent were white alone, not Hispanic and 5
percent were black alone. [Current Population Survey Annual
Social and Economic Supplement data available at ``HINC-05.
Percent Distribution of Households, by Selected Characteristics
Within Income Quintile and Top 5 Percent,'' United States
Census Bureau, https://www.census.gov/data/tables/time-series/
demo/income-poverty/cps-hinc/hinc-05.html.]
[GRAPHIC] [TIFF OMITTED] T2021.007
.epsSavings
Based on SCF data, white, non-Hispanic households in 2019 were 34.9
percent more likely to save than black, non-Hispanic households. From
1992-2019, white, non-Hispanic households have been consistently more
likely to save and this greater likelihood has ranged from 25.1 percent
to 59.8 percent. [Excel based on public data with estimates inflation-
adjusted to 2019 dollars on ``Survey of Consumer Finances,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scfindex.htm.]
[GRAPHIC] [TIFF OMITTED] T2021.008
.epsWealth
Net worth
- The median net worth of white, non-Hispanic households in
2019 was 685 percent greater than that of black, non-Hispanic
households. From 1989 to 2019, the median net worth of white,
non-Hispanic households has been consistently greater and
ranged from 519-1579 percent greater. [``Survey of Consumer
Finances, 1989-2019,'' Board of Governors of the Federal
Reserve System, https://www.federalreserve.gov/econres/scf/
dataviz/scf/chart/#series:
Before_Tax_Income;demographic:racecl4;p
opulation:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.009
.eps- The mean net worth of white, non-Hispanic households in
2019 was 589 percent greater than that of black, non-Hispanic
households. From 1989 to 2019, the mean net worth of white,
non-Hispanic households has been consistently greater and
ranged from 363-603 percent greater. [``Survey of Consumer
Finances, 1989-2019,'' Board of Governors of the Federal
Reserve System, https://www.federalreserve.gov/econres/scf/
dataviz/scf/chart/#series:Before
_Tax_Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.010
.eps- Across different age groups, median wealth for black
Americans is consistently less than that of white Americans:
for under 35, median wealth for white Americans is 42.3 times
that of black Americans; for 35-54, median wealth for white
Americans is 4.6 times that of black Americans; and for over
55, median wealth for white Americans is 5.9 times that of
black Americans. [Bhutta, Chang, Dettling and Hsu,
``Disparities in Wealth by Race and Ethnicity in the 2019
Survey of Consumer Finances,'' Board of Governors of the
Federal Reserve System, September 28, 2020, https://
www.federalreserve.
gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-
ethnicity-in-the-2019-survey-of-consumer-finances-
20200928.htm.]
Table 1: Wealth rises with age for all families, but substantial wealth
gaps between white and non-white families persist throughout the life-
cycle.
------------------------------------------------------------------------
White Black Hispanic Other
------------------------------------------------------------------------
Under 35 25.4 0.6 11.2 13.5
------------------------------------------------------------------------
35-54 185.0 40.1 46.1 154.5
------------------------------------------------------------------------
Over 55 315.0 53.8 111.5 213.2
------------------------------------------------------------------------
Source: Federal Reserve Board, 2019 Survey of Consumer Finances.
Notes: Table displays median wealth by age group and by race and
ethnicity in thousands of 2019 dollars.
Assets
- The median assets of white, non-Hispanic households in 2019
was 478 percent greater than that of black, non-Hispanic
households. From 1989 to 2019, the median assets of white, non-
Hispanic households have been consistently greater and ranged
from 220-478 percent greater. [``Survey of Consumer Finances,
1989-2019,'' Board of Governors of the Federal Reserve System,
https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before
_Tax_Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.011
.eps- The mean assets of white, non-Hispanic households in
2019 was 432 percent greater than that of black, non-Hispanic
households. From 1989 to 2019, the mean assets of white, non-
Hispanic households have been consistently greater and ranged
from 256-433 percent greater. [``Survey of Consumer Finances,
1989-2019,'' Board of Governors of the Federal Reserve System,
https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before_Tax_
Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.012
.eps- In 1989, the gap between white, non-Hispanic households
and black, non-
Hispanic households that held assets was 21.7 percentage points
and has decreased to 0.8 percentage points in 2019. [``Survey
of Consumer Finances, 1989-2019,'' Board of Governors of the
Federal Reserve System, https://www.federalreserve.gov/econres/
scf/dataviz/scf/chart/#series:Before_Tax_
Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.013
.epsFinancial assets
- The median financial assets of white, non-Hispanic
households in 2019 was 800 percent greater than that of black,
non-Hispanic households. From 1989 to 2019, the median
financial assets of white, non-Hispanic households have been
consistently greater and ranged from 327-1,178 percent greater.
[``Survey of Consumer Finances, 1989-2019,'' Board of Governors
of the Federal Reserve System, https://www.federalreserve.gov/
econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:all;uni
ts:
median.]
[GRAPHIC] [TIFF OMITTED] T2021.014
.eps- The mean financial assets of white, non-Hispanic
households in 2019 was 600 percent greater than that of black,
non-Hispanic households. From 1989 to 2019, the mean financial
assets of white, non-Hispanic households have been consistently
greater and ranged from 312-742 percent greater. [``Survey of
Consumer Finances, 1989-2019,'' Board of Governors of the
Federal Reserve System, https://www.federalreserve.gov/econres/
scf/dataviz/scf/chart/#
series:Before_Tax_Income;demographic:racecl4;population:all;unit
s:median.]
[GRAPHIC] [TIFF OMITTED] T2021.015
.eps- In 1989, the gap between white, non-Hispanic households
and black, non-
Hispanic households that held financial assets was 31.6
percentage points and has decreased to 1.6 percentage points in
2019. [``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before
_Tax_Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.016
.epsSavings bonds
- The median savings bonds of black, non-Hispanic households
in 2019 was 33 percent greater than that of white, non-
Hispanic households. In 2007, the median savings bonds of
black, non-Hispanic and white, non-Hispanic households were
equal and since then the median savings bonds of black, non-
Hispanic households have been greater. [``Survey of Consumer
Finances, 1989-2019,'' Board of Governors of the Federal
Reserve System, https://www.federalreserve.gov/econres/scf/
dataviz/scf/chart/#series:Before_Tax_
Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.017
.eps- The mean savings bonds of white, non-Hispanic households
in 2019 was 284 percent greater than that of black, non-
Hispanic households. Between 1989 and 2019, the mean savings
bonds of white, non-Hispanic households have been greater than
that of black, non-Hispanic households except for in 2010 and
2013. [``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:
all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.018
.eps- The percent holding savings bonds has declined for both
black, non-Hispanic households and white, non-Hispanic
households between 1989 and 2019. [``Survey of Consumer
Finances, 1989-2019,'' Board of Governors of the Federal
Reserve System, https://www.federalreserve.gov/econres/scf/
dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:all;uni
ts:
median.]
[GRAPHIC] [TIFF OMITTED] T2021.019
.epsDirectly held stocks
- The median directly held stocks of white, non-Hispanic
households in 2019 was 150 percent greater than that of black,
non-Hispanic households. From 1989 to 2019, the median directly
held stocks of white, non-Hispanic households have been
consistently greater and ranged from 100-820 percent greater.
[``Survey of Consumer Finances, 1989-2019,'' Board of Governors
of the Federal Reserve System, https://www.federalreserve.gov/
econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:
all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.020
.eps- The mean directly held stocks of white, non-Hispanic
households in 2019 was 594 percent greater than that of black,
non-Hispanic households. From 1989 to 2019, the mean directly
held stocks of white, non-Hispanic households have been
consistently greater and ranged from 255-1,831 percent greater.
[``Survey of Consumer Finances, 1989-2019,'' Board of Governors
of the Federal Reserve System, https://www.federalreserve.gov/
econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:all;uni
ts:
median.]
[GRAPHIC] [TIFF OMITTED] T2021.021
.eps- Between 1989 and 2019, the percent of white, non-
Hispanic households with directly held stocks has been
consistently larger than that of black, non-
Hispanic households and has ranged from 12-19 percentage points
greater. [``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:all;uni
ts:
median.]
[GRAPHIC] [TIFF OMITTED] T2021.022
.epsStock holdings
- The median stock holdings of white, non-Hispanic households
in 2019 was 238 percent greater than that of black, non-
Hispanic households. From 1989 to 2019, the median stock
holdings of white, non-Hispanic households have been
consistently greater and ranged from 98-490 percent greater.
[``Survey of Consumer Finances, 1989-2019,'' Board of Governors
of the Federal Reserve System, https://www.federalreserve.gov/
econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:all;uni
ts:
median.]
[GRAPHIC] [TIFF OMITTED] T2021.023
.eps- The mean stock holdings of white, non-Hispanic
households in 2019 was 469 percent greater than that of black,
non-Hispanic households. From 1989 to 2019, the mean stock
holdings of white, non-Hispanic households have been
consistently greater and ranged from 226-758 percent greater.
[``Survey of Consumer Finances, 1989-2019,'' Board of Governors
of the Federal Reserve System, https://www.federalreserve.gov/
econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:all;uni
ts:median.]
[GRAPHIC] [TIFF OMITTED] T2021.024
.eps- Between 1989 and 2019, the percent of white, non-
Hispanic households with stock holdings has been consistently
larger than that of black, non-Hispanic households and has
ranged from 23-31 percentage points greater. [``Survey of
Consumer Finances, 1989-2019,'' Board of Governors of the
Federal Reserve System, https://www.federalreserve.gov/econres/
scf/dataviz/scf/chart
/
#series:Before_Tax_Income;demographic:racecl4;population:all;uni
ts:median.]
[GRAPHIC] [TIFF OMITTED] T2021.025
.epsRetirement accounts
- From 1989-2019, median retirement accounts of white, non-
Hispanic households are consistently greater than that of
black, non-Hispanic households and range from 100-314 percent
greater. [``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before_Tax_
Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.026
.eps- From 1989-2019, mean retirement accounts of white, non-
Hispanic households are consistently greater than that of
black, non-Hispanic households and range from 115-320 percent
greater. [``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before_Tax_
Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.027
.eps- Between 1989 and 2019, the percent of white, non-
Hispanic households with retirement accounts has been
consistently larger than that of black, non-
Hispanic households and has ranged from 18-27 percentage points
greater. [``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:all;uni
ts:
median.]
[GRAPHIC] [TIFF OMITTED] T2021.028
.eps- Across age ranges, retirement account ownership by white
families is consistently at least 2 times that of black
families. [Bhutta, Chang, Dettling and Hsu, ``Disparities in
Wealth by Race and Ethnicity in the 2019 Survey of Consumer
Finances,'' Board of Governors of the Federal Reserve System,
September 28, 2020, https://www.federalreserve.gov/econres/
notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-
in-the-2019-survey-of-consumer-finances-20200928.htm.]
[GRAPHIC] [TIFF OMITTED] T2021.029
.epsHome ownership
- From 1960-2017, home ownership for white Americans has been
consistently greater than that of black Americans and was 72
percent greater in 2017. [Choi, McCargo, Neal, Goodman and
Young, Explaining the Black-White Home Ownership Gap: A Closer
Look at Disparities Across Local Markets (Washington, DC: Urban
Institute, October 2019), https://www.urban.org/sites/default/
files/publication/101160/explaining_the_black-white_home
ownership_gap_a_closer_look_at_disparities_across_local_markets_
0.pdf.]
[GRAPHIC] [TIFF OMITTED] T2021.030
.eps- Home ownership for black Americans is less than that of
white Americans even when separately controlling for household
income, educational attainment, and marital status. [Choi,
McCargo, Neal, Goodman, and Young, Explaining the Black-White
Home Ownership Gap: A Closer Look at Disparities Across Local
Markets (Washington, DC: Urban Institute, October 2019),
https://www.urban.org/sites/default/files/publication/101160/
explaining_
the_black-
white_homeownership_gap_a_closer_look_at_disparities_across_
local_markets_0.pdf.]
[GRAPHIC] [TIFF OMITTED] T2021.031
.eps[GRAPHIC] [TIFF OMITTED] T2021.032
.eps[GRAPHIC] [TIFF OMITTED] T2021.033
.eps- ``Marital composition, FICO score distribution, age, and
income distribution explain the largest proportion of the
black-white home ownership gap at the [Metropolitan Statistical
Area] level. The results also show that about 17 percent of the
home ownership gap remains unexplained.'' [Choi, McCargo, Neal,
Goodman, and Young, Explaining the Black-White Home Ownership
Gap: A Closer Look at Disparities Across Local Markets
(Washington, DC: Urban Institute, October 2019), https://
www.urban.org/sites/default/files/publication/101160/
explaining_the_black-white_homeownership_gap_a_closer_look_
at_disparities_across_local_markets_0.pdf.]
[GRAPHIC] [TIFF OMITTED] T2021.034
.epsMortgages or home-equity loans
- From 1989-2019, median mortgages or home-equity loans of
white, non-
Hispanic households are consistently greater than that of
black, non-Hispanic households and range from 8-136 percent
greater [``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before
_Tax_Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.035
.eps- From 1989-2019, mean mortgages or home-equity loans of
white, non-
Hispanic households are consistently greater than that of
black, non-Hispanic households and range from 12-68 percent
greater [``Survey of Consumer Finances, 1989-2019,'' Board of
Governors of the Federal Reserve System, https://
www.federalreserve.gov/econres/scf/dataviz/scf/chart/
#series:Before
_Tax_Income;demographic:racecl4;population:all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.036
.eps- Between 1989 and 2019, the percent of white, non-
Hispanic households with mortgages or home-equity loans has
been consistently larger than that of black, non-Hispanic
households and has ranged from 11-18 percentage points greater.
[``Survey of Consumer Finances, 1989-2019,'' Board of Governors
of the Federal Reserve System, https://www.federalreserve.gov/
econres/scf/dataviz/scf/chart/
#series:Before_Tax_Income;demographic:racecl4;population:
all;units:median.]
[GRAPHIC] [TIFF OMITTED] T2021.037
.epsIntergenerational Mobility
Income mobility
- ``Black Americans and American Indians have much lower rates
of upward mobility and higher rates of downward mobility than
whites, leading to persistent disparities across generations. .
. . Both blacks and American Indians have rank-rank mobility
curves that are shifted down relative to whites across the
entire parental income distribution by approximately 13
percentiles. This remains true even among children born to
parents in the top 1 percent, implying that children born into
high-income black families have substantially higher rates of
downward mobility than whites across generations . . . black
child born to parents in the top quintile is roughly as likely
to fall to the bottom family income quintile as he or she is to
remain in the top quintile; in contrast, white children are
nearly five times as likely to remain in the top quintile as
they are to fall to the bottom quintile.'' [Chetty, Hendren,
Jones, and Porter, ``Race and Economic Opportunity in the
United States: An Intergenerational Perspective,'' The
Quarterly Journal of Economics 135, no. 2 (2020): 711-783.]
[GRAPHIC] [TIFF OMITTED] T2021.038
.epsWealth mobility
- White families have greater access to wealth from family
members or friends than do black families: white families are
almost three times more likely to have received an inheritance;
they are 2.85 times more likely to expect an inheritance; their
median expected and actual inheritances are larger; and they
are almost two times more likely to be able to get $3,000 from
family or friends. [Bhutta, Chang, Dettling, and Hsu,
``Disparities in Wealth by Race and Ethnicity in the 2019
Survey of Consumer Finances,'' Board of Governors of the
Federal Reserve System, September 28, 2020, https://www.
federalreserve.gov/econres/notes/feds-notes/disparities-in-
wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-
finances-20200928.htm.]
Table 2: White families are substantially more likely to receive
inheritances, gifts, and other family support than black and hispanic
families.
------------------------------------------------------------------------
White Black Hispanic Other
------------------------------------------------------------------------
Received an inheritance (percent) 29.9 10.1 7.2 17.8
------------------------------------------------------------------------
Conditional median inheritance 88.5 85.8 52.2 59.4
(thousands of 2019 dollars)
------------------------------------------------------------------------
Expect an inheritance (percent) 17.1 6.0 4.2 14.7
------------------------------------------------------------------------
Conditional median expected 195.5 100.0 150.0 100.0
inheritance (thousands of 2019
dollars)
------------------------------------------------------------------------
Could get $3,000 from family or 71.9 40.9 57.8 63.4
friends (percent)
------------------------------------------------------------------------
Parent(s) have a college degree 34.4 24.8 15.2 40.0
(percent)
------------------------------------------------------------------------
Source: Federal Reserve Board, 2019 Survey of Consumer Finances.
Note: Table displays inheritances and gifts received, expected
inheritances, and other indicators of family support, by race and
ethnicity, expressed in either percent or thousands of 2019 dollars.
Parent(s) with a college degree refers to the parents of the reference
person.
Disproportionate Impact of GFC
The home ownership rate for black Americans declined almost ten times
as much as that of white Americans from 2000 to 2017. [Choi, McCargo,
Neal, Goodman, and Young, Explaining the Black-White Home Ownership
Gap: A Closer Look at Disparities Across Local Markets (Washington, DC:
Urban Institute, October 2019), https://www.urban.org/sites/default/
files/publication/101160/explaining_the_black-white_
homeownership_gap_a_closer_look_at_disparities_across_local_markets_0.pd
f.]
[GRAPHIC] [TIFF OMITTED] T2021.039
.eps- ``In the 2007 to 2009 period, wealth declined for both
groups. White wealth excluding home equity dropped by 17
percent; blacks lost 23 percent of their wealth, not including
the value of their homes. But starting in 2009, white wealth
trends began an uptick, whereas blacks saw a 17-percentage-
point further decline.'' [Burd-Sharps and Rasch, Impact of the
U.S. Housing Crisis on the Racial Wealth Gap Across Generations
(New York: Social Science Research Council, June 2015; New
York: American Civil Liberties Union, June 2015), https://
www.aclu.org/sites/default/files/field_document/discrimlend_
final.pdf.]
[GRAPHIC] [TIFF OMITTED] T2021.040
.eps- Household wealth including home equity: ``while the
typical white household experienced zero losses between 2009
and 2011 [] the typical black household continued to experience
significant declines in wealth over the same period [, 12.7
percent].'' [Burd-Sharps and Rasch, Impact of the U.S. Housing
Crisis on the Racial Wealth Gap Across Generations (New York:
Social Science Research Council, June 2015; New York: American
Civil Liberties Union, June 2015), https://www.aclu.org/sites/
default/files/field_document/discrimlend_
final.pdf.]
[GRAPHIC] [TIFF OMITTED] T2021.041
.epsAppendix B
EITC
- Black families are overrepresented in the households with
children with incomes under $55,000 as well as with incomes
under $30,000. ``In 2018, black households constituted 14
percent of all households with children, but 22 percent of
those with income below $55,000 (around the maximum adjusted
gross income to qualify for the EITC) . . . Overall, white
households are the largest share of EITC recipients (because
they constitute a majority of the working population), but
women of color in particular are disproportionately likely to
benefit from the credit.'' [Urban Institute, ``Racial
Disparities and the Income Tax System,'' https://
apps.urban.org/features/race-and-taxes/#earned-income-tax-
credit.]
[GRAPHIC] [TIFF OMITTED] T2021.042
.eps- ``21 percent of black women receive the EITC, more than
double the 9 percent share of white women who receive it. Women
of color also tend to receive a larger average EITC than white
women.'' The average EITC benefit for white, non-Latina women
in 2018 was $1,600 whereas it was $2,200 for black, non-Latina
women. [Marr and Huang, ``Women of Color Especially Benefit
From Working Family Tax Credits,'' Center on Budget and Policy
Priorities, September 9, 2019, https://www.cbpp.org/research/
federal-tax/women-of-color-especially-benefit-from-working-
family-tax-credits.]
- Maggie R. Jones has estimated that the take-up rate for the
EITC was greater for those who are black alone than for those
who are white alone: 76.85 percent versus 78.29 percent in 2005
and 77.76 percent versus 81.91 percent in 2009. [Jones,
``Changes in EITC Eligibility and Participation, 2005-2009,''
CARRA Working Paper Series #2014-04 (Washington, DC: Center for
Administrative Records Research and Applications, July 11,
2014), https://www.census.gov/content/dam/Census/library/
working-papers/2014/adrm/carra-wp-2014-04.pdf.]
- Spending on the EITC has been increasing over time. [Robert
Bellafiore, ``The Earned Income Tax Credit (EITC): A Primer,''
Tax Foundation, May 21, 2019, https://taxfoundation.org/earned-
income-tax-credit-eitc/.]
[GRAPHIC] [TIFF OMITTED] T2021.043
.epsAppendix C
differential tax treatment based on race, ethnicity, or gender
Australia
``Types of income.'' Australian Government: Australian Taxation
Office, accessed April 2021. https://www.ato.gov.au/General/Aboriginal-
and-Torres-Strait-Islander-people/Tax-for-individuals/Your-income-and-
deductions/Types-of-income/#::text=
Aboriginal%20and%20Torres%20Strait%20Islander%20people%20and%20Indigenou
s
%20holding%20entities,native%20title%20payments%20or%20benefits.
- ``Aboriginal and Torres Strait Islander people and
Indigenous holding entities do not need to pay income tax or
capital gains tax on native title payments or benefits.''
``Receiving native title benefits--what it means for your tax
obligations.'' Australian Government: Australian Taxation Office,
accessed April 2021. https://www.ato.gov.au/General/Aboriginal-and-
Torres-Strait-Islander-people/In-detail/Receiving-native-title-
benefits---what-it-means-for-your-tax-obligations/.
- ``On 28 June 2013, Parliament passed laws that affect you if
you are an Aboriginal or Torres Strait Islander person or an
Indigenous holding entity and you receive a native title
benefit. The new law says certain payments or non-cash benefits
you receive in relation to your native title rights are not
subject to tax, including capital gains tax. These laws apply
retrospectively to cover native title benefits received from
July 1, 2008.''
- ``These changes mean that: native title benefits are now
considered non-
assessable non-exempt (NANE) income and are therefore not
subject to income tax (however, income earned from investing a
native title benefit is assessable as income); any capital
gains or losses made from transferring native title rights to
an Indigenous holding entity or Indigenous person are
disregarded; any capital gains or losses made from surrendering
or canceling native title rights are disregarded.''
``What is native title?'' Kimberly Land Council, accessed April
2021. https://www.klc.org.au/what-is-native-title.
- ``Native title is the recognition that Aboriginal and Torres
Strait Islander people have rights and interests to land and
waters according to their traditional law and customs as set
out in Australian Law. Native Title is governed by the Native
Title Act 1993 (Cth). Native title was introduced into law as a
result of the historic Mabo decision in which the High Court
ruled that Australia was not terra nullius--a land belonging to
no-one--at the time of European colonisation. This decision
recognised Aboriginal and Torres Strait Islanders as being
Australia's first people and that their rights and interests in
the land and waters continued to exist despite settlement.
Native title may include rights and interests to: live on the
area and erect shelters and structure; access the area for
traditional purposes, like camping or for ceremonies; visit and
protect important places and sites[,] hunt, fish and gather
food or traditional resources like bush medicines, water, ochre
and wood; teach law, custom and engage in cultural
activities.''
Canada
``Information on the tax exemption under section 87 of the Indian
Act.'' Government of Canada, accessed April 2021. https://
www.canada.ca/en/revenue-agency/services/indigenous-peoples/
information-indians.html.
- ``As an Indian, you are subject to the same tax rules as
other Canadian residents unless your income is eligible for the
tax exemption under section 87 of the Indian Act. That
exemption applies to the income of an Indian that is earned on
a reserve or that is considered to be earned on a reserve, as
well as to goods bought on, or delivered to, a reserve.''
- ``If you have personal property--including income--situated
on a reserve, that property is exempt from tax under section 87
of the Indian Act.''
United States
``Frequently Asked Questions.'' U.S. Department of the Interior:
Indian Affairs, accessed April 2021. https://www.bia.gov/frequently-
asked-questions.
- ``Do American Indians and Alaska Natives pay taxes? Yes.
They pay the same taxes as other citizens with the following
exceptions: Federal income taxes are not levied on income from
trust lands held for them by the U.S.; State income taxes are
not paid on income earned on a Federal Indian reservation;
State sales taxes are not paid by Indians on transactions made
on a Federal Indian reservation; Local property taxes are not
paid on reservation or trust land.''
``ITG FAQ #4 Answer--What are the tax implications of being a
federally recognized tribe?'' IRS, accessed April 2021. https://
www.irs.gov/government-entities/indian-tribal-governments/itg-faq-4-
answer-what-are-the-tax-implications-of-being-a-federally-recognized-
tribe.
- ``Federally recognized tribes are sovereign legal entities,
similar to State governments. They have all the rights and
attributes of a sovereign entity such as a State. They have a
constitutionally guaranteed status as sovereign entities. They
are not subject to tax based on this. Federally recognized
tribal governments are a unique set of entities in the United
States in this respect. Revenue Ruling 67-284 states that an
Indian tribe, as an income producing entity, is not subject to
income taxation. However, income earned, if not otherwise
exempt from income taxation, would be included in the gross
income of the Indian tribal member when distributed or
constructively received by the tribal member. Examples of
income that aren't taxable to Indian tribal members include
payments made under certain general welfare programs and
payments exempt under the Per Capita Act.''
India
``What are the income tax exemptions and other monetary benefits
available to women?'' The Economic Times, last updated March 4, 2021.
https://economictimes.indiatimes.com/wealth/tax/what-are-the-income-
tax-exemptions-and-other-monetary-benefits-available-to-women/
articleshow/74666372.cms.
- ``Up until Financial Year (FY) 2011-12, women and men had
different income tax slabs with women having to pay slightly
less tax. However, from FY 2012-13, this was done away with and
tax slabs for men and women were made the same. Therefore,
currently there are no income tax exemptions specifically for
women.''
Chakraborty, Pinaki, Chakraborty, Lekha, Karmakar, Krishanu, and
Shashi M. Kapila. ``Gender equality and taxation in India: An unequal
burden?'' In Taxation and Gender Equity: A comparative analysis of
direct and indirect taxes in developing and developed countries, edited
by Caren Grown and Imraan Valodia. London: Routledge, 2010.
- ``In 2008-09, the income tax threshold was increased from
Rs. 110,000 (U.S.$2,733, based on an exchange rate of 40.24 Rs.
= 1 U.S.($) to Rs. 150,000 and from Rs. 145,000 to Rs. 180,000
for women income earners. For both males and females over 65,
it is even higher, at Rs. 225,000. It is important to note that
India is one of the few countries, and the only one in this
volume, where the tax system provides such positive
discrimination for women. Until 2001, the tax rates on
individuals, both men and women, were the same. In 2001, women
were given a special rebate up to Rs. 5,000 against taxes
payable, unless they were above 65, in which case they received
the senior citizen rebate of Rs. 20,000. In 2005, the minimum
non-taxable income was raised to Rs. 125,000 for women
taxpayers as against the general threshold of Rs. 100,000. In
2005, the tax exemption limit for women was raised to Rs.
1,35,000, while the Rs. 5,000 tax rebate was discontinued and
in 2007, this limit was raised to Rs. 1,45,000.''
- ``Although the Indian tax system positively discriminates by
gender due to the higher tax threshold for women, the
effectiveness of such a policy is limited as the number of
women within the income tax net is a minuscule proportion of
the total number of income taxpayers and an even more minuscule
proportion of the total number of adult women in India.
Currently, the total number of individual taxpayers is about 27
million out of a total population of about 1 billion, so
approximately 2.7 per cent of the population falls within the
income tax net. . . . Women likely constitute less than 3
percent of this small number. . . . In other words, the use of
income tax as a means to further gender equality seems
limited.''
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______
Prepared Statement of Shay Hawkins, Co-Founder
and President, Opportunity Funds Association
introduction
Chairman Wyden, Ranking Member Crapo, and members of the committee,
it is a pleasure to be with you today. This will be my third time
testifying before Congress, but my first time testifying before the
Senate, so thank you for having me. I am the co-founder and president
of the Opportunity Funds Association (OFA), a trade association whose
members are entrepreneurs, investors, developers and fund managers
operating in Opportunity Zones. Through our members, we connect capital
to overlooked areas including Frontline Communities, improving lives,
creating opportunities, and ensuring long-term economic growth.
This morning, I would like to share a few success stories from
Opportunity Zones, discuss ways to build wealth through expanded
retirement saving, remind the committee of the ways Tax Reform made the
tax code more equal, and finally suggest policies to get investment
capital to minority entrepreneurs.
Prior to co-funding OFA, I served as Tax Counsel to Senator Tim
Scott (R-SC) where I helped champion the Investing in Opportunity Act,
legislation authored by Senators Tim Scott and Cory Booker (D-NJ) that
became Opportunity Zones. Research from the accounting firm Novogradac
shows that over $15 billion has been raised for investment so far with
over $3 billion of that being raised in the midst of a pandemic. An
August report from the Council of Economic Advisors estimates that
Opportunity Zones will lift 1 million Americans from poverty and reduce
poverty in designated zones by 11 percent.
building wealth through diverse projects and diverse leaders
Quinn Palomino was born in Vietnam right at the end of the Vietnam
War. She grew up at the refugee camps that the U.S. set up at Fort
Chaffee in Arkansas. Today, Quinn leads Virtua Partners, a global
private equity firm that was active in social impact prior to
Opportunity Zones, but has raised $100 million across four Opportunity
Funds to build a combination of commercial real estate and affordable
housing nationwide.
I'm proud to say that in my hometown of Cleveland, OH, the
minority- and
veteran-owned Bridgeport Group is raising capital from Opportunity Fund
investors to expand its supply chain logistics business to serve
Cleveland's world class health-care market. The venture will expand to
provide prescription and OTC drug fulfillment services for local
retailers to cost effectively compete with disruptive online
pharmaceutical providers. Bridgeport's founder Andre Bryant is an
active entrepreneur who makes it a point to support other minority
entrepreneurs.
Two weeks ago in Panama City, FL, Jorge Gonzalez, CEO of St. Joe
Company broke ground on a waterfront hotel and stand-alone restaurant
on Panama City Marina. The parcel is city-owned and will be leased to
St. Joe, providing immediate revenue to residents. The terms provide
for an increase in lease payments as the hotel's revenues grow over
time. The project will create 150 direct jobs for current residents and
rebuild a portion of Panama City that was completely destroyed during
Hurricane Michael.
Alex Bhathal, managing partner of RevOZ, a leading real estate
investment firm specializing in Opportunity Zones, will cut the ribbon
on an 11,325 square-foot office project. The facility will house San
Bernardino County's Children's Department of Behavioral Health (DBH),
providing mental wellness care to some of the most vulnerable and
underserved members of the community. The facility's location allows
for synergy between the County's collective community resources, such
as the San Bernardino County Office, San Bernardino Department of
Health, San Bernardino County Public Defender, San Bernardino County
Juvenile Court, and local schools.
building wealth through retirement savings
According to Federal Reserve data, the bottom 50 percent of
American families hold less than 2 percent of total U.S. wealth and
have a median retirement savings balance of $0. Fixing this requires
policies specifically targeted to the tens of millions of lower-income
workers for whom a tax deduction provides little meaningful support.
During my time as Tax Counsel for Senator Scott, I was proud to
advise him as he and this committee developed the bipartisan SECURE
Act. The bill was the largest retirement reform to impact the economy
in more than a decade, made it easier to save for retirement, andmade
retirement plans more accessible to more people.
Another promising way to address this challenge was outlined in a
recent paper from the Economic Innovation Group by a bipartisan pair of
economists, Teresa Ghilarducci and Kevin Hassett. The authors propose a
new program modeled after the highly successful Federal Thrift Savings
Plan (TSP) that would be aimed specifically at helping lower-income
workers build wealth and retirement security. As a former Senate
staffer who, like every member of this committee, has benefited first-
hand from the TSP, I believe this proposal deserves careful
consideration. It is precisely the kind of idea that could fill the
gaps in current policy and ensure that all workers are rewarded for
hard work and diligent savings. If properly designed, such a program
could help narrow the racial wealth gap.
congress should do no harm
It is critical that we build on previous efforts to make the income
tax code more simple, fair, and focused on helping the American people.
The Tax Cuts and Jobs Act:
Placed a cap on the State and Local Tax Deduction
We should not reverse course and lift the cap on
SALT.
Representative Alexandria Ocasio-Cortez recently
called SALT ``A Gift to Billionaires.''
I can't say that I agree with the Representative
often, but in this case the math is on her side.
Lifting the cap on the SALT deduction would be a
huge give away to the rich.
Even with the cap in place, around three-quarters
of the benefit goes to families in the top fifth of the income
distribution.
According to the Brookings Institution, if the
cap is lifted, almost all (96 percent) of the benefits of SALT cap
repeal would go to the top quintile (giving an average tax cut of
$2,640); 57 percent would benefit the top 1 percent (a cut of $33,100);
and 25 percent would benefit the top 0.1 percent (for an average tax
cut of nearly $145,000).
Uncapping SALT is a nonstarter for those
concerned with income inequality in the tax code.
Doubled the Standard Deduction
TCJA increased the standard deduction from $6,500
to $12,000 for single filers and $13,000 to $24,000 for taxpayers who
are married filing jointly.
Millions of households will no longer need to go
itemizing their deductions.
The Joint Committee on Taxation estimates that
about 88 percent of the 150 million households that file taxes will
take the increased standard deduction.
Doubled the Child Tax Credit
Taxpayers can claim a maximum credit of $2,000
for each child, with a portion of the credit refundable.
If the credit is greater than the taxpayer's
liability, they can receive a refund up to $1,400 based on an earned
income formula.
The CTC, in combination with other refundable tax
credits, is explicitly designed to benefit low-income families with
workers and children and can significantly boost incomes and lift
families above the poverty line, according to the Congressional
Research Service (CRS).
CRS estimates that TCJA's Federal income tax rate
changes reduced total poverty by 15 percent.
Nearly all of the poverty reduction from the income
tax changes were experienced by families that have both workers and
children.
Limited the Home Mortgage Interest Deduction (HMID)
The benefits of the HMID go primarily to high-
income taxpayers because high-income taxpayers tend to itemize more
often, and the value of the HMID increases with the price of a home.
According to the Tax Foundation, in 2018, less
than 4 percent of taxpayers earning less than $50,000 will claim HMID,
and these taxpayers will receive less than 1 percent of the overall
benefits.
Taxpayers making over $200,000 will make up 34
percent of claims and take 60 percent of the benefits.
what congress should do to help
Keep the Playing Field Level for Entrepreneurs
More than 90 percent of small businesses are organized as pass-
throughs (sole proprietorships, LLCs, partnerships, or S corporations),
not as corporations. This percentage is even higher for minority owned
businesses. Because of TCJA, pass-through business owners can now claim
a 20 percent deduction on their share of the business's income. The
deduction is scheduled to sunset in 2026, Repealing this sunset, as
suggested in Senator Daines' legislation, will benefit millions of
pass-through businesses and help level the playing field between small
and large businesses.
Democratize Opportunity Zone Investment
Opportunity Zones allow for a permanent exclusion from taxable
income of capital gains from the sale or exchange of an investment in
an Opportunity Fund if the investment is held for at least 10 years.
This benefit should be allowed for any capital invested and held in an
Opportunity Fund for at least 10 years, not just capital gains. By
allowing non-capital gains to be invested in Opportunity Zones, we can
democratize the community development tool and allow investors at every
level of wealth and income to participate. The change will also
increase the overall amount of capital available to entrepreneurs
building businesses in Opportunity Zones.
Empower CDFIs
Congress should also consider allowing Community Development
Finance Institutions (CDFIs) to receive equity investments as
Opportunity Zone Businesses. CDFIs are already active as business and
project lenders in distressed communities and have a deep understanding
of a community's needs, strengths and weaknesses. Allowing CDFIs to
take in equity capital from Opportunity Zone investors and then lend
this capital out to entrepreneurs in on a larger scale would money in
minority hands and minority communities.
Make Opportunity Zones Transparent
Perhaps the most important step Congress can take to optimize
sustainable growth in Opportunity Zones is to pass a bill adding
reporting and transparency requirements to the policy. Senator Tim
Scott along with Senators Sinema, and Grassley introduced a bipartisan
bill to this end last Congress. The bill would enable Treasury to
collect key information on the location of Opportunity Zone
investments, the types of businesses and projects attracting
investment, and the number of jobs created. This information will
enable Congress to adjust the policy to further incentivize investment
in areas remaining underserved, and will demonstrate the viability of
the policy as a community development tool.
Extend the Opportunity Zones Policy
Congress should finally consider extending this great policy.
Investment in Opportunity Zones was first undermined by untimely
regulations, and further hindered by the global pandemic. Extending the
policy to account for the time and momentum lost would go far in
bringing capital into distressed communities for benefit of existing
residents.
______
Questions Submitted for the Record to Shay Hawkins
Questions Submitted by Mike Crapo
Question. You have been working extensively with Opportunity Zone
projects. Do you believe that it was important that there was
bipartisan support in building up the legislation leading to the
Opportunity Zone provisions that ended up in the Tax Cuts and Jobs Act?
Answer. Yes. It was absolutely critical that there was bipartisan
support for Opportunity Zones (44 House Democrats, 44 House
Republicans, 7 Senate Democrats, 7 Senate Republicans). We have also
seen bipartisan legislation passed to expand Opportunity Zones use in
Puerto Rico to support the Territory in its economic recovery from
hurricane damage. The IMPACT Act which would add critical transparency
and reporting requirements to Opportunity Zones was introduced last
Congress with bipartisan sponsors.
Question. Your fellow panelist Professor Brown has recommended that
the Federal Government improve measurement and gathering and use of
data on race and ethnicity. The focus is to better understand any
interplay between provisions of the tax system and racial, ethnic, and
gender identifications.
Related to the Opportunity Zones provisions of the tax code, there
has been bipartisan legislation called the IMPACT Act. That Act
promotes reporting and measurement for opportunity funds, investors,
and possibly Opportunity Zone projects themselves.
I have four questions related to the IMPACT Act and Opportunity
Zones.
First, can you discuss what your understanding is of the bipartisan
IMPACT Act, and what you think are its objectives?
Second, with respect to that act, how important is it in terms of
measuring the impact of Opportunity Zones?
Third, will a failure to pass the IMPACT Act inhibit Congress's
ability to fine-tune the provision?
Fourth, in your experience with Opportunity Zones projects, what
have been your observations on whether or how the projects have
increased employment and business opportunities for minorities?
Answer. The IMPACT Act was introduced by Senator Tim Scott and co-
sponsored with Senator Krysten Sinema and former chair of the finance
committee Chuck Grassley. The bill and acronym is about Improving and
reinstating the Monitoring, Prevention, Accountability, Certification,
and Transparency of the Opportunity Zones provision.
The IMPACT Act codifies certain reporting requirements for
Opportunity Funds (the investment vehicle for opportunity zones),
requirements such as the total assets they have held in the fund, the
location, the value of Opportunity Zones property held by the fund,
whether the property is owned or leased, the location and industry
classification of operating businesses, equity investment, and the
number of persons the fund expects to be employed to the various
investments that they're making.
The legislation also codifies requirements of what information that
investors will see from the fund's managers. Information requirements
could include relevant dates on which investment positions are made,
descriptions of the various Opportunity Zones investments, and other
measures that will allow IRS to track the deferral and recognition of
gain.
The IMPACT Act also adds some penalties for funds that fail to
report in a timely and accurate manner.
A second set of requirements are for the Treasury Department, which
will be required to do an economic impact analysis that will measure
several domestic and economic factors to determine the impact of the
Opportunity Zones provision. The Treasury Department will look at:
The total number of funds.
The total assets of all funds.
The distribution of Opportunity Zones investments across their
financial industry classification.
The percentage of Opportunity Zones that have received
investment through the incentive.
The amount of Opportunity Fund investments made in each census
tract and the ratio of real property investments to the operating
businesses.
Over time, the information will be available to compare the
effectiveness of the Opportunity Zones fund investments, compared to
those that are not; so a failure to pass the IMPACT Act will absolutely
inhibit Congress's ability to fine tune the provision.
Opportunity Zones projects have increased minority employment and
business opportunities. An example can be found in my home town of
Cleveland OH. Minority and veteran-owned Bridgeport Group is raising
capital from Opportunity Fund investors to expand its supply chain
logistics business to serve Cleveland's world-class health-care market.
The venture will expand to provide prescription and OTC drug
fulfillment services for local retailers to cost effectively compete
with disruptive online pharmaceutical providers. Bridgeport's founder
Andre Bryant is an active entrepreneur who makes it a point to support
other minority entrepreneurs.
If Congress passes the IMPACT Act we will have more complete
information about the effectiveness of opportunity zones in creating
business opportunities for minorities.
Question. The Tax Cuts and Jobs Act did a number of things to
simplify and increase progressivity of the personal income tax system,
including: doubling of the standard deduction; expanding the Child Tax
Credit; expanding the alternative minimum tax exemption; enacting
Opportunity Zones incentives; capping the SALT deduction; capping the
mortgage-interest deduction; and limiting the exclusion for
employer-provided fringe benefits.
Do you agree with the Joint Committee on Taxation analysis showing
that TCJA made the individual side of the income tax code more
progressive, and do you think that any of the list of provisions I just
identified, including the cap on the SALT deduction, should be rolled
back?
Answer. I absolutely agree with the Joint Committee on Taxation
analysis showing that TCJA made the individual side of the income tax
code more progressive. I do not think that any of the provisions
identified above should be rolled back. In particular the cap on the
SALT deduction should not be removed. Even with the cap in place,
around three-quarters of the benefit goes to families in the top fifth
of the income distribution. According to the Brookings Institution, if
the cap is lifted Almost all (96 percent) of the benefits of SALT cap
repeal would go to the top quintile (giving an average tax cut of
$2,640); 57 percent would benefit the top one percent (a cut of
$33,100); and 25 percent would benefit the top 0.1 percent (for an
average tax cut of nearly $145,000).
Question. You have had extensive experience with Opportunity Zones
and funds, including being able to observe the manner in which the
capital they provide positively impacts low-income communities.
Could you please share any examples that come to mind when you
reflect on the positive impact that opportunity zone capital has on the
community that it comes into?
Could you please share any examples that come to mind when you
reflect on the positive impact that such capital has on entrepreneurs
and business owners located in and around opportunity zones?
Are opportunity zones an effective way of increasing capital in
disadvantaged areas? What changes, if any, could be made to the
provisions to enhance their effectiveness in this regard?
Answer. Quinn Palomino was born in Vietnam right at the end of the
Vietnam War. She grew up at the refugee camps that the U.S. set up at
Fort Chaffee in Arkansas. Today, Quinn leads Virtua Partners, a global
private-equity firm that was active in social impact prior to
Opportunity Zones, but has raised $100 million across four Opportunity
Funds to build a combination of commercial real estate and affordable
housing nationwide.
In Panama City, FL, Jorge Gonzalez, CEO of St. Joe Company, broke
ground on a waterfront hotel and stand-alone restaurant on Panama City
Marina. The parcel is city-owned and will be leased to St. Joe,
providing immediate revenue to residents. The terms provide for an
increase in lease payments as the hotel's revenues grow over time. The
project will create 150 direct jobs for current residents and rebuild a
portion of Panama City that was completely destroyed during Hurricane
Michael.
Alex Bhathal, managing partner of RevOZ, a leading real estate
investment firm specializing in Opportunity Zones, will cut the ribbon
on an 11,325 square-foot office project. The facility will house San
Bernardino County's Children's Department of Behavioral Health (DBH),
providing mental wellness care to some of the most vulnerable and
underserved members of the community. The facility's location allows
for synergy between the County's collective community resources, such
as the San Bernardino County Office, San Bernardino Department of
Health, San Bernardino County Public Defender, San Bernardino County
Juvenile Court, and local schools.
Opportunity Zones are an effective way of increasing capital in
disadvantaged areas. The Council of Economic Advisors estimates that
over 1 million Americans will be lifted out of poverty because of the
policy.
what congress should do to help
Democratize Opportunity Zones Investment
Opportunity Zones allow for a permanent exclusion from taxable
income of capital gains from the sale or exchange of an investment in
an Opportunity Fund if the investment is held for at least 10 years.
This benefit should be allowed for any capital invested and held in an
Opportunity Fund for at least 10 years, not just capital gains. By
allowing non-capital gains to be invested in Opportunity Zones, we can
democratize the community development tool and allow investors at every
level of wealth and income to participate. The change will also
increase the overall amount of capital available to entrepreneurs
building businesses in Opportunity Zones.
Empower CDFIs
Congress should also consider allowing Community Development
Finance Institutions (CDFIs) to receive equity investments as
Opportunity Zones Businesses. CDFIs are already active as business and
project lenders in distressed communities and have a deep understanding
of a community's needs, strengths, and weaknesses. Allowing CDFIs to
take in equity capital from Opportunity Zones investors and then lend
this capital out to entrepreneurs on a larger scale would put money in
minority hands and minority communities.
Make Opportunity Zones Transparent
Perhaps the most important step Congress can take to optimize
sustainable growth in Opportunity Zones is to pass a bill adding
reporting and transparency requirements to the policy. Senator Tim
Scott, along with Senators Sinema and Grassley, introduced a bipartisan
bill to this end last Congress. The bill would enable Treasury to
collect key information on the location of Opportunity Zones
investments, the types of businesses and projects attracting
investment, and the number of jobs created. This information will
enable Congress to adjust the policy to further incentivize investment
in areas remaining underserved, and will demonstrate the viability of
the policy as a community development tool.
Extend the Opportunity Zones Policy
Congress should finally consider extending this great policy.
Investment in Opportunity Zones was first undermined by untimely
regulations, and further hindered by the global pandemic. Extending the
policy to account for the time and momentum lost would go far in
bringing capital into distressed communities for benefit of existing
residents.
Question. When it comes to addressing underlying disparities
through effective policy choices, a number of potential solutions have
been offered. In your mind, what are some of the most effective ones
that Congress should be considering, and please include consideration
of any interplay between your suggested solution and the Federal
budget?
Answer. Congress should prioritize policies that enable work and
wage growth including regulatory reform and policies that grow small
businesses and make U.S. corporations more globally competitive.
Congress should also emphasize policies that empower Americans to be
more self-sufficient. Finally, Congress must consider the fact that any
policy to reduce poverty will fail without a social foundation of
better parents and strong marriages.
Question. What changes will be most impactful in terms of
addressing the racial, gender, and ethnic wealth gaps? Is the tax code
the preferred vehicle for seeking to address such disparities?
Answer. Because families with little or negative wealth also have
little taxable income, the tax code is probably not the best vehicle
for addressing racial gender and ethnic wealth gaps. To the extent
Congress looks to the tax code, it should focus on policies such as the
Secure Act that increases the ability to save for lower-income
Americans.
Another promising way to address this challenge was outlined in a
recent paper from the Economic Innovation Group by a bipartisan pair of
economists, Teresa Ghilarducci and Kevin Hassett. The authors propose a
new program modeled after the highly successful Federal Thrift Savings
Plan (TSP) that would be aimed specifically at helping lower-income
workers build wealth and retirement security. As a former Senate
staffer who, like every member of this committee, has benefitted first-
hand from the TSP, I believe this proposal deserves careful
consideration. It is precisely the kind of idea that could fill the
gaps in current policy and ensure that all workers are rewarded for
hard work and diligent savings. If properly designed, such a program
could help narrow the racial wealth gap.
Questions Submitted by Hon. Todd Young
Question. Before the onset of the pandemic, the U.S. economy was
delivering record gains for working Americans. The red-hot economic
growth arising from the 2017 passage of the Tax Cuts and Jobs Act,
along with the smarter regulation during the Trump administration,
provided opportunity for all Americans. Prior to the pandemic, we saw:
(i) the lowest overall unemployment rate in more than 50 years; (ii)
record low unemployment rates for black and Hispanic workers; and (iii)
solid wage growth, with stronger growth for low-wage workers than for
upper earners. These are just a few of the many economic successes we
saw following the 2017 tax cuts.
While the Nation continues to rebuild from the pandemic, do you
believe it is wise to undo the reforms that provided for the record
gains seen in 2018 and 2019?
Answer. I do not believe it is wise to undo the reforms that
provides for the record gains seen in 2019 and 2019,
Question. I would like to follow up on your hearing testimony and
your extensive experience with Opportunity Zones and funds,
particularly having observed the manner in which the capital they
provide positively impacts low-income communities.
Could you please share an example or two you have observed of the
positive impact that Opportunity Zones capital has on the communities
in which it is invested?
Answer. In Panama City, FL, Jorge Gonzalez, CEO of St. Joe Company,
broke ground on a waterfront hotel and stand-alone restaurant on Panama
City Marina. The parcel is city-owned and will be leased to St. Joe,
providing immediate revenue to residents. The terms provide for an
increase in lease payments as the hotel's revenues grow over time. The
project will create 150 direct jobs for current residents and rebuild a
portion of Panama City that was completely destroyed during Hurricane
Michael.
Alex Bhathal, managing partner of RevOZ, a leading real estate
investment firm specializing in Opportunity Zones, will cut the ribbon
on an 11,325 square-foot office project. The facility will house San
Bernardino County's Children's Department of Behavioral Health (DBH),
providing mental wellness care to some of the most vulnerable and
underserved members of the community. The facility's location allows
for synergy between the County's collective community resources, such
as the San Bernardino County Office, San Bernardino Department of
Health, San Bernardino County Public Defender, San Bernardino County
Juvenile Court, and local schools.
Question. I understand there was bipartisan support in building up
the legislation leading to the Opportunity Zones provisions that ended
up in the Tax Cuts and Jobs Act. Do you believe this bipartisan support
was important to the successful enactment and implementation of the
program?
Answer. Yes. It was absolutely critical that there was bipartisan
support for Opportunity Zones (44 House Democrats, 44 House
Republicans, 7 Senate Democrats, 7 Senate Republicans). We have also
seen bipartisan legislation passed to expand Opportunity Zones use in
Puerto Rico to support the Territory in its economic recovery from
hurricane damage. The IMPACT Act which would add critical transparency
and reporting requirements to Opportunity Zones was introduced last
Congress with bipartisan sponsors.
______
Prepared Statement of Himalaya Rao-Potlapally,
Managing Director, Black Founders Matter Fund
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for the opportunity to appear before you today.
My name is Himalaya Rao-Potlapally, and I am the managing director
of the Black Founders Matter Fund, an early-stage venture capital firm
that operates out of Portland, OR and invests in black entrepreneurs
that are leading startups across several verticals within the United
States.
You will probably notice that I don't represent the face of venture
capital. On the surface, there are very few women in this space, and
even fewer women of color. I am also a first-generation immigrant to
this country, and I started my career as a school social worker in the
Bronx in New York City working in high-risk schools with children and
families.
When I got my MBA, I was exposed to what entrepreneurship is and
who could be an entrepreneur. Learning that it didn't have to be
someone with several Ph.D.s or with generational wealth, my wife and I
decided to try it for ourselves and started a company. I only started
seeking out resources and knowledge about venture capital selfishly to
understand how I would be judged if I ever raised capital. I fell into
this world by accident, but as soon as I did, I realized the very
specific need for me to be here.
There is a huge lack of representation when it comes to the
investor makeup. Even when there are people of color or women in the
space, most of them have come from generational wealth and a higher
socioeconomic status. This inherently creates a space in which we have
homogeneous thinking. To combat what I was seeing, I positioned my
career in this space to first start as a venture capital consultant. I
went into firms who had the willingness to diversify their dealflow but
had seen no tangible differences in outcomes. In just 1 year of me
being with several of these firms, I was able to significantly change
their investment portfolio. As I analyzed why this was happening, I
realized that even when there is a willingness to diversify deaflow,
there are significant barriers that create unchanged outcomes. I cite
three main reasons for this inequity: the underlying framework for
evaluating potential startups, the homogeneous groupthink mentality,
and the lack of an on ramp to truly representative investors.
barriers to investing in diversity and innovation
1. The underlying framework for evaluating potential startups is
based on pattern matching and a dataset of previous success attained by
one demographic of founders.
The basis of evaluating startups is inherently biased. When
investors look at startups, they are essentially evaluating companies
compared to what already exists in the market and their own portfolio.
We compare them to existing ventures as a way to determine their
viability and propensity for success based on what we know already
works. This pattern matching behavior \1\ causes investors to look at
startups and notice incremental improvements in the business model,
team dynamics, or go-to-market strategy. While all three of those areas
are fundamental to creating great ventures, exclusively looking at
those factors creates a scenario where investors are missing a key
element to an innovative venture. The word innovation is defined as the
introduction of something new, whether it be a new idea, method, or
device.\2\ One of its synonyms is novelty.
---------------------------------------------------------------------------
\1\ Sparks, A. (2021). Raising Venture Capital (1.12 ed.). San
Francisco, CA: Holloway.
\2\ Innovation. (n.d.). Retrieved from https://www.merriam-
webster.com/dictionary/innovation.
The solutions we think of to problems are based on our framework of
reality. Our reality is based on our subjective lived experiences that
confirm or challenge what we already know.\3\ When the experience or
fact confirms what we already know, it strengthens that reality and
locks it into place. A challenge to our existing reality, presents our
mind with the opportunity to rationalize how the example is an outlier
that should not to be considered, or establishes the example as part of
a new pattern that requires us to rethink our logic framework. The
result is that we all take in a series of objective experiences and
facts and then internally process them through our own subjective view
of reality, to come up with what is true and what is possible.
---------------------------------------------------------------------------
\3\ Confirmation bias. (n.d.). Retrieved from https://
www.britannica.com/science/confirmation-bias.
When we bring that back to venture capital, founders' reality and
perceived notions of possibilities creates their varying approach to
solving any small or systemic problem. BIPOC founders inherently
experience the world and reality in a different way and therefore have
a different set of norms and solutions they come up with. In our
pattern matching evaluation framework, truly different ideas are
impossible to compare. The result is that we evaluate all deals based
on our historical dataset which is overwhelmingly composed of solutions
presented by white founders. Because of their drastically different
lived experiences, BIPOC founders largely present ideas that are
incomparable to this existing dataset and are therefore overlooked; not
because there is an overt want to exclude people based on their race or
ethnicity, but because our existing methodology of success is
essentially based on an algorithm that only takes its inputs from one
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group of lived experiences and potential solutions.\1\
Innovation implicitly requires difference. But how can we ever
filter or look for it when all our systems are designed to compare new
ideas to existing benchmarks and metrics?
2. We create homogenous groupthink in environments without the
four types of diversity.
On top of an underlying biased framework, we have the problem of
homogenous thinking. When we look at angel groups, venture capital
funds, or private equity--there is a stark lack of diversity with
regards to gender and racial equity. While demographic diversity (based
on age, gender, ethnicity, and race) is foundational to creating
representation, we run this risk of creating environments that have
superficial diversity when we miss the intersectionality of age,
gender, race, and ethnicity with concurring factors. A truly diverse
environment consists of three other types of diversity in addition to
demographic diversity.
It requires information diversity.\4\ To achieve this, we need
to look at sources that people are using to gather information.
Is everyone looking at the same articles, publications, and
datasets as a method of aggregating knowledge and creating a
starting point? If so, all the inputs are identical and
reinforce one another. This creates an environment where we are
only surrounded by information that confirms what we already
know and solidifies what we see as reality and possibilities.
---------------------------------------------------------------------------
\4\ Phillips, K.W., Duguid, M., Thomas-Hunt, M., and Uparna, J.
(2013). ``Diversity as Knowledge Exchange: The Roles of Information
Processing, Expertise, and Status.'' Oxford Handbooks Online.
doi:10.1093/oxfordhb/9780199736355.013.0009.
We also need value diversity.\5\ This relates to the core
values and beliefs that people hold and use to navigate the
world. This can be especially difficult in our current
polarized society where we see things are being right and wrong
instead of opinions that range on a spectrum informed by our
contrasting and sometimes contradicting realities.
---------------------------------------------------------------------------
\5\ Tran, B. (2016). ``A History of How U.S. Academics, Laws, and
Business Have Created the Current Approach to Organizational Diversity:
Visual, Innovative, and All-Inclusive Multiculturalism.'' In Prescott,
J. (Eds.), Handbook of Research on Race, Gender, and the Fight for
Equality (pp. 380-397). IGI Global. http://doi:10.4018/978-1-5225-0047-
6.ch017.
Finally, we need education diversity.\6\ We need to ask if all
the people in any given room have the same level and type of
formal or informal education. If so, we've all been
indoctrinated with the same information and knowledge and are
more likely to participate in a homogeneous thought process.
The type of education a person receives is also highly
correlated with socioeconomic status and education diversity is
one the most consistent types of diversities that is
overlooked. Across the spectrum, from non-profit boards to
government positions, to corporate leadership, we tend to see a
lack of intersectionality between racial, educational, and
socioeconomic diversity present in our leadership.
---------------------------------------------------------------------------
\6\ Moore-Berg, S.L., and Karpinski, A. (2018). ``An intersectional
approach to understanding how race and social class affect intergroup
processes.'' Social and Personality Psychology Compass, 13(1).
doi:10.1111/spc3.12426.
Without these four types of diversities present, we engage in and
encourage superficial diversity that enables tokenization rather than
impact-driven, sustainable change. We should instead strive to create
environments where different perspectives are intentionally centered
---------------------------------------------------------------------------
and heard.
3. There is currently a lack of an on ramp to greater
participation by representative investors into small businesses and new
ventures.
If we can agree that we need these four types of diversities
present in any given environment, then the last major barrier to
investment in innovation is the lack of an on ramp to truly
representative investors. To be a participant and decision-maker in
venture capital, you must be an accredited investor. As defined by the
SEC,\7\ an accredited investor is an individual that makes $200,000 in
annual income, $300,000 if a combined couple income, or has $1,000,000
in net assets, excluding the primary residence. This definition alone
excludes the majority of Americans from ever being able to participate
as investors in venture capital. In the last couple of years, the
accredited investor definition has expanded to include those who work
within venture capital or have intimate knowledge of the inherent risks
that come with venture investing.\8\ While this was a great expansion,
it's only the beginning. We need continued modifications to this
definition as well as intentional initiatives, like tax incentives, to
help drive participation into this historically closed loop activity.
We all come with our own set of inherent biases and subjective
realities. Creating environments where investors and founders are truly
representative of one another is a way to mitigate confirmation bias
that we use to evaluate success. These initiatives, like the one
Senator Wyden has proposed,\9\ incentivize greater participation by
different types of investors. When we are constructing initiatives, we
must exercise caution to ensure that we are creating a catalytic
environment that encourages participation of new and diverse investors
into a broad range of diverse entrepreneurs and businesses.
---------------------------------------------------------------------------
\7\ Accredited Investors. (n.d.). Retrieved from https://
www.investor.gov/introduction-investing/investing-basics/glossary/
accredited-investors.
\8\ Amendments to Accredited Investor Definition. (2020, December
7). Retrieved from https://www.sec.gov/corpfin/amendments-accredited-
investor-definition-secg.
\9\ Wyden Introduces Bill to Boost Capital Access for Women-Owned
Business: The United States Senate Committee on Finance. (2019, October
30). Retrieved from https://www.finance.senate.gov/ranking-members-
news/wyden-introduces-bill-to-boost-capital-access-for-women-owned-
business.
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key recommendations
Based on the previous discussion of barriers to investment in
diverse entrepreneurs and innovation, the following constitute the
starting points for effective change.
Investor education that goes against the existing pattern
matching behavior and instead upholds a holistic education framework
that examines a person's unique experience and its contribution to
metrics of a successful venture. The Black Founders Matter Fund has one
such framework developed on the basis of Effectual Entrepreneurship
\10\ overlaid with a social work framework of Systems Theory.\11\
---------------------------------------------------------------------------
\10\ Read, S., Sarasvathy, S., Drew, N., Wiltbank, R., and
AOhlsson, A. (2011). Effectual Entrepreneurship. Routledge.
\11\ Systems Theory. (n.d.). Retrieved from https://
www.sciencedirect.com/topics/psychology/systems-theory.
Incentive structures, including tax credits, student loan
forgiveness, and stipends/vouchers, as a method of incentivizing non-
monetary participation in leadership structures by diverse individuals.
As an example, non-profit boards are usually comprised of individuals
who have flexible work schedules, those who are retired, and those who
have enough passive or generational wealth to allow flexibility to
commit to a non-paid position. Creating structures that allow for
stipends and/or vouchers that can be used for living expenses/health
and wellness expenses can open doors for a broader range of individuals
to participate in leadership and community development. Tax incentives
and student loan forgiveness would also contribute to the long-term
flattening of the wealth disparity in exchange for the inclusion of
---------------------------------------------------------------------------
diverse voices in setting organizational strategies and solutions.
Expansion of the accredited investor definition to allow
greater participation by the majority of American citizens.
Incentive programs, including tax credits and student loan
credits, that accelerate and encourage participation of investment into
new ventures and small businesses. Special consideration should be
given to ensure that the resulting investment goes into a broad range
of businesses and individuals to ensure diverse distribution of
dollars.
conclusion
Creating environments that truly incentivize and encourage
participation from a diverse set of individuals might seem difficult to
achieve. But the lack of this environment and exclusively investing in
one type of solution or founder creates ripple effects throughout our
society. Here in the United States, we pride ourselves on being the
global leader of progress and innovation. We must therefore look to
solve this complex problem with a variety of different solutions to
ensure that we can continue to remain competitive in the global
landscape. This country is home to different cultures, identities, and
ideologies. We need to find a way to harness the strength of our
differences and diversity for a brighter, inclusive, and innovative
future.
Thank you again for the opportunity to testify, and I look forward
to your questions.
______
Question Submitted for the Record to Himalaya Rao-Potlapally
Question Submitted by Hon. Maggie Hassan
Question. Given the barriers that women, minority, and rural
entrepreneurs face in accessing capital, many have difficulty hiring
their first few employees. A tax credit to support initial hiring would
help these entrepreneurs start up their businesses. That's why I've
joined Chairman Wyden's bill to support women and minority
entrepreneurs, and why I worked on a bipartisan basis to secure a tax
credit for new businesses hires in the American Rescue Plan.
How do barriers to accessing capital affect the ability of women
and minority entrepreneurs to hire and retain employees?
Answer. Women and minority entrepreneurs have an exceptionally
difficult time when it comes to the race for talent. I was recently
connecting with a female entrepreneur as she reflected on her journey
to finding a co-founder. Although she had revenue and could demonstrate
market validation, investors wouldn't capitalize her company until she
had a co-founder to create more stability in the executive team. The
issue is that the women and BIPOC individuals historically suffer from
systematic wealth disparities. Therefore, there are less women and
BIPOC individuals and families available that can afford to work
without any salary now with the promise of equity and returns later.
Lack of funding continues to be the number one reason why startups lose
the ability to hire and retain top talent in their ventures. It is
therefore critical that we create pathways for companies led by women
and BIPOC leaders to get funded, so that they can participate in the
startup talent race. Hiring their first few employees and executive
team can mean the difference between a startup that scales and one that
fails.
Across the board, there is undercapitalization when it comes to
women and BIPOC-led ventures. The bill you proposed with Chairman Wyden
not only creates a tax credit that benefits these small businesses when
they hire their first employees, but also helps to create incentives
for investors to fund small businesses run by women and BIPOC
entrepreneurs. As stated above, an ability for companies to get funded
gives them the tools and resources to hire strong talent to scale
quickly and solidify their differentiation moat.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
This morning the Finance Committee will examine issues of racial
justice and tax code inequality in America. Nobody of good conscience
wants there to be a race-based penalty or a discount on taxes.
Everybody ought to pay a fair share, and everybody ought to have a fair
chance to get ahead. In practice, the U.S. tax code does not always
work that way.
If America's busted old tax code truly excels at anything, it's
rewarding those who are fortunate enough to already have wealth. The
lucky few with the top incomes can go years deferring their taxes,
paying what they want and when they want. On the other hand, there's no
deferral for a black nurse who pays taxes out of every paycheck or a
Latina small business owner who pays taxes quarterly.
According to a recent survey, a typical white American family has
eight times the wealth of a typical black American family. Some of the
cornerstone tax policies in America include well-intentioned tax
incentives for home ownership, education, and retirement savings. Those
incentives only really work for people who can afford to buy homes and
set money aside for education and retirement. Those people are much
likelier to be white.
The committee will hear a lot more examples like those today
illustrating how the tax code adds to inequality in this country. The
fact is, some recent changes have made the situation worse. An
estimated 80 percent of the individual benefits of the Trump tax law
went to white Americans. Even the benefits that went only to the top 1
percent of taxpayers were skewed the same way.
The American Rescue Plan enacted in March begins to change the math
of racial injustice and tax code inequality. It expanded the Earned
Income Tax Credit for millions of working people. It expanded the Child
Tax Credit and makes sure millions more working families will receive
the full amount available. Too often, families and individual workers
with lower incomes, particularly black and Latino, haven't had access
to those full benefits.
Those expansions are going to be game changers for those workers
and families in Oregon and all across the country. They ought to be
permanent, and I'm working with members of this committee to make that
happen.
Inequality isn't just about race, it's also about gender. Women
business owners, particularly women of color, are underrepresented,
under-capitalized and underappreciated. The share of business revenues
that go to women-owned businesses hasn't budged in 20 years. It's stuck
at 4 percent. Along with Senator Cortez Masto and Senator Hassan,
Senator Cardin and I are introducing the PROGRESS Act that will help to
increase that figure. Our bill is all about promoting investment in
women- and minority-owned businesses and helping them grow and hire
more workers.
Finally, policy-makers need better, confidential data on how tax
laws affect Americans of different races. Other Federal agencies
collect that type of demographic information and policy-makers can use
it to improve them. The IRS does not.
The fact is, the tax code isn't strictly about government funding.
Congress decided long ago to use the tax code to tackle major economic
and social challenges. The words black or white or Asian or Latino or
Native American don't have to appear anywhere in the code for tax laws
to affect those groups differently. Too often, those differences are
adding to inequality.
The IRS needs to meet a higher standard of confidentiality due to
its history and the sensitive nature of taxpayer information. That
said, it makes no sense to blind lawmakers to the key data that would
illuminate injustice in our tax laws. It's time for more tax data
transparency. This committee is going to make sure that happens in a
manner that fully protects the privacy and confidentiality of American
taxpayer information.
I'm looking forward to discussing all those issues and more today.
There's a lot for us to cover in this hearing. I want to thank our
witness panel for joining us.
______
Communications
----------
Letter Submitted by Vania K. Baker
U.S. Senate
Committee on Finance
I am a U.S. American citizen who lives outside the United States. To be
clear: I am an individual. I am not a corporation. I am not a
multinational. I did not move from the United States to avoid paying
U.S. taxes. But, by moving from the United States, I am automatically
subject to the U.S. Extraterritorial tax regime--a regime that imposes
more punitive taxation and reporting on Americans living abroad--than
is imposed on American residents. This is because the Internal Revenue
Code treats all things foreign to the United States punitively.
I moved from the United States because of work and family. In fact, I
am a full tax resident in the country where I live. But, because I
actually live and work in the EU, I am required to pay taxes and assume
responsibility for my financial and retirement planning here, where I
live. My income, financial and retirement assets are foreign to the
United States, but are local to me. Because my income and financial
assets, although local to me, are foreign to the United States, I am
subject to the U.S. Extraterritorial tax regime. As such, I am subject
to constant stress and fear of penalties should I make mistakes in
complying with the Internal Revenue Code. Furthermore, I find it very
difficult to find competent professional help. The help I can find is
very expensive (often costing more than $500 a year).
I know that you will find it difficult to relate to this. However,
because and only because, I live outside the United States, my
difficulties include the following:
Difficulty in maintaining bank/financial accounts where I live:
FATCA has provided incentives for banks in my
country to refuse to deal with U.S. citizens.
Punitive Taxation on non-U.S. mutual funds.
Being able to participate in non-U.S. pensions and still get the
benefits of tax deferral available to my neighbors.
Taxation on the sale of my principal residence which is not
taxed in the country where I live.
Difficulty in carrying on a business. It is normal for people in
my country to carry on business through small business corporations--
which are taxed punitively by the IRS (GILTI).
Having the retirement savings in my corporation effectively
confiscated by the 965 Transition Tax.
Being subject to income based on phantom capital gains. (Because
I am required to live my life tethered to the U.S. dollar, fluctuations
in the exchange rate can result in unexpected fake income).
To be clear, I am and will always be a U.S. American. However, I find
it very difficult to maintain compliance with both the U.S. Internal
Revenue Code and the tax code of my country of residence. Because of
this dual tax obligation, I am finding it very difficult to save and
invest for retirement. What one country gives, the other country takes.
The necessity of complying with both tax regimes means that I get the
worst of each tax regime. As a result, I feel that I am being forced to
consider whether it is possible to retain my U.S. citizenship. No U.S.
American should be forced to choose between his cherished U.S.
citizenship and the need to engage in responsible financial/retirement
planning.
It is terribly unfair that, because I live outside the United States, I
am forced to choose between my responsibilities to plan for retirement
and my responsibilities under the Internal Revenue Code. Why should I
be subject to additional requirements that resident U.S. Americans are
not? I am not living in the United States nor using services in the
United States. I have even been denied a COVID-19 vaccine from the U.S.
Government (because I don't live in the United States) while being
required to pay taxes to the United States!
The U.S. Extraterritorial tax system is terribly unfair.
A great American writer, the late Pat Conroy, began his book ``The
Prince of Tides'' with the following words: ``My wound is geography. It
is also my anchorage, my port of call.''
Although, my U.S. citizenship is my anchorage and my port of call, the
unfair U.S. extraterritorial tax regime--triggered by my geography--is
most definitely my wound.
Please fix this extreme injustice!
______
Letter Submitted by Amy Balcerak
U.S. Senate
Committee on Finance
I am a proud American citizen who lives outside the United States. To
be clear: I am an individual. I am not a corporation. I am not a
multinational. I did not move from the United States to avoid paying
U.S. taxes. But, by moving from the United States, I am automatically
subject to the U.S. Extraterritorial tax regime--a regime that imposes
more punitive taxation and reporting on Americans living abroad--than
is imposed on American residents. This is because the Internal Revenue
Code treats all things foreign to the United States punitively.
I moved from the United States because my husband got a job opportunity
to move us to Switzerland, and we were looking for a new adventure! In
fact, I am a full tax resident the country where I live. But, because I
actually live and work in Switzerland, I am required to pay taxes and
assume responsibility for my financial and retirement planning here,
where I live. My income, financial and retirement assets are foreign to
the United States, but are local to me. Because my income and financial
assets, although local to me, are foreign to the United States I am
subject to the U.S. Extraterritorial tax regime. As such, I am subject
to constant stress and fear of penalties should I make mistakes in
complying with the Internal Revenue Code. Furthermore, I find it very
difficult to find competent professional help. The help I can find is
very expensive, costing around $1,300 a year.
I know that you will find it difficult to relate to this. However,
because and only because, I live outside the United States, my
difficulties include the following:
Difficulty in maintaining bank/financial accounts where I live:
FATCA has provided incentives for banks in my
country to refuse to deal with U.S. citizens.
Punitive Taxation on non-U.S. mutual funds.
Being able to participate in non-U.S. pensions and still get the
benefits of tax deferral available to my neighbors.
Taxation on the sale of my principal residence which is not
taxed in the country where I live.
Difficulty in carrying on a business. It is normal for people in
my country to carry on business through small business corporations--
which are taxed punitively by the IRS (GILTI).
Having the retirement savings in my corporation effectively
confiscated by the 965 Transition Tax.
Being subject to income based on phantom capital gains. (Because
I am required to live my life tethered to the U.S. dollar, fluctuations
in the exchange rate can result in unexpected fake income).
To be clear, I am and will always be a proud American. But, I find it
very difficult to maintain compliance with both the U.S. Internal
Revenue Code and the tax code of my country of residence. Because of
this dual tax obligation, I am finding it very difficult to save and
invest for retirement. What one country gives, the other country takes.
The necessity of complying with both tax regimes means that I get the
worst of each tax regime. As a result, I feel that I am being forced to
consider whether it is possible to retain my U.S. citizenship. No proud
American should be forced to choose between his cherished U.S.
citizenship and the need to engage in responsible financial/retirement
planning.
It is terribly unfair, that because I live outside the United States,
that I am forced to choose between my responsibilities to plan for
retirement and my responsibilities under the Internal Revenue Code. Why
should I be subject to additional requirements that resident Americans
are not? I am not living in the United States and using services in the
United States. I have even been denied a COVID-19 vaccine from the U.S.
Government (because I don't live in the United States) while being
required to pay taxes to the United States!
The U.S. Extraterritorial tax system is terribly unfair.
A great American writer, the late Pat Conroy, began his book ``The
Prince of Tides'' with the words: ``My wound is geography. It is also
my anchorage, my port of call.''
Although, my U.S. citizenship is my anchorage and my port of call. The
unfair U.S. extraterritorial tax regime--triggered by my geography--is
most definitely my wound.
Please fix this extreme injustice!
______
Statement of Professor Caroline Bruckner, Professorial Lecturer,
Accounting and Taxation Managing Director, Kogod Tax Policy Center,
Kogod School of Business, American University
Chair Wyden, Ranking Member Crapo, Committee Members and Staff, thank
you for holding the full committee hearing on April 20, 2021, titled,
``Combating Inequality: The Tax Code and Racial, Ethnic, and Gender
Disparities.'' My name is Caroline Bruckner and I am a tax professor on
the faculty at American University's Kogod School of Business. I also
serve as the Managing Director of the Kogod Tax Policy Center (KTPC),
which conducts non-partisan policy research on tax and compliance
issues specific to small businesses and entrepreneurs. Our mission is
to develop and analyze research and policy recommendations for tax-
related problems faced by small businesses, and to promote public
dialogue concerning tax issues critical to small businesses and
entrepreneurs. In connection with my appointment as Managing Director
of the KTPC in 2015, I have focused our research agenda, in part, on
the tax and financing challenges facing women business owners, who are
overwhelmingly small businesses.
In June 2017, the KTPC released ground-breaking research on women
business owners and small business tax expenditures, Billion Dollar
Blind Spot: How the U.S. Tax Code's Small Business Expenditures Impact
Women Business Owners (BDBS), which built on my prior experience as
Chief Counsel to the U.S. Senate Committee on Small Business and
Entrepreneurship. That research included survey data from experienced
women-owned firms and focused on four small business tax expenditures
(i.e., Section 1202--100% Exclusion from Capital Gains Tax for
Investments in Qualified Small Business Stock; Section 1244--Ordinary
Loss Treatment for Investments in Small Business Stock; Section 179--
Expensing for Small Businesses; and Section 195--Deduction for
Qualified Start-Up Costs). We found:
1. While the number of women-owned firms has increased at
extraordinary rates in recent decades, the majority of these firms
remain predominately small businesses operating in service industries
and still encounter substantial challenges with growing their receipts
and accessing capital;
2. Our survey data showed that when women-owned firms can take
advantage of tax expenditures, they do (see, e.g., Section 195).
However, least some of the U.S. tax code's small business tax
expenditures targeted to stimulating small firm investment either
explicitly exclude service firms by design (e.g., Section 1202), and by
extension, the majority of women-owned firms, or operatively bypass
them in favor of firms that are incorporated (e.g., Section 1244) or
operating in industries that tend to make more regular capital-
intensive investments (e.g., Section 179);
3. There is a critical (and long-overdue) need to develop tax data and
research to measure the effectiveness of small business expenditures
with respect to women-owned firms; and
4. The lack of demographic data and tax research on U.S. tax code's
small business tax expenditure with respect to women business owners
constitutes a billion-
dollar blind spot in U.S. tax policy.
Throughout 2017's tax reform debate, I submitted multiple statements
for the record to the Congressional tax-writing committees and
testified before the U.S. House of Representatives Committee on Small
Business on this research and the need to specifically consider the tax
challenges and data gaps identified in BDBS.\1\ However, at no point
during the tax reform debate did Congress meaningfully and specifically
consider whether money spent on tax expenditures targeted to small
businesses would be effective in addressing the access to capital
challenges faced by most women business owners.\2\
---------------------------------------------------------------------------
\1\ The testimony and submissions included links to and excerpts
from BDBS, which detailed the legislative history and Congress's intent
to provide access to capital and opportunities for growth to small
businesses with respect to four specific tax expenditures. See e.g.,
Small Business Tax Reform: Modernizing the Code for the Nation's Job
Creators: Hearing Before the U.S. House Committee on Small Business,
115th Congress (testimony of Caroline Bruckner) (October 2017), https:/
/www.govinfo.gov/content/pkg/CHRG-115hhrg27040/html/CHRG-115hhrg27040.
htm; Caroline Bruckner (July 27, 2017), Statement for the Record to the
U.S. House of Representatives Committee on Ways and Means Tax Policy
Subcommittee in Connection With July 13 Hearing, ``How Tax Reform Will
Help America's Small Businesses Grow and Create New Jobs.''; Bruckner,
Caroline (July 14, 2017), Submission to the U.S. Senate Finance
Committee in Response to the Chair's Request for Recommendations for
Tax Reform (on file with author); Caroline Bruckner, Statement for the
Record to the U.S. Senate Committee on Small Business and
Entrepreneurship in Connection With the June 14 Hearing Titled, ``Tax
Reform and Barriers to Small Business Growth,'' (June 28, 2017).
\2\ Bruckner, Caroline (2020). ``Doubling Down on a Billion Dollar
Blind Spot: Women Business Owners and Tax Reform.'' American University
Business Law Review, Vol. 9, Issue 1.
In fact, subsequent research on the witnesses that testified before the
Congressional tax-writing committees shows that women business owners
were repeatedly overlooked and under-represented as witnesses during
tax reform hearings.\3\ For example, in 2017, the tax-writing
committees held a total of 12 hearings on tax reform and less than 19%
of the witnesses testifying at these hearings were women. In fact,
women were witnesses in only 7 hearings and no women business owner
testified at the sole SFC hearing on business tax reform. More
broadly, analysis of witnesses testifying before the tax-writing
committees from 2007 through 2017 at tax reform hearings found that 44%
of the SFC tax reform hearings had no women as witnesses, while 46% of
W&M tax reform hearings failed to include any women.\4\
---------------------------------------------------------------------------
\3\ In 2019, together with Karen O'Connor, the Jonathan N. Helfat
Distinguished Professor of Political Science, Department of Government,
School of Public Affairs at American University, I developed the
Congressional Record Representation Dataset [hereinafter CRRD], which
is the first-of-its kind digital diversity and inclusion legislative
tool in the U.S. designed to track the number of women and people of
color testifying before congressional committees to measure diversity
and inclusion of congressional witnesses. The CRRD is comprised of
witnesses testifying at congressional legislative, oversight or
investigative hearing identified using published committee end-of-
congress (EOC) reports and hearing transcripts. The CRRD excludes
witnesses at confirmation hearings or mark-ups. The CRRD has been
created by human-based processing of publicly available EOC Reports,
which congressional committees are required to prepare and file at the
end of each Congress. EOC Reports document a committee's legislative
activities during a Congress and identify witnesses that testified at
hearings. Preliminary results for the gender of witnesses before U.S.
Senate Committee on Finance (SFC) and the U.S. House of Representatives
Committee on Ways and Means (W&M) from the CRRD for the 110th-112th
Congresses announced in January 2020. Bruckner, Caroline, Karen
O'Connor and Dakota Strode, ``A Seat at the Table: Just How
Representative Is the Legislative Process? An Analysis of the Gender
Distribution of Witnesses Before a Select Group of Committees in the
U.S. Congress.'' Southern Political Science Association Annual Meeting,
San Juan, Puerto Rico, available at: https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3543554.
\4\ Bruckner, supra n. 2 at 19.
Overall, women comprised only a small fraction (17.5%) of the total 462
witnesses called to testify at the 91 tax reform hearings the tax-
writing committees held from 2007 through 2017, and the data used to
develop this witness testimony research does not (yet) include the race
or ethnicity of witnesses. At the same time, by 2017, women business
owners had grown to comprise almost 40% of all U.S. businesses and
research showed that women of color were responsible for much of the
overall growth.\5\ The systemic representation inequity before the tax-
writing committees is particularly problematic given SFC alone ``has
the largest committee jurisdiction in either chamber of Congress,
oversees more than 50 percent of the federal budget and has
jurisdiction over tax, trade and healthcare policy.''\6\
---------------------------------------------------------------------------
\5\ Bruckner, supra n. 2, at 9 (citing research finding that firms
owned by women of color grew at a rate of 43 percent over the last five
years--double the rate of all new women-owned firms).
\6\ Press Release, U.S. Senate Committee on Finance (Nov. 9, 2017),
available at: https://www.finance.senate.gov/imo/media/doc/
11.9.17%20Committee%20History.pdf.
The absence of consideration of women business owners as part of the
tax reform legislative process reflects an effort by Congress to double
down on the billion-dollar blind spot it has when it comes to tax
expenditures and women business owners. Specifically, as part of the
final tax reform legislation Congress passed in 2017, Congress included
hundreds of billions of dollars in funding for targeted small business
tax expenditures that my research suggests are less favorable to women
business owners.\7\
---------------------------------------------------------------------------
\7\ Bruckner, supra n. 2, at 26-27.
Although some women business owners had some tax savings as a result of
the tax reform legislation, data from Congressional tax experts raises
new questions on the equity of the distribution of the revenue of some
tax expenditures funded by the legislation. For example, in 2018, the
Joint Committee on Taxation (JCT) released data on the distribution of
the revenue loss triggered by the Section 199A deduction created for
individuals with business income that indicated more than 90% of the
revenue loss would ``flow to firms with income of more than $100,000 in
2018 and 2024.''\8\ In other words, the majority of revenue Congress
spent in funding Section 199A flowed to firms other than the majority
of women business owners (88%) who have revenues of less than $100,000
and who struggle to access capital.\9\
---------------------------------------------------------------------------
\8\ Id. at 26 (referring to data from Joint Committee on Taxation,
JCX-32R-18, Tables Related to the Federal Tax System in Effect 2017-
2026 (2018)).
\9\ Testimony Before the U.S. House of Representatives Committee on
Budget in connection with a hearing titled, ``2017 Tax Law--Impact on
the Budget and American Families.'' (February 27, 2019), available at:
https://budget.house.gov/sites/democrats.budget.house.gov/files/
documents/02.27.2019.Bruckner_%20Testimony.pdf.
The most recent 2021 JCT estimates suggest that more than 21 million
taxpayers will claim a Section 199A deduction that will cost taxpayers
$186 billion in 2021 alone.\10\ Given that tax expenditures ``are
similar to direct spending programs that function as entitlements to
those who meet the established statutory criteria,''\11\ the tax-
writing committees have an oversight responsibility to taxpayers to
determine what businesses are benefiting from these business tax
programs. My research suggests that combatting inequality in the U.S.
tax code requires greater oversight of business tax expenditures and
should include consideration of the legislative process and who is
testifying before the tax-writing committees as part of that process.
---------------------------------------------------------------------------
\10\ Joint Committee on Taxation, JCX-18-21, Overview of the
Federal Tax System as in Effect For 2021 (2021), available at: https://
www.jct.gov/publications/2021/jcx-18-21/.
\11\ Joint Committee on Taxation, JCX-23-30, Estimates of Federal
Tax Expenditures for Fiscal Years 2020-2024 (2020), available at:
https://www.jct.gov/publications/2020/jcx-23-20/.
---------------------------------------------------------------------------
Conclusion
With the economic devastation triggered by the COVID-19 pandemic and
its impact on working women, Congress has repeatedly demonstrated a
willingness to respond to small businesses owners in distress. The
CARES Act and the American Rescue Plan included several tax provisions
targeted to help businesses survive despite challenging economic
conditions. The SFC is to be commended for recognizing the inequities
that exist in the U.S. tax code and its administration by holding this
hearing. In addition, Chair Wyden's recent introduction, together with
Senators. Cardin, Hassan and Cortez Masto, of the Providing Real
Opportunities for Growth to Rising Entrepreneurs for Sustained Success
(PROGRESS) Act demonstrates critical leadership and willingness to use
tax expenditures to tackle existing inequities, including those faced
by women- and minority-owned firms looking to secure capital to grow
their businesses. But there is more work to do. Moving forward, the SFC
should:
1. Hold hearings to consider the impact of U.S. tax code's
business tax expenditures on women- and minority-owned small
businesses;
2. Task the U.S. Government Accountability Office with preparing a
report detailing recommendations on how Congress can coordinate with
the U.S. Department of Treasury, IRS, the U.S. Small Business
Administration and JCT to develop the demographic data needed to
prepare an assessment of the distribution of existing tax business
expenditures with respect to women-owned and minority-owned firms. The
report's recommendations should include discussions of and
recommendations on protecting taxpayer privacy data;
3. Develop voluntary witness disclosure statements for individuals
testifying before the tax-writing committees. Such statements should
ask witnesses to volunteer information with respect to their gender,
race, ethnicity, and veteran status;
4. Amend the tax-writing committee rules to require staff to
include voluntarily-provided demographic data of witnesses testifying
before the committees in end-of-congress reports and hearing
transcripts; and
5. Charge JCT with including demographic distribution data when
preparing estimates of business tax expenditures in its annual tax
expenditure reports.
Combating inequality in the U.S. tax system will require sustained
commitment by this Committee and holding this hearing is an important
step. I stand ready to help the Committee with its work. Feel welcome
to contact me with questions regarding the foregoing.
______
Letter Submitted by Anne-Marie Yarbrough Buzatu
Dear Committee Members,
Imagine you were born in Canada, but moved to Texas as a young person,
obtained U.S. citizenship and built your family life and career in
Texas. You love your life in Texas, but there is one BIG catch: you
have to pay higher Canadian tax rates on your income, often on top of
the taxes you are already paying in the U.S., for services such as
Canadian nationalized health care that you never personally benefit
from. You can't take advantage of U.S. tax programs such as 401K plans
and education deductions because they are not ``Canadian approved''
programs. Furthermore, Texas banks have to report all of your financial
records to the Canadian tax authorities, and as a result very few banks
will accept you as a client, so you can't shop around for a better
mortgage or a higher savings interest rate. Finally, you are
effectively barred from investing in any kind of mutual funds or
investment instruments in Texas because they are treated by Canada as
``offshore'' accounts overseen by the Canadian Financial Crimes Unit,
with onerous reporting requirements and punitive tax rates. All of this
because you were born in Canada, and because of your place of origin
you are treated differently from/more punitively than other Americans--
even those born in other countries. Then imagine that your repeated
calls to change the system to something more equitable were
systematically ignored by both Canadian and U.S. authorities. Sound
unfair? This is the reality I have to contend with every day as a
``U.S. person'' residing in Switzerland.
I am an American citizen, born and raised in Texas, who has resided in
Switzerland for more than 15 years, and who has recently obtained Swiss
citizenship. Because of my status as a ``U.S. person'', I am
discriminated against in Switzerland, my place of residence and now
nationality, because of the U.S. practice of taxing ``U.S. persons'' on
their worldwide income, and the Foreign Account Tax Compliance Act
(FATCA) and the bilateral agreement that the U.S. negotiated with
Switzerland in order to enforce FATCA. Furthermore, because I reside
outside of the U.S., I am discriminated against as compared to my U.S.-
based compatriots and am unable to benefit from a whole host of social
benefits, tax deductions and banking services. Here are a few examples:
I am effectively banned from opening an investment account in
Switzerland, my place of residence and nationality, because financial
institutions do not want to assume the onerous reporting requirements
that come with a potential withholding fee of 30%.
Nearly all banks in Switzerland will not accept me as a client
for regular banking services for the same reasons, so there is no way
for me to compare banking services or take advantage of offers that are
not provided by the one bank that will accept me (UBS).
Nearly all U.S.-based investment firms and banks will not accept
me as a client because I am not a resident of the U.S.
I pay into a retirement fund that is very similar to a 401K
program, and which provides similar tax advantages in Switzerland
because I am only taxed on that income when I take it out at
retirement; but both my and the employer's contributions are taxed by
the U.S. in the year I earn them meaning I am taxed at a punitive rate.
I cannot take deductions for my sons' university tuition because
they schools they go to are not on the U.S. Department of Education's
Database of Accredited Post Secondary Institutions and Programs (DAPIP)
\1\ or the Federal Student Loan Program list.\2\
---------------------------------------------------------------------------
\1\ https://ope.ed.gov/dapip/#/home.
\2\ https://studentaid.gov/understand-aid/types/international.
---------------------------------------------------------------------------
I am not able to benefit from a whole host of tax deductions and
credits that my U.S.-residing compatriots do because I am not a
resident of the U.S.
Many IRS services are only available to U.S. residents, meaning
that they are not available to me as a U.S. person residing abroad.
Being a ``U.S. person'' has impacted me professionally because
any Swiss institution I work and have bank signatory rights for would
have to have their finances reported to the IRS. I have only worked for
non-profit NGOs in Switzerland.
In many cases Swiss taxes are assessed in a manner that is
fundamentally incompatible with the U.S. income tax approach, meaning
that in some cases I am double-taxed by both systems; the current U.S.-
Swiss tax treaty does not effectively address these inconsistencies
(see more below).
U.S. taxation on my and my husband's income is disastrous for us, for
numerous reasons which are laid out in detail in the below submission.
However, before wading into the weeds, I wanted to put up front my
recommendations for how to overhaul international taxation so that it
is fairer and reduces discrimination against folks like myself:
(1) Change the system of citizen-based taxation of individuals to
that of individual taxation on only income earned from U.S. sources,
and not worldwide taxation, also known as resident-based taxation for
individuals, the kind of income taxation that most of the rest of the
world practices (for a relatively simple and fast interim fix to this
issue by the U.S. Treasury while waiting on lengthier legislative
processes, please read this article);\3\
---------------------------------------------------------------------------
\3\ https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3795480&fbclid=IwAR10eXmPraGW3
Wuaa_VgnL7HYObjUBZz3302cglQOsT2rPyxtmy5SS7ibgU.
---------------------------------------------------------------------------
(2) Create a special committee that looks at the impacts of U.S.
taxation on its nationals residing abroad so that any changes made to
the tax code are reviewed by this body to ensure that our situations
are taken into consideration, including analyses of how they are
(in)compatible with the tax systems of the other 190+ countries in
which U.S. persons live in order to protect against unintended negative
consequences; and finally
(3) To include formal representation of Americans living abroad in
our representative bodies, as the approximately 9 million of us living
abroad need a voice. Switzerland and France include seats for their
citizens residing abroad in their Parliaments, and the U.S. can and
should do the same.
To understand why I am making these recommendations, please read the
more personal account below.
I was born and raised in Texas, where I lived most of my life until I
and my family moved to Switzerland more than 15 years ago. We didn't
feel we had much choice. In August 2005, my husband was laid off from
his job in the high-tech sector. We had two young boys aged 4 and 7,
and I was working as a part-time consultant and a more than full-time
mom. Once my husband lost his job, we suddenly were faced with
extremely high health insurance costs (COBRA), significant student loan
debts and a high monthly rent with no income. My husband applied for
several jobs and had a few interviews, but the one he got was working
in IT for the International Computing Center, a UN-affiliated computer
services organization, located in Geneva, Switzerland.
In Switzerland, I went back to school studying the impact of war and on
international security and human rights. I subsequently managed to
carve out a really fulfilling career working for Swiss-based NGOs where
I strive to limit the negative impacts of businesses on human rights,
as well as work with the private sector to foster positive change, both
on the ground as well as in the halls of international policy.
I love the U.S. and have close ties with family members and several
good friends who live there. Both of my elderly parents are alive, but
have been experiencing some serious health issues of late. Before the
pandemic, I typically would visit them at least once a year, and it has
been tough waiting on the sidelines, hoping that I will be able to see
them again before too long. It is important to me that I am able to
visit them, and to be able to spend more time with them should they
need extra care and support, and more generally I love getting back to
the U.S. There are definitely things that I miss, like really good Tex-
Mex (!) in an affordable restaurant, infinite sunsets over a West Texas
sky, and easy, laid-back conversations with good friends and family.
What I do not love is the U.S. taxation of people like me who live,
work and pay taxes in a completely different tax system, which in many
areas is completely incompatible with the U.S. tax system. As a matter
of fact, you could say that the U.S. has three different distinct
income tax regimes which creates different, unequal classes of
taxation: 1. Residence--For U.S. residents, 2. U.S. Source--For non-
resident aliens, 3. Extraterritorial--For Americans Abroad. This last
regime to which I and my family are subject means that we don't get the
same kinds of deductions and tax credits as our homeland-based
compatriots. For example: I participate in an employer-contribution
retirement program which is very similar to U.S. 401K programs: the
employer matches my contributions, and I do not have to declare the
employer nor my contributions on my Swiss taxes as they are paid, only
when I take them out after retirement when I am likely earning much
less. However, the U.S. taxes me on the employer contributions as well
as my own contributions to the tax plan in the year that they are paid,
so I am taxed by the U.S. on money I haven't even received, and likely
at a higher tax rate than I would be at during retirement. Another
example: my son is going to a university located in Berlin, Germany,
however the school is not on the list of U.S. recognized educational
institutions, so we are unable to deduct his tuition from our taxes.
Furthermore, Swiss income taxes are structured completely differently
from those of the U.S., and they are in most cases lower than the U.S.
income tax rates. However, the cost of living in Switzerland is one of
the highest in the world and is considerably higher than we were paying
in Texas. People who visit from the U.S. are shocked at the prices in
the stores and restaurants here, and renting/buying homes is extremely
expensive. However, because of the relatively high salaries (in Geneva
we have an approximate $25/hour min. wage) and low taxes, these prices
are generally affordable to people who work here. Less so for us: as
``U.S. persons'', because we are unable to take many of the same
deductions as our homeland compatriots, we essentially have to pay
higher U.S. taxes than Americans living in the U.S., higher taxes than
others who live and work in Switzerland and pay the higher Swiss
prices. And to be very clear, we are not earning very high salaries,
but rather are at that sour spot of earning just a little more than the
Foreign Earned Income Exemption (FEIE) once things like our employer
contributions to pensions and other benefits--much of which we don't
get in pocket--are taken into account. As such, we pay U.S. taxes at a
pretty high rate on income that doesn't make it into our bank account
and given the high cost of living we have here, this means we are
penalized financially relative to our colleagues who are working
similar jobs.
Moreover, as U.S. persons residing abroad, we are not able to take
advantage of many of the tax credits that are available to those living
in the U.S. For example, in March 2018 we bought a Tesla Model 3 (the
more affordable Tesla) and were under the impression that we would be
able to get the $7,500 tax credit to help us offset the still
significant cost. However, when we did our U.S. taxes, we learned that
this tax credit was only available to those actually living in the
U.S., not those living abroad. In a way I understand the rationale: our
Tesla would not be directly benefiting those living in the U.S.
(although it is contributing to an overall globally cleaner
environment), and therefore we should get no incentive from the U.S. to
buy it. However, by the same logic, we should not be paying taxes in
the U.S. on income that we do not earn from there, to pay for an
infrastructure and a Congress that does not directly benefit or
represent us.
Coming back to the incompatibility between Swiss and U.S. income tax
systems, this is not just limited to the fact that similar Swiss
retirement and education tax programs are not recognized by the U.S.,
but also to completely different approaches in the manner of
calculating income tax. For example, in Geneva the way that taxes are
assessed in relationship to our townhouse is that the income tax
authorities tax us on the fictional ``income'' we would have earned if
we had been renting the house out (which we are not). The way they
calculate this is very complicated and not fully known to me, but it
has something to do with the type of property, when the property was
built, where it is located, and the amount of income that we earn from
our work (this last element helps to ensure that we will not be priced
out of our home by property taxes even as property values rise).
Furthermore, it is something we find out long after the fact of filing
taxes. For example, for tax year 2020, we will file our Swiss tax
returns in June of 2021 and we will get the calculation of this
``income tax on our property'' somewhere in October-November 2021, long
after our U.S. tax returns are due and interest is being assessed on
any unpaid amounts. Furthermore, its incompatibility with how U.S.
assesses income and property taxes makes it really difficult to know
how to include that in our tax returns. We tried to do it for a couple
of years, but this did not seem to be accepted by the IRS, and then we
had to pay additional taxes with penalties and interest. Now we do not
even try to include these taxes we pay on our U.S. tax return, and so
we are being double-taxed by both Swiss and U.S. jurisdictions on that
income.
When it comes to trying to get information, help and guidance from the
IRS so that we can navigate these difficulties more easily, this is
also not set up for those of us living abroad. Most of the time when I
call the IRS, I get a message that the line is too busy and they are
not accepting calls at that time. Sometimes I have gotten a message
saying that the estimated wait is between a certain time, such as 7 to
10 minutes, and then finally hung up after being on hold for more than
30 minutes. Needless to say, there are no toll-free numbers for U.S.
persons abroad, so of course we have to pay international long-distance
rates. However, even many of the IRS online services are not available
to those of us living outside of the U.S. (see below for an example).
Another problem is that as ``U.S. persons'', nearly ALL banks will
simply not open an account for us, which has huge implications on, for
example, shopping for affordable mortgages from local/cantonal banks.
Further, we are effectively banned from investing in any kind of
stocks, bonds or mutual funds in our country of residence and
nationality. We are getting older, and we wanted to try to invest in a
mutual fund here to put aside a little extra money for our golden
years. However, the only bank we found in Switzerland that would accept
us as customers had a 250,000 Swiss Francs (about $270,000) minimum
investment requirement--something that is definitely out of our league!
Furthermore, we learned that even if we could and did invest in a
mutual fund here in the country where we live (and now are also
citizens of), that it would be treated by the U.S. as a ``Passive
Foreign Investment Company'' and would be taxed at an exorbitant rate.
Discrimination against me as a ``U.S. person'' has also impacted me
professionally. After I was hired as the COO for a very small, non-
profit Swiss NGO we learned that if I were given signatory rights on
our organizational bank account, that the financial records of this
Swiss organization would have to be sent to the IRS. Therefore, I do
not have these rights, and I can't perform all of the functions of my
role. This puts me at a disadvantage employment-wise relative to all of
the qualified candidates who do not have U.S. citizenship.
Furthermore, filing and paying taxes in the U.S. is extremely
complicated, and
calculations/corrections made by the IRS are not transparent. We have
consistently filed and tried to pay our taxes in accordance with the
rules as we understand them, although the tax code is not exactly
straight-forward especially for people like us living outside the U.S..
Sometimes we get bills years later without any explanation as to why or
how new calculations were made. For example, we recently got a bill
from the IRS from 2014 for nearly $8,000(!) This is a lot of money for
us. I wrote the IRS and asked for an explanation of how they calculated
this amount more than six years after the fact and got no response
except for a threatening letter that they are going to levy taxes on
our assets. I tried to go online to get a transcript of how they
calculated this tax, however the online service is not available to
persons who live abroad! There is a phone-in/write-in service to obtain
tax transcripts, but it only goes back to the previous three years'
returns. I tried to call anyway and was not able to get through.
I am not against paying taxes, and fully recognize the necessity of
them. If I were to earn any money from U.S. sources, it would make
sense that I pay U.S. tax rates under the U.S. tax system, but not that
I pay Swiss taxes on top of them. If every country taxed because of
nationality (or even former permanent residence status) with no regard
to the other nationalities and their accompanying tax systems, the
impacts would be devastating: many persons here in Geneva have 3, 4 or
even more nationalities, and having to satisfy the requirements of
multiple different, incompatible national income tax systems on income
earned in one country would not be sustainable, nor would it be fair.
In this respect the U.S. is the only country (outside of Eritrea) that
taxes on the basis of nationality/permanent residence, but this also
highlights how incongruent and out of step this practice is with the
rest of the world, and for its citizens/permanent residents who happen
to reside in other countries. Every time Congress makes a change to the
tax code, this directly impacts me and those of us living outside of
the U.S. who are also subject to other tax code regulations. However,
these impacts are rarely if ever discussed by members of Congress, and
certainly not studied in depth as to how they will impact/interact with
the other 190+ countries' income tax regimes where U.S. persons may be
living. This results in devastating unintended consequences on ordinary
folks: if I were rich, or a multinational, I would have the resources
to figure out how to get around the different tax systems, but I am
not.
Finally, I cannot express the anger and frustration I feel when I read
that Amazon and 54 other major U.S. corporations, as recently reported
in The New York Times,\4\ paid ZERO income taxes on incredible, record-
setting profits in the many billions. How is it that we, a middle-class
family who hasn't even lived or earned any income in the U.S. for more
than 15 years, are effectively paying more income taxes than Amazon?
---------------------------------------------------------------------------
\4\ https://www.nytimes.com/2021/04/02/business/economy/zero-
corporate-tax.html.
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Therefore, we ask you to:
(1) Change the system of citizen-based taxation of individuals to
that of individual taxation on only income earned from U.S. sources,
and not worldwide taxation, also known as resident-based taxation for
individuals, the kind of income taxation that most of the rest of the
world practices (for a relatively simple and fast interim fix to this
issue by the U.S. Treasury while waiting on lengthier legislative
processes, please read this article);\5\
---------------------------------------------------------------------------
\5\ https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3795480&fbclid=IwAR10eXmPraGW3
Wuaa_VgnL7HYObjUBZz3302cglQOsT2rPyxtmy5SS7ibgU.
---------------------------------------------------------------------------
(2) Create a special committee that looks at the impacts of U.S.
taxation on its nationals residing abroad so that any changes made to
the tax code are reviewed by this body to ensure that our situations
are taken into consideration in such regulation and to protect against
unintended consequences; and finally
(3) To include formal representation of Americans living abroad in
our representative bodies, as the approximately 9 million of us living
abroad need a voice. Switzerland and France include seats for their
citizens residing abroad in their Parliaments, and the U.S. can and
should do the same.
We should not be penalized and discriminated against just because we
were born in, had American parents or lived a significant time in the
U.S., and reside in another country. Furthermore, we can be an
important resource to the U.S.--we can play the role of ``local
ambassador'' in our countries of residence, helping to bridge
differences and forge understandings between the U.S. and the countries
we call home, which is increasingly important in our highly
interconnected, shrinking world.
As a last note, it is more than somewhat ironic that the U.S.
ostensibly got its start over a tax dispute with its overseas colonial
parent, with American revolutionaries crying out the slogan ``no
taxation without representation,'' launching a war that brought about
the birth of our nation, and yet it taxes folks like me who earn their
income completely outside the U.S. system and have no effective
representation on the U.S.-created impacts we face living abroad. That
notion of justice, of democratic representation and fair taxation is
fundamental to the very identity of the United States, and yet somehow
it is the only developed country that burdens individuals such as
myself with a tax imposition that does not take into account the
situations in which we are living, and which prevents us from fully
participating in the societies of which we are part.
Many have said that you, our representatives, don't care for U.S.
persons residing abroad, that we don't matter enough in terms of votes
or funding, that our situations don't play well on media platforms in
terms of messaging, that we don't have enough pull or importance to get
any attention. However, I am still hoping that you can care about
something that is wrong and unfair, even if it isn't politically
expeditious. In fact, it is my American-bred idealism and pragmatic,
can-do spirit that make me believe that we can work together to develop
an income tax system that is fair and not unduly burdensome, and that
honors those fundamental American values which we all hold dear.
I thank you for your time and attention, and hope that this submission
will be fully considered by the Committee. I would be happy to provide
any additional information or support to help you better understand the
implications of the U.S. income tax system on folks like me who live in
other countries.
Sincerely,
Anne-Marie Yarbrough Buzatu
______
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael G. Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to submit these comments for the record to the Committee on this topic.
First, we will review income data by race.
As you know, the IRS does not collect information on race, ethnicity or
gender when we file taxes. The best we can do is analyze differences in
income by race, as estimated by the Current Population Survey published
by the U.S. Census Bureau. From this, we can infer the impact on tax
collections. To ease presentation, only two categories are used: white
non-hispanic and other.
There are a total of 128.4 million American households, 8.7 million are
in the white middle and upper middle classes (top 10%), with 4.5
million non-whites in the top 10%. There are 76.2 million white and
39.1 million non-whites in the bottom 90% of households. Here is how
income is distributed.
----------------------------------------------------------------------------------------------------------------
Households Income Percentages in Percent of
(millions) (trillions) group total
----------------------------------------------------------------------------------------------------------------
Total 128.4 $12.6
----------------------------------------------------------------------------------------------------------------
White top 10% 8.7 $3.4 38% 27%
----------------------------------------------------------------------------------------------------------------
White next 90% 76.2 $5.6 62% 44%
----------------------------------------------------------------------------------------------------------------
Other top 10% 4.5 $1.0 29% 8%
----------------------------------------------------------------------------------------------------------------
Other remaining 90% 39.1 $2.5 71% 20%
----------------------------------------------------------------------------------------------------------------
All white 84.9 $9.0 71% 66%
----------------------------------------------------------------------------------------------------------------
All other 43.6 $3.5 28% 34%
----------------------------------------------------------------------------------------------------------------
All top 10% 13.2 $4.4 35%
----------------------------------------------------------------------------------------------------------------
All next 90% 115.3 $8.1 64%
----------------------------------------------------------------------------------------------------------------
Among Whites, the top 10% of households receive 38% of income within
the group and 27% of the total population. Among others, the top 10%
receive 29% within the group and 8% of the total. The top 10% in the
population receive 35% of income. Whites make up 66% of the population,
receiving 71% of the income.
Over time, this has led to wealth inequality. This table is excerpted
from our forthcoming volume on who owns the national debt. For more on
the topic of debt as class warfare, see the first attachment. Here is
how assets are broken down by race, as estimated using the 2019 Survey
of Consumer Finance conducted by the Federal Reserve.
[GRAPHIC] [TIFF OMITTED] T2021.044
.epsThis chart shows the mix between race and class, with all non-
White, non-Hispanics combined into a single class. Understanding this
table will give you insight into why poor Whites resent minorities and
why these two groups vote in separate parties.
[GRAPHIC] [TIFF OMITTED] T2021.045
.epsThis chart shows why lower income Whites and non-Whites need to
find unity.
[GRAPHIC] [TIFF OMITTED] T2021.046
.epsNext, we will turn our attention to current tax policy.
Prior to the American Recovery Plan Act, the tax code was what we
inherited from the Tax and Job Cuts Act (not a typo) passed in the
116th Congress. As we detailed at the time, this legislation rewarded
the speculative sector, including corporations, while simplifying
personal income tax filings (although sole proprietors may not see it
that way). The Act was supply side economics run amok. One year after
these cuts took effect (giving them time to work their way through the
economy), economic growth was down by approximately one percent of GDP.
Our analysis of the TCJA can be found in Attachment Two.
In January of 2020, I predicted the failure of mortgage backed
securities holding single family home rental properties (which have
been sold to Exchange Traded Funds) and cryptocurrency. The Federal
Reserve's efforts to back toxic securities due to the pandemic
prevented Exchange Traded Funds holding ETFs from crashing. The slowing
in the economy prevented mass sales of crypto to the general public.
The ARPA has its pluses and its minuses. On the minus side, families
who had adequate income during the pandemic now have money to blow.
Instead of spending it they are using it to speculate. Masses of people
are about to enter the bottom half of EFT and Crypto markets, which
will allow the top tiers of the scheme (whose seed money was provided
by the Ryan-Brady-Trump tax cuts) to get out.
The increased Child Tax Credit and its new refundability will provide
long term economic security to children and their parents, especially
their mothers. For some families, one or the other parent can stay home
with the children--including the father. When my daughter was born, my
wife had a career position and I did not, so it was a no-brainer for me
to stay home to be the nurturing parent. The new provisions will give
others that chance--especially if credits are expanded to median income
levels.
The new CTC provisions are good for women and racial and ethnic
minorities, as well as the White Working Class. Giving everyone a
better deal will lower the temperature, provided it does not come with
the ``stink of welfare.''
There are two avenues to distribute money to families. The first is to
add CTC benefits to unemployment, retirement, educational (TANF and
college) and disability benefits. The CTC should be high enough to
replace survivor's benefits for children.
The second is to distribute them with pay through employers. This can
be done with long term tax reform, but in the interim can be
accomplished by having employers start increasing wages immediately to
distribute the credit to workers and their families, allowing them to
subtract these payments from their quarterly corporate or income tax
bills.
Over the long-haul, tax reform is necessary to cement these gains.
Please see our tax reform plan in the third attachment. It is designed
to provide adequate income and services to families (both with
increased minimum wages and Child Tax Credits) through employer-paid
taxes, funding government services through a goods and services tax,
separating out taxation of capital gains and income from income to an
asset value added tax and higher tier subtraction VAT collections on
wage income up to the $330,000 level and above, with additional
personal income taxation for incomes over $425,000.
The top rates for higher tier subtraction VAT, personal income taxes
and asset VAT would all be set to the same rate, say 26%, so that forms
of income are not manipulated to avoid taxation. It would also
effectively raise taxes on salaried income to 52%, with capital incomes
reinvested or investments funded by salary income adding an additional
26% of taxation. Spending money will also trigger taxation.
Adding the effect of lower tier subtraction VAT collection to taxation
on business owners and the top marginal rate approaches 90%. Such taxes
are meant to prevent payment of extreme salaries rather than maximizing
revenue. This provides more wages to the rest of the population,
especially to those who are not adequately compensated at lower income
levels.
Thank you for the opportunity to address the committee. We are, of
course, available for direct testimony or to answer questions by
members and staff.
Attachment One--Debt as Class Warfare, September 24, 2020
Visibility into how the national debt, held by both the public and the
government at the household level, sheds light on why Social Security,
rather than payments for interest on the public debt, are a concern of
so many sponsored advocacy institutions across the political spectrum.
Direct household attribution exists through direct bond holdings,
income provided by Social Security payments and secondary financial
instruments backed with debt assets. Using the Federal Reserve Consumer
Finance Survey and federal worker and Social Security payment and tax
information, we have calculated who owes and who owns the national debt
by income quintile. Federal Reserve and Bank holdings are attributed
based on household checking and savings account sizes.
Responsibility to repay the debt is attributed based on personal income
tax collection. Payroll taxes create an asset for the payer, so they
are not included in the calculation of who owes the debt. Calculations
based on debt held when our study on the debt was published,
distributed based on the latest data (2017) from the IRS Data Book show
a ratio of $16.5 of debt for every dollar of income tax paid.
This table shows a summary level distribution of income, national debt
and debt assets in three groupings based on share of Adjusted Gross
Income received, rather than by number of households. This answers the
perennial question of who is in the middle class.
[GRAPHIC] [TIFF OMITTED] T2021.047
.epsThe bottom 75% of taxpaying units hold few, if any, public debt
assets in the form of Treasury Bonds or Securities or in accounts
holding such assets. Their main national debt assets are held on their
behalf by the Government. They are owed more debt than they owe through
taxes.
The next highest 20% (the middle class), hold few bonds, a third of
bond-backed financial assets and a quarter of government held
retirement assets.
The top 5% (roughly 8.5% of households) own the vast majority of non-
government retirement holdings and collect (and roll over) most net
interest payments. This stratum owns very little of retirement assets
held by the government, hence their interest in controlling these
costs. Their excess liability over assets is mostly attributable to
internationally held debt. Roughly $4 trillion of this debt is held by
institutions, with the rest held by individual bond holds, including
debt held by members of this stratum in off-shore accounts.
Source: Settling (and Squaring) Accounts: Who Really Owes the National
Debt? Who Owns It? available from Amazon at https://www.amazon.com/dp/
B08FRQFF8S.
Attachment Two--The Tax and Job Cuts Act
The Tax and Job Cuts Act (not a typo) was a classic piece of Austrian
Economics, where booms are encouraged and busts happen with no
bailouts. Strong companies and best workers keep jobs and the devil
takes the hindmost. It is economic Darwinism at its most obvious, but
there is a safety valve. When tax cuts pass, Congress loses all fiscal
discipline, the Budget Control Act baseline discipline is (as it should
be) suspended and deficits grow. Bond purchasers pick up the slack
caused by the TCJA, which they will as long as we run trade deficits,
unless the President's economic naivete ruins that for us.
Modern economics has become infected with the idea that higher tax
rates and lower public spending hurt the economy. By definition, this
is not the case. The exact opposite is true. To refresh our memories of
what is in the U.S. Code and most basic economics textbooks, Gross
Domestic Product equals equal government purchases, consumption from
government employee, contractor, transfer recipient and second order
private sector spending, which leads to private sector investment, and
exports net of imports (which creates a source of funds for debt
finance).
Anything that is not part of GDP is considered ``savings'' or in
reality, is asset inflation. If you want to end poverty, give poor
people and retirees more money and the economy will grow. Increase
government expenditure (even bombers) and the economy will grow,
including for the now notorious upper middle class.
Lower tax rates also made money available to chase the same supply of
investment instruments, which bid up their price, and caused the
invention of a whole range of new products which would be built up and
sold by the emerging financial class, who would profit-take and watch
what they created go bust and start yet another modern recession,
especially the Great Recession just experienced. Only higher tax rates
or increased deficit spending control such asset inflation (and the
consumption cycles associated with them--which Marx thought was the
driver of the boom bust cycle--Marx had a failure of imagination).
A key part of our proposals is to increase income tax revenue from the
very wealthy through our income surtax. The higher the marginal tax
rate goes, the less likely shareholders and CEOs will go after worker
wages in the guise of productivity while pocketing the gains for
themselves. Since shareholders usually receive a normal profit through
dividends, it is the CEO class that gets rich off of workers unless tax
rates are high enough to dissuade them.
Attachment Three--Tax Reform, Center for Fiscal Equity, March 5, 2021
Individual payroll taxes. These are optional taxes for Old-Age and
Survivors Insurance after age 60 for widows or 62 for retirees. We say
optional because the collection of these taxes occurs if an income
sensitive retirement income is deemed necessary for program acceptance.
Higher incomes for most seniors would result if an employer
contribution funded by the Subtraction VAT described below were
credited on an equal dollar basis to all workers. If employee taxes are
retained, the ceiling should be lowered to $85,000 to reduce benefits
paid to wealthier individuals and a $16,000 floor should be established
so that Earned Income Tax Credits are no longer needed. Subsidies for
single workers should be abandoned in favor of radically higher minimum
wages.
Wage Surtaxes. Individual income taxes on salaries, which exclude
business taxes, above an individual standard deduction of $85,000 per
year, will range from 6.5% to 26%. This tax will fund net interest on
the debt (which will no longer be rolled over into new borrowing),
redemption of the Social Security Trust Fund, strategic, sea and non-
continental U.S. military deployments, veterans' health benefits as the
result of battlefield injuries, including mental health and addiction
and eventual debt reduction. Transferring OASDI employer funding from
existing payroll taxes would increase the rate but would allow it to
decline over time. So would peace.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes,
dividend taxes, and the estate tax. It will apply to asset sales,
dividend distributions, exercised options, rental income, inherited and
gifted assets and the profits from short sales. Tax payments for option
exercises and inherited assets will be reset, with prior tax payments
for that asset eliminated so that the seller gets no benefit from them.
In this perspective, it is the owner's increase in value that is taxed.
As with any sale of liquid or real assets, sales to a qualified broad-
based Employee Stock Ownership Plan will be tax free. These taxes will
fund the same spending items as income or S-VAT surtaxes. This tax will
end Tax Gap issues owed by high income individuals. A 26% rate is
between the GOP 24% rate (including ACA-SM and Pease surtaxes) and the
Democratic 28% rate. It's time to quit playing football with tax rates
to attract side bets.
Subtraction Value-Added Tax (S-VAT). These are employer paid Net
Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-battlefield injuries and long term care.
Employer paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable Child Tax Credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
The S-VAT is also used for personal accounts in Social Security,
provided that these accounts are insured through an insurance fund for
all such accounts, that accounts go toward employee-ownership rather
than for a subsidy for the investment industry. Both employers and
employees must consent to a shift to these accounts, which will occur
if corporate democracy in existing ESOPs is given a thorough test. So
far it has not. S-VAT funded retirement accounts will be equal-dollar
credited for every worker. They also have the advantage of drawing on
both payroll and profit, making it less regressive.
A multi-tier S-VAT could replace income surtaxes in the same range.
Some will use corporations to avoid these taxes, but that corporation
would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits). Distributions from such corporations will be
considered salary, not dividends.
Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on
purchase invoices. The rate varies according to what is being financed.
If Medicare for All does not contain offsets for employers who fund
their own medical personnel or for personal retirement accounts, both
of which would otherwise be funded by an S-VAT, then they would be
funded by the I-VAT to take advantage of border adjustability. I-VAT
also forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government.
Enactment of both the A-VAT and I-VAT ends the need for capital gains
and inheritance taxes (apart from any initial payout). This tax would
take care of the low-income Tax Gap.
I-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional I-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.5% to 13%).
As part of enactment, gross wages will be reduced to take into account
the shift to S-VAT and I-VAT, however net income will be increased by
the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will
replace pass-through and proprietary business and corporate income
taxes.
Carbon Value-Added Tax (C-VAT). A carbon tax with receipt visibility,
which allows comparison shopping based on carbon content, even if it
means a more expensive item with lower carbon is purchased. C-VAT would
also replace fuel taxes. It will fund transportation costs, including
mass transit, and research into alternative fuels (including fusion).
This tax would not be border adjustable.
Summary
This plan can be summarized as a list of specific actions:
1. Increase the standard deduction to workers making salaried income
of $425,001 and over, shifting business filing to a separate tax on
employers and eliminating all credits and deductions--starting at 6.5%,
going up to 26%, in $85,000 brackets.
2. Shift special rate taxes on capital income and gains from the
income tax to an asset VAT. Expand the exclusion for sales to an ESOP
to cooperatives and include sales of common and preferred stock. Mark
option exercise and the first sale after inheritance, gift or donation
to market.
3. End personal filing for incomes under $425,000.
4. Employers distribute the Child Tax Credit with wages as an offset
to their quarterly tax filing (ending annual filings).
5. Employers collect and pay lower tier income taxes, starting at
$85,000 at 6.5%, with an increase to 13% for all salary payments over
$170,000 going up 6.5% for every $85,000--up to $340,000.
6. Shift payment of HI, DI, SM (ACA) payroll taxes employee taxes to
employers, remove caps on employer payroll taxes and credit them to
workers on an equal dollar basis.
7. Employer paid taxes could as easily be called a subtraction VAT,
abolishing corporate income taxes. These should not be zero rated at
the border.
8. Expand current state/federal intergovernmental subtraction VAT to a
full GST with limited exclusions (food would be taxed) and add a
federal portion, which would also be collected by the states. Make
these taxes zero rated at the border. Rate should be 19.5% and replace
employer OASI contributions. Credit workers on an equal dollar basis.
9. Change employee OASI of 6.5% from $18,000 to $85,000 income.
______
Letter Submitted by Sylvia de Bruin
U.S. Senate
Committee on Finance
I am a proud American citizen who lives outside the United States. To
be clear: I am an individual. I am not a corporation. I am not a
multinational. I did not move from the United States to avoid paying
U.S. taxes. But, by moving from the United States, I am automatically
subject to the U.S. Extraterritorial tax regime--a regime that imposes
more punitive taxation and reporting on Americans living abroad--than
is imposed on American residents. This is because the Internal Revenue
Code treats all things foreign to the United States punitively.
I moved from the United States because I had a job opportunity in the
Netherlands. In fact, am a full tax resident the country where I live.
But, because I actually live and work in the Netherlands I am required
to pay taxes and assume responsibility for my financial and retirement
planning here, where I live. My income, financial and retirement assets
are foreign to the United States, but are local to me. Because my
income and financial assets, although local to me, are foreign to the
United States I am subject to the U.S. Extraterritorial tax regime. As
such, I am subject to constant stress and fear of penalties should I
make mistakes in complying with the Internal Revenue Code. Furthermore,
I find it very difficult to find competent professional help. The help
I can find is very expensive (often costing more than $500 a year).
I know that you will find it difficult to relate to this. However,
because and only because, I live outside the United States, my
difficulties include the following:
Difficulty in maintaining bank/financial accounts where I live:
FATCA has provided incentives for banks in my
country to refuse to deal with U.S. citizens.
Punitive Taxation on non-U.S. mutual funds.
Being able to participate in non-U.S. pensions and still get the
benefits of tax deferral available to my neighbors.
Taxation on the sale of my principal residence which is not
taxed in the country where I live.
Difficulty in carrying on a business. It is normal for people in
my country to carry on business through small business corporations--
which are taxed punitively by the IRS (GILTI).
Having the retirement savings in my corporation effectively
confiscated by the 965 Transition Tax.
Being subject to income based on phantom capital gains. (Because
I am required to live my life tethered to the U.S. dollar, fluctuations
in the exchange rate can result in unexpected fake income).
To be clear, I am and will always be a proud American. But, I find it
very difficult to maintain compliance with both the U.S. Internal
Revenue Code and the tax code of my country of residence. Because of
this dual tax obligation, I am finding it very difficult to save and
invest for retirement. What one country gives, the other country takes.
The necessity of complying with both tax regimes means that I get the
worst of each tax regime. As a result, I feel that I am being forced to
consider whether it is possible to retain my U.S. citizenship. No proud
American should be forced to choose between his cherished U.S.
citizenship and the need to engage in responsible financial/retirement
planning.
It is terribly unfair, that because I live outside the United States,
that I am forced to choose between my responsibilities to plan for
retirement and my responsibilities under the Internal Revenue Code. Why
should I be subject to additional requirements that resident Americans
are not? I am not living in the United States and using services in the
United States. I have even been denied a COVID-19 vaccine from the U.S.
Government (because I don't live in the United States) while being
required to pay taxes to the United States!
The U.S. Extraterritorial tax system is terribly unfair.
A great American writer, the late Pat Conroy, began his book ``The
Prince of Tides'' with the words: ``My wound is geography. It is also
my anchorage, my port of call.''
Although, my U.S. citizenship is my anchorage and my port of call. The
unfair U.S. extraterritorial tax regime--triggered by my geography--is
most definitely my wound.
Please fix this extreme injustice!
______
Letter Submitted by Christine Dymkowski
I am an American citizen who has lived outside the United States for
virtually my entire adult life. I am a middle-income individual, who
did not move from the United States to avoid paying U.S. taxes, but
because I fell in love with someone British. However, by moving from
the United States, I am automatically subject to the U.S.
extraterritorial tax regime, one that imposes more punitive taxation
and reporting on Americans living abroad than is imposed on American
residents. This is because the Internal Revenue Code treats all
financial matters foreign to the United States in a punitive and
sometimes confiscatory way.
Because I live in Britain, I am required to pay taxes and assume
responsibility for my financial and retirement planning here, where I
live. All of my income, financial and retirement assets are foreign to
the United States, but local to me. However, because I have kept my
American citizenship, I am subject to the U.S. extraterritorial tax
regime, making it very difficult for me to live the same kind of life
that my friends and neighbours live: they are subject to only one tax
system, whereas I, as a U.S. citizen, am subject to both the U.S. and
the UK tax systems, which are not compatible. Most attempts at
responsible financial and retirement planning where I live are
frustrated by the need to comply with U.S. tax laws. This is clearly
unfair. My income derives entirely from my previous salary and now my
pension from the British university in which I worked and on which I
have paid British taxes (which are higher than the U.S. tax rate). How
can the United States justify imposing taxation on the non-U.S. income
and investments of a person who is a tax resident of another country
and who has not had a financial or economic connection to the United
States for 45 years?
U.S. treatment of its citizens who live overseas also subjects me to
constant stress and the fear of penalties should I make even non-wilful
mistakes in complying with the Internal Revenue Code. IRS rules for
Americans who live overseas are extremely complex, requiring
preparation by professionals. I recently filed my 2020 return, on which
I owed $10.00 (ten dollars). Because I have to account for all my
``foreign'' (i.e., local to me) investments, the return was about 150
pages long and cost 1,854 (about $2,500) to prepare, which
is about 7% of my U.S. taxable income.
There is no other advanced country in the world that imposes this kind
of extraterritorial taxation, and it is very disheartening that, even
though American emigrants and emigrant organizations have for many
years written to and met with Congressional lawmakers about the
problems that citizenship-based taxation causes us, no one listens.
When we write about the difficulties we face, our representatives in
Congress send back replies that bear no relation to our specific points
and complaints. Because, and only because, I live outside the United
States, my difficulties include the following:
Difficulty in maintaining bank/financial accounts where I live:
FATCA has provided incentives for banks in my
country to refuse to deal with U.S. citizens, and I have had to close
one savings account with a good interest rate because the bank doesn't
want to deal with the complexity of reporting to the IRS.
Confiscatory taxation of non-U.S. mutual funds: the U.S. tax on
them may exceed the total value of the funds.
Being subject to U.S. tax based on phantom capital gains.
Because the IRS requires me to use USD as my functional currency, I am
subject to ``fake income'' on nothing but changes in the exchange rate:
investments that actually lose money in real (pound sterling) terms may
show phantom gains as a result of fluctuating exchange rates.
Having the United States impose taxes on things that my country
of residence does not.
Having a substantial ``tax credit'' from the U.S. because I pay
much higher taxes in the UK than I would in the U.S., but finding that
the IRS will not apply this tax credit to, for example, interest paid
on my UK savings accounts.
Finding it difficult to cope with the required paperwork and
records and the online FBAR form as I get older. I sometimes don't
switch money out of a savings account to get better interest elsewhere
because I'm afraid I won't keep track, and the IRS imposes draconian
penalties for even non-wilful mistakes on the FBAR.
As a tax resident of both the United States and the UK, I get the worst
of both tax systems. How can this be fair? I can't imagine the U.S.
would take kindly to a foreign country taxing U.S. residents earning
U.S. dollars and paying U.S. tax, simply because the person had
retained their original citizenship.
I very much hope to remain a U.S. citizen until I die, as being
American is part of my identity. However, I am finding it very
difficult to maintain compliance with both the U.S. Internal Revenue
Code and UK tax. Because of this dual tax obligation, my responsible
planning for old age has been for nothing: I invested savings from my
fully-taxed British salary in a UK government-recommended stocks and
shares Individual Savings Account (ISA). As I am not a high net worth
individual, I did not seek any specialist financial advice before doing
so and consequently did not know that the U.S. would regard the mutual
funds held in the ISA as PFICs and tax them in what is essentially a
confiscatory way--U.S. tax will take not just the gains, but the
principal. As a result, I am being forced to consider whether it is
possible to retain my U.S. citizenship. No one should be forced to
choose between their citizenship and the need to engage in responsible
financial and retirement planning.
It is terribly unfair that I am facing this choice simply because I
live outside the United States. Why should I be subject to additional
requirements that resident Americans are not? I am not living in the
U.S. and using services there. And how can the U.S. be happy, given its
ideal of fairness and justice for all, to be the only developed country
in the world to show such cavalier disregard for the well-being of its
citizens who live overseas?
As I hope I have demonstrated, the U.S. extraterritorial tax system is
terribly unfair, making my U.S. citizenship my biggest burden as I face
old age. For many years, both individual Americans and American
organizations abroad have been attempting to get both Treasury and
Congress to address these issues. The United States should abandon its
anomalous extraterritorial tax regime and join the rest of the world in
adopting a system of residence-based taxation. Please fix this extreme
injustice and show that you care for ALL Americans, no matter where
they live.
______
Letter Submitted by Elizabeth Holt
U.S. Senate
Committee on Finance
To whom it may concern:
I am a proud American citizen who lives outside the United States. To
be clear: I am an individual. I am not a corporation. I am not a
multinational. I did not move from the United States to avoid paying
U.S. taxes. But, by moving from the United States, I am automatically
subject to the U.S. Extraterritorial tax regime--a regime that imposes
more punitive taxation and reporting on Americans living abroad--than
is imposed on American residents. This is because the Internal Revenue
Code treats all things foreign to the United States punitively.
I moved from the United States to care for my elderly mother who had
several health issues and lived alone. Her health trials lasted for 3
years until the end of her life, after which as Executor of her Estate,
it was easier to remain in Canada to deal with them. I ended up
remaining here and retiring, to be near family. In fact, I am a full
tax resident of the country where I live. But, because I actually live
in CANADA, I am required to pay taxes and assume responsibility for my
financial and retirement planning here, where I live. My income,
financial and retirement assets are foreign to the United States, but
are local to me. Because my income and financial assets, although local
to me, are foreign to the United States I am subject to the U.S.
Extraterritorial tax regime. As such, I am subject to constant stress
and fear of penalties should I make mistakes in complying with the
Internal Revenue Code. Furthermore, I find it very difficult to find
competent professional help. The help I can find is very expensive
(often costing more than $500 a year).
I know that you will find it difficult to relate to this. However,
because and only because, I live outside the United States, my
difficulties include the following:
Difficulty in maintaining bank/financial accounts where I live:
FATCA has provided incentives for banks in my
country to refuse to deal with U.S. citizens.
Punitive Taxation on non-U.S. mutual funds.
Being able to participate in non-U.S. pensions and still get the
benefits of tax deferral available to my neighbors.
Taxation on the sale of my principal residence which is not
taxed in the country where I live.
Difficulty in carrying on a business. It is normal for people in
my country to carry on business through small business corporations--
which are taxed punitively by the IRS (GILTI).
Having the retirement savings in my corporation effectively
confiscated by the 965 Transition Tax.
Being subject to income based on phantom capital gains. (Because
I required to live my life tethered to the U.S. dollar, fluctuations in
the exchange rate can result in unexpected fake income).
To be clear, I am and will always be a proud American. But, I find it
very difficult to maintain compliance with both the U.S. Internal
Revenue Code and the tax code of my country of residence. Because of
this dual tax obligation, I am finding it very difficult to save and
invest for retirement. What one country gives, the other country takes.
The necessity of complying with both tax regimes means that I get the
worst of each tax regime. As a result, I feel that I am being forced to
consider whether it is possible to retain my U.S. citizenship. No proud
American should be forced to choose between his cherished U.S.
citizenship and the need to engage in responsible financial/retirement
planning.
It is terribly unfair, that because I live outside the United States,
that I am forced to choose between my responsibilities to plan for
retirement and my responsibilities under the Internal Revenue Code. Why
should I be subject to additional requirements that resident Americans
are not? I am not living in the United States and using services in the
United States. I have even been denied a COVID-19 vaccine from the U.S.
Government (because I don't live in the United States) while being
required to pay taxes to the United States!
The U.S. Extraterritorial tax system is terribly unfair.
A great American writer, the late Pat Conroy, began his book ``The
Prince of Tides'' with the words: ``My wound is geography. It is also
my anchorage, my port of call.''
Although, my U.S. citizenship is my anchorage and my port of call. The
unfair U.S. extraterritorial tax regime--triggered by my geography--is
most definitely my wound.
Please fix this extreme injustice!
Thank you,
Elizabeth Holt
______
Letter Submitted by Nicholas Matthew Lee
U.S. Senate
Committee on Finance
Cc: U.S. Representative Madeline Dean (PA 4th District)
U.S. Senator Bob Casey Jr. (PA)
U.S. Senator Pat Toomey (PA)
Dear Senators,
I am writing to you as an individual U.S. citizen, concerned about
inequalities that are created and perpetuated by a lack of empathy,
understanding, and tolerance for Americans that reside overseas. While
you may take the position that this is ``yet another expat rights''
letter, I can assure you that it is not. Emigrant rights are another
facet of equality between races and nationalities. Furthermore, some of
the negative impacts of the U.S. extraterritorial tax regime
specifically discourage full economic participation by Non-Resident
Alien spouses of U.S. citizens.
There is abundant literature asserting that the United States subjects
its overseas citizens to a separate, but more punitive tax system in
comparison to resident citizens and nonresident aliens. In this
comment, I will avoid discussing the full extent of this, and I will
instead focus on specific issues that related to ``mixed'' couples and
tax ``baggage'' that is likely to only affect immigrants and U.S.
citizens that are a bit ``foreign.''
Penalties against U.S. citizens with non-resident alien spouses
Consider two couples, both living outside the United States. One couple
is ``fully American,'' with both spouses being U.S. citizens. Another
is a biracial couple, with one being from a foreign land and the other
being a born-and-raised U.S. citizen.
What is apparent is that the tax code penalizes the mixed couple in
situations that are viewed with complete unquestioning trust with the
``full American'' couple. Listing some of these situations out:
The fully American couple will be ``Married Filing Jointly,''
enjoying tax treatment that is largely similar to if they were both
single. The mixed couple will be forced to have the U.S. citizen spouse
``Married Filing Separately''--a penalized position with lesser
deductions and allowances, or they can be ``Married Filing Jointly,''
in which case the foreign spouse is excluded from the financial system
of the country they live in and subject to taxation by a country they
may have never lived in and whose passport they do not carry.
There is a limit of $159,000 of tax free property transfers each
year from one spouse to another if it is a mixed couple, rather than a
fully American couple.
While a fully American couple benefits from an unlimited marital
deduction in the unfortunate event of one spouse dying, the mixed
couple may encounter estate taxes that the fully American couple is not
subject to. This is due to the unlimited marital deduction not applying
to mixed couples.
Discouraging financial participation by NRA spouses
Because of Community Property rules, there are circumstances in which a
Nonresident Alien Spouse, even Married Filing Separate, is
``contaminated'' by U.S. tax status. Due to FATCA, it is not uncommon
for foreign banks, investment firms, and other financial institutions
to deny spouses of U.S. persons access to necessary services. At the
same time, those NRA spouses are denied access to the U.S. financial
system due to their non-residence.
This is worsened by the Controlled Foreign Corporation and GILTI rules,
which have created the need for many small businesses to remove
partners that may have indirect ties through a U.S. spouse, or for
spouses to rid themselves of a business that became partly owned by
U.S. persons through community property rules.
Tax provisions that disproportionately affect immigrants and emigrants
The U.S. tax code takes a distinctly punitive view towards foreign
retirement accounts that are not subject to the treaty benefits, often
causing individuals to incur significant accounting and tax costs due
to IRS 8621 form preparation and the associated PFIC tax regime.
When considering who is likely to hold a foreign pension--immigrants to
the United States and non-resident U.S. citizens, we see a clear
pattern. Those who are of a ``foreign race'' are subjected to a
punitive treatment of illiquid accounts that are owned due to having
lived and worked in another land. Had they been ``proper'' Americans,
they would have lived and worked their whole lives in the U.S., where
accounts would cleanly fit into the Traditional IRA, Roth IRA, 401k
taxonomy. This punitive treatment lies in the racist assumption that
there is zero legitimate reason for someone to have foreign finances--
clearly, it must be suspicious and part of an elaborate scheme.
We see similar penalization when considering the Windfall Elimination
Provision, which may penalize Americans for having lived and worked in
another country at any point in their lives. Again, a penalty that
never affects a ``pure'' American that has never resided outside of the
United States.
A call to action
While these adverse effects of the U.S. tax code are not intended in
any way that is overtly racist, the reality is that the U.S. tax code
has a separate and more punitive tax treatment for most situations that
are ``foreign'' as opposed to ``American.''
These provisions by and large affect immigrants to the U.S., having
``financial baggage'' from their life before the U.S., and emigrants
and spouses of emigrants, who are subject to America's unique
extraterritorial tax code.
The lack of movement on this issue, despite years of pleas for help,
goes back to the aforementioned undertone. These people aren't really
American. They're a bit foreign, and we should treat them with
suspicion, and their issues with apathy.
I urge you to consider the inequality imposed by the tax code's failure
to consider legitimate reasons for a U.S. person to have foreign
finances, and to adopt measures to mitigate this.
Alternately, consider adopting Residence Based Taxation like the rest
of the world, which would eliminate much of the discrimination that the
tax code inflicts on U.S. citizens and their spouses.
______
Letter Submitted by David Moskowitz
To: Senate Committee on Finance
I can't tell you how disappointing it is to watch and hear no mention
of how the tax law impacts citizens living abroad, and how unjust it
treats us. There is a very clear geographic disparity, which is
something you need to address.
I am an American citizen, who has lived abroad for more than 20 years.
I decided to move abroad when I was 25, to see the world and experience
life outside of the United States. Initially, I lived in Japan for 12
years, learned the language, and eventually started my own business. In
2009, I moved to Singapore, got married and started up a few more
businesses over the years.
I did not move abroad or set up a business abroad to avoid taxes.
However, the tax laws and other compliance rules are a massive burden.
After the passage of the TCJA, it is now difficult as an American to
compete globally, as I am now taxed as if my company was located in and
selling to people in the U.S. The solution to this is to sell my
ownership in the business. It's simply not worth the headache and the
potential tax burden, as I could be taxed for income that I will never
receive.
The current tax laws also punish citizens living outside of the U.S.
for investing in retirement plans, ETFs or other investment vehicles in
their country of resident. I can't effectively save without worrying
about complex tax and compliance implications such as PFICs.
Foreigners investing the U.S. stock market are treated better than the
U.S. treats its own citizens abroad. Foreigners pay no U.S. capital
gains tax on U.S. shares, but I will still owe capital gains in the
U.S. on any investments in the country which I am actually a resident.
As a homeowner with my wife, from what I understand, when we sell the
property, although no tax may be due in Singapore, I may owe taxes in
to the U.S.! Additionally, if the currency rate changes, even if we
make no gain on the property, I could actually owe money to the U.S. in
phantom currency gains.
Paying a professional to help navigate this minefield has costs me
thousands of dollars, with very little in actual tax due to the U.S.
The current tax system is incredibly unfair to American citizens who
live abroad. The simplest solution is to follow what the rest of the
world does, residency-based taxation.
Please for once, consider us when creating your new tax policies.
Sincerely,
David Moskowitz
______
Professional Managers Association
700 12th St., NW, Ste. 700, PMB 95968
Washington, DC 20005
202-793-6262
https://www.promanager.org/about
Statement of Chad Hooper, Executive Director
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
On behalf of the Professional Managers Association--the non-profit
professional association that has since 1981 represented professional
managers, management officials, and non-bargaining unit employees at
the Internal Revenue Service (IRS)--I write to provide a written
statement for the record for the April 20, 2021 hearing on ``Combating
Inequality: The Tax Code and Racial, Ethnic, and Gender Disparities.''
We appreciate the Committee for elevating issues of diversity and
inclusivity within our tax system. As IRS leaders, PMA is committed to
ensuring our workforce is equipped to maintain the equitable delivery
of taxpayer services. This means having a workforce that reflects the
diversity of our nation and the resources to enforce our tax laws at
all income levels.
I. Congress must conduct necessary oversight to ensure the IRS
provides leadership opportunities to diverse
populations and is conscious of equity issues
impacting taxpayers.
PMA immediately applauded \1\ President Biden's swift action to rescind
the last administration's memorandums halting diversity and inclusion
training. These trainings are critical to the IRS's commitment to being
an equal opportunity employer and ability to ensure the equitable
delivery of taxpayer services.
---------------------------------------------------------------------------
\1\ https://mailchi.mp/7db9647c086b/pma-statement-on-president-
bidens-day-one-action-on-covid-19-diversity-training?e=%5bUNIQID%5d.
Even before the White House memos,\2\ IRS leadership was hesitant to
offer employees Equity, Diversity, and Inclusivity (EDI) training,
whether on a voluntary or compulsory basis. PMA has approached
leadership about introducing EDI trainings based on staff interest.
Political leadership showed little interest in additional trainings and
refused to meet with PMA on the issue.
---------------------------------------------------------------------------
\2\ Training in the Federal Government, M-20-34, Office of
Management and Budget, September 4, 2020; https://www.whitehouse.gov/
wp-content/uploads/2020/09/M-20-34.pdf; Ending Employee Trainings That
Use Divisive Propaganda to Undermine the Principle of Fair and Equal
Treatment for All, M-20-37, Office of Management and Budget, September
28, 2020; https://www.whitehouse.gov/wp-content/uploads/2020/09/M-20-
37.pdf; Mandatory Review of Employee Training under E.O. 13950,
September 22, 2020; https://www.chcoc.gov/content/mandatory-review-
employee-training-under-eo-13950-september-22-2020.
Since President Biden's orders restoring EDI trainings, we are grateful
to the IRS for its work in restoring the IRS curriculum and for using
---------------------------------------------------------------------------
this as an opportunity to refresh and update its content.
Speaking about difficult issues like racism is not comfortable. It is
difficult. It does not come naturally. Doing so requires grace and
understanding that comes from training and experience. PMA has sought
avenues to address equity and diversity issues within our Association
and it is with a heavy heart I must admit we have had to expel several
members due to blatantly racist messages communicated over government
email.
For example, following a member-wide message on the importance of
diversity after the death of George Floyd, a white GS-14-equivalent
frontline manager argued in an email to PMA that ``the first slaved,
not indentured servants, were white'' and that they had ``read
firsthand accounts of white men who were put into slavery for life in
Delaware, Maryland, North Carolina, and Virginia.'' This is the same
individual who said the Boston Tea Party was a terrorist act and that
``even today, [they] hate the British.'' Not only is this statement a
clear EEO violation for reflecting discrimination based on national
origin, but it highlights a misunderstanding regarding the role and
impact of slavery by using a few, select stories of white oppression to
justify the denial of hundreds of years of the legal enslavement,
disenfranchisement, and segregation imposed on black Americans.
Another Executive Officer within the IRS vocally opposed the
recognition of Juneteenth in an email to PMA, arguing that recognition
of this holiday would require the recognition of women's suffrage or
the Holocaust. ``This could go on and on,'' the Executive cautioned.
The IRS employees who felt it was appropriate to send these hateful
messages over their official work email for the United States
Government are in critical roles affecting millions of taxpayers.
This is a documented problem throughout our federal workforce. In
September 2020, the Merit Systems Protection Board (MSPB) reported,
``African American and Hispanic employees were less likely to say that
their agency did a good job of either recruiting or retaining a diverse
workforce. They were also more likely than White employees to say that
they had not been treated fairly in terms of career advancement,
awards, training, performance appraisals, job assignments, discipline,
and pay. Finally, they were more likely to say that they had been
denied a job, promotion, pay increase, or other job benefit within the
past 2 years because they had been discriminated against based on
race.''
The MSPB described the survey results regarding disparate treatment
based on race ``strikingly consistent,'' with African American and
Hispanic employees continually agreeing that people of color within our
federal workforce are being subjected to higher standard and being
passed over for supervisory positions.
The IRS workforce has steadily increased in diversity over time. In a
March 2021 annual report,\3\ the IRS provided the following total
workforce distribution by racial and ethnic origin and gender for FY
2020:
---------------------------------------------------------------------------
\3\ https://www.irs.gov/pub/irs-pdf/p5465.pdf.
White--49.11%
Black--28.84%
Hispanic--14.05%
Asian--6.53%
American Indian or Alaska Native--0.83%
Native Hawaiian or Pacific Islander--0.19%
_______________________________________________________________________
Male--34.83%
Female--65.17%
Unfortunately, IRS leadership does not reflect the diversity of its
workforce. In FY 2020, the IRS reports the following distribution of
members of the Senior Executive Service (SES) by racial and ethnic
origin and gender:
White--65.9%
Black--23%
Hispanic--5.8%
Asian--4.2%
_______________________________________________________________________
Male--54.4%
Female--45.6%
Oversight is necessary to ensure IRS leadership is taking an active
role in addressing barriers to the advancement for women and people of
color within the Service. The failure to ensure a diverse cadre of
employees rise to leadership levels has a direct impact on taxpayer
services.
PMA learned in February 2020 that, despite mandates under both Title VI
of the Civil Rights Act of 1964 and Executive Order 13166 \4\
prohibiting discrimination based on national origin and requiring
federal agencies to provide individuals with limited English
proficiency ``meaningful access to program benefits and services
conducted or funded by the federal government,'' as well as the reality
that over 67 million American have a primary language other than
English in their home, the IRS was neglecting to provide multi-lingual
telephone support to domestic taxpayers. Instead, according to the EDI
office's own admission to PMA, the IRS was engaging in civil rights
settlements with these individuals, allowing the Service to quietly
continue failing to provide equal access to taxpayer services.
---------------------------------------------------------------------------
\4\ https://www.justice.gov/crt/executive-order-13166.
It was likely no single ``racist'' individual's decision to fail to
provide non-English speaking Americans with taxpayer assistance
services. Rather, an unconscious bias toward English speakers and a
lack of diverse voices at the Service's decision-
making tables allowed this inequity to exist. Thankfully, and to the
Service's credit, this issue has been addressed and the IRS now
provides multi-lingual telephone support for domestic taxpayers as
---------------------------------------------------------------------------
required by law.
This example demonstrates that positive and rapid change is possible
when pressure is placed on leadership to elevate issues of diversity
and equity. It also illustrates the necessity of ensuring diverse
voices are heard within the IRS and each IRS leader is trained in
diversity, equity, inclusion, and accessibility issues.
II. Congress must ensure the IRS is equipped with the resources and
mission clarity to equally enforce our tax laws
against all violators at any income levels.
PMA appreciates several members of the Committee for identifying the
manner in which resource constraints impact equity issues within the
Service. We echo the sentiments of several witnesses emphasizing the
need for greater enforcement funding to rectify racially discriminatory
audit rates. We do not support the IRS being tasked with collecting
race-related data in addition to the agency's current work. Instead,
PMA supports increased access for the IRS to existing datasets
collected by other agencies. For example, the IRS can sort its
enforcement data by ZIP code or Census tract to root out racial
disparities in its actions. By leveraging information already in the
hands of our federal government, we can be sure that the data are
accurate, collected in an efficient manner, and avoid duplication of
work across the Executive branch.
In the last decade, \5\ the IRS has lost over 20,000 full-time
equivalent positions and had its funding slashed by over $2 billion.
These cuts have dramatically diminished \6\ enforcement capabilities
within the IRS, according to the Congressional Budget Office (CBO).
---------------------------------------------------------------------------
\5\ https://www.irs.gov/statistics/irs-budget-and-workforce.
\6\ https://www.cbo.gov/system/files/2020-07/56422-CBO-IRS-
enforcement.pdf.
The result is that IRS employees, with limited resources and support,
audit taxpayers with simpler, easier to audit returns. These taxpayers
tend to be low income and tend to receive the Earned Income Tax Credit
(EITC). They also tend to be people of color. Meanwhile, high-income
earners with complex tax returns are infrequently audited due to a lack
---------------------------------------------------------------------------
of time and resources.
While the IRS does sponsor a program to provide free legal assistance
to low-income taxpayers, in Mississippi, the state with the highest
audit rate in the country, ProPublica \7\ discovered in 2019 that there
was only one attorney for the program in the entire state.
---------------------------------------------------------------------------
\7\ https://projects.propublica.org/graphics/eitc-audit.
This legal assistance program is just one example of a well-intentioned
program meant to assist those in need that has failed its taxpayers due
---------------------------------------------------------------------------
to a lack of funding and oversight by Congress.
Adequately funding the enforcement functions of the IRS will allow the
Service to refocus efforts on those most negatively impacting our tax
system. Economic analysis published in November 2020 \8\ reflects that
investing $100 billion over the next decade in IRS technology, data,
and personnel would allow the agency to collect up to $1.4 trillion in
unpaid tax revenue. Funding the IRS is both equitable and efficient.
---------------------------------------------------------------------------
\8\ https://www.taxnotes.com/featured-analysis/shrinking-tax-gap-
comprehensive-approach/2020/11/25/2d7ht.
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III. Conclusion
It is our hope you can understand that racism is a real and true
problem within the civil service, both on an individual and systemic
level. Black, indigenous, and/or people of color (BIPOC) managers and
BIPOC candidates to join the Senior Executive Service have approached
PMA as an anonymous group to share their stories of discrimination.
Many are too afraid for their careers to make formal reports.
PMA feels it is necessary for Congress to provide oversight on internal
equity issues and ensure the IRS is taking an active role in
diversifying its leadership ranks. In the event of continued leadership
resistance to offering voluntary or compulsory anti-racist leadership
and anti-bias training, we encourage Congress to act so all employees
have the opportunity to be trained on EDI issues. Congress must also
appropriately fund the IRS to allow the Service to rectify longstanding
inequities in our practices and refocus enforcement efforts as
necessary.
Thank you for your consideration of PMA's views on this critical topic.
Please do not hesitate to contact PMA's Washington Representative Jason
Briefel ([email protected]) if the association can be of any
assistance to you on this matter.
Sincerely,
Chad Hooper
Executive Director
Professional Managers Association
Public Citizen
215 Pennsylvania Avenue, SE
Washington, DC 20003
202-546-4996
https://www.citizen.org/
May 4, 2021
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
Re: Hearing on ``Combating Inequality: The Tax Code and Racial, Ethnic,
and Gender Disparities''
Chairman Wyden, Ranking Member Crapo and Honorable Committee Members:
On behalf of more than 500,000 members and supporters of Public Citizen
nationwide, we thank you for holding this timely session and
respectfully offer the following comments to the record for the hearing
entitled ``Combating Inequality: The Tax Code and Racial, Ethnic, and
Gender Disparities.''
During a global pandemic when many Americans are enduring mass
suffering--hundreds of thousands of deaths, millions of jobs lost, and
shuttered businesses across the nation--the very rich, Wall Street and
some corporations' financial health is better than ever. What's more,
the collective wealth of billionaires increased by $1.6 trillion \1\
since March 2020--the start of the pandemic. This basic unfairness is
deepened when looked at through the lens of racial injustice.
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\1\ Chuck Collins, Inequality.Org, Updates: Billionaire Wealth,
U.S. Job Losses and Pandemic Profiteers (April 2021), https://
tinyurl.com/32wyvzyk.
The ramifications of racial inequality are deeply embedded in our
nation's fabric and can be traced to early origins of this country's
inception. Slaves forcibly transported against their will from Africa
served as collateral for the nation's first mortgages and literally and
figuratively laid the building blocks for what is known as ``Wall
Street'' and the global financial market at large.\2\ And, the first
bond market was backed by Black enslaved human beings.\3\ The U.S. must
confront this unconscionable underpinning of our financial system.
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\2\ Pedro Nicolaci da Costa, ``America's First Bond Market Was
Backed By Enslaved Human Beings,'' Forbes (September 1, 2019), https://
tinyurl.com/ffxx3w65.
\3\ Id.
Furthermore, due to years of discriminatory policies that upheld
systemic racism, the wealth of white families is ten times that of
Black families--the wealth of white families is on average around
$171,000, while the wealth of a typical Black family is only
$17,150.\4\ Factors such as redlining, mass incarceration, decline in
union jobs, and racially-biased employment practices have denied many
African Americans access to the ``American Dream.''
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\4\ Jenice R. Robinson, ``Institute on Taxation and Economic Policy
Report, Adequately Funding the IRS Would Be One Small Step Toward
Racial Equity in the Tax Code'' (July 2021), https://tinyurl.com/
9fv67bdv.
Moreover, studies show that racial inequality is manifested in our tax
code.\5\ For example, because wealthy families are disproportionately
white, and a large portion of the giveaways in the 2017 tax law went to
the wealthy, according to a study from Prosperity Now and the Institute
on Taxation and Economic Policy, of the nearly $275 billion of
giveaways in the 2017 tax law, around 80% ($218 billion) went to white
households.
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\5\ Dorothy Brown, The Whiteness of Wealth: How the Tax System
Impoverishes Black Americans--And How We Can Fix It (Penguin Random
House 2021).
Unfortunately, the racial inequities around Wall Street trading
persist. Around half of the population owns no stock market wealth at
all, even indirectly. And among households of color, the share is even
smaller. As a result of public policies that systematically excluded
Black, Latinx, and other families of color from wealth-building
opportunities that benefit white families, only around one third of
Black and one quarter of Latinx families owned any stock at all in
2019.\6\
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\6\ Neil Bhutta et al, ``Disparities in Wealth by Race and
Ethnicity in the 2019 Survey of Consumer Finances'', Board of Governors
of the Federal Reserve, FEDS Notes, September 28, 2020, https://bit.ly/
32hwAnD.
IRS enforcement is another way that racial inequities are felt in the
tax code. The wealthy are responsible for 70% of the underreporting in
taxable income yet we see the IRS auditing lower income Americans at
the about same level as the top 1%.\7\ It is particularly galling that
areas with the high-audit rate in majority-Black communities.\8\
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\7\ Paul Kiel, ``It's Getting Worse: The IRS Now Audits Poor
Americans at About the Same Rate as the Top 1%,'' ProPublica (May 30,
2019), https://tinyurl.com/ns8pb8bv.
\8\ Paul Kiel and Hannah Fresques, ``Where in the U.S. Are You Most
Likely to Be Audited by the IRS?'', ProPublica (April 1, 2019) https://
bit.ly/3vKn7lh.
To address these racial inequities in the implementation of our tax
code, we suggest policies that will require the wealthy, Wall Street,
and profitable corporations to pay their fair share. Increasing the
corporate tax rate, the top rate on individuals and pursuing a
Millionaires Surtax or Ultra-Millionaire Tax along with policies that
address accumulations of wealth (such as a strengthened estate tax and
ending stepped-up basis for wealth gains that accrue over time) will
help ensure that wealthy families, that are predominately made up of
white individuals, will pay more of their fair share. Similarly, a tax
on financial transactions such as stock, bond, and derivative trades
would help address the inequities in ownership of stock wealth by race.
And, tax cheats must be made to follow the law. We urge Congress to not
only increase mandatory and discretionary funding for the IRS, but also
to set audit levels in law that would require significant increases in
the percentages of large corporations and the wealthy that would be
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audited.
Public Citizen looks forward to working with the committee to enact
policies that unrig our tax code and reinvest in all American
communities to create a fairer society.
Thank you for the opportunity to submit this statement for the record.
For questions, please email [email protected] or
[email protected].
Sincerely,
Susan Harley
Managing Director
Public Citizen's Congress Watch division
Robert L. Stewart
Tax and Disclosure Advocate
Public Citizen's Congress Watch division
______
Stop Extraterritorial American Taxation (SEAT)
3 impasse Beausejour
78600 Le Mesnil le Roi
France
http://www.seatnow.org
[email protected]
U.S. Senate
Committee on Finance
April 29, 2021
Please accept this as our submission with respect to the subject of the
April 20, 2021 Senate Finance Committee Hearing: ``Combating
Inequality: The Tax Code and Racial, Ethnic, and Gender Disparities.''
The title to this hearing acknowledges that the United States Tax Code
has different impacts upon different people based upon race, ethnicity,
and gender. This list, however, leaves out at least one additional
critical factor. Senator Crapo himself refers to that factor in his
statement: geography.
Senator Crapo is correct: the tax code (sometimes by accident and
sometimes by design) does lead to differing impacts based on where an
individual--who is a citizen or resident of the United States--lives.
Generally, the United States has one tax system for U.S. citizens who
live inside the geographical borders of the United States. The United
States operates a separate and more punitive ``Extraterritorial Tax
System'' for U.S. citizens (and Green Card holders) living outside the
geographical borders of the United States.
The ``Extraterritorial Tax System'' is not a secret: it has been
explained well by a multitude of observers.\1\ This punitive regime
affects persons of all races (including African-Americans \2\),
genders, and ages. Its sole factor for discrimination is geography--the
mere fact of living outside the United States coupled with having
income, assets and/or financial accounts outside the United States.
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\1\ An Act to provide for reconciliation pursuant to titles II and
V of the concurrent resolution on the budget for fiscal year 2018, Pub.
L. 115-97. Known colloquially as The Tax Cuts and Jobs Act (TCJA).
\2\ Laura Snyder, ``Taxing the American Emigrant,'' 74 Tax Law.
299, 313-17 (2021), available at SSRN: https://ssrn.com/
abstract=3795480.
When U.S. citizens move from the United States and become tax residents
of another country, they are subject to a U.S. tax regime that is more
complex, punitive and penalty laden than are U.S. residents. To
compound matters, the taxation of Americans abroad varies depending on
where they actually live. For example, U.S. citizens living in Canada
are subject to a different set of U.S. tax rules than U.S. citizens
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living in Israel.
Indeed, the Senate Finance Committee recognized this problem at least
as early as 2015. That is when the Senate Finance Committee Bipartisan
Tax Working Group \3\ on International Tax concluded their report with
the following paragraphs:
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\3\ https://www.finance.senate.gov/chairmans-news/finance-
committee-bipartisan-tax-working-group-reports.
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
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Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
Six years have passed and there is still no movement on overhauling the
taxation of individual Americans living overseas, in spite of the clear
directive from the International Tax Working Group. In fact, the
situation for Americans abroad has gotten far worse. This is due in
large part to the enhancements to the Subpart F regime in TCJA.\1\ We
informed the Senate Finance Committee in that regard in our submission
dated April 22, 2021, available here.\4\
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\4\ http://seatnow.org/wp-content/uploads/2021/04/SEAT-Submission-
Overhauling-International-Taxation.pdf.
As stated above, Senator Crapo was correct in acknowledging that the
U.S. tax code leads to differing impacts across geography. Further, he
was also correct to point this out together with the other factors of
race, gender, and age. This is because Americans living overseas are
the victims of prejudice--and the victims of prejudicial taxation
policies--in a manner that is closely akin to the prejudice--and
prejudicial policies--to which many other Americans are victim as a
result of racism, sexism, and ageism. Researchers refer to this
prejudice with a variety of names, including ``placism,'' as well as
``prejudice of place,'' ``blemish of place,'' ``spatial taint,''
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``stigma of place,'' and ``territorial stigmatization.''\2\
Former Senator Max Baucus--one of Senator Wyden's predecessors as Chair
of the Senate Finance Committee--was not immune to this prejudice. In
1995, he stated:
[Americans] are going to great lengths, thousands of miles to
other countries, to avoid paying their fair share. In a
metaphorical sense, burning the flag, giving up what should be
their most sacred possession, their American citizenship, to
find a tax loophole. . . . These are precisely the sort of
greedy, unpatriotic people that FDR called malefactors of great
wealth. . . . Let us not allow more of these rich freeloaders
to get away.\5\
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\5\ 3 Senate Committee on Finance, Tax Treatment of Expatriated
Citizens: Hearing on S. 453, S. 700, H.R. 831, H.R. 981, H.R. 1535 and
H.R. 1812, 104th Cong. 2 (July 11, 1995), https://
www.finance.senate.gov/imo/media/doc/Hrg104-795.pdf [https://perma.cc/
7LDH-XW26] (statement of Sen. Max Baucus).
This comment, alongside many others expressed by other members of the
United States Congress dating back to the Civil War right up to
today,\6\ expose longstanding and deep-seated prejudices against
Americans who live outside the United States. Is it any wonder that
these prejudices have been translated into extraterritorial taxation
and banking policies that are highly damaging to Americans and green
card holders living outside the United States?
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\6\ Laura Snyder, ``Taxing the American Emigrant,'' at 317-20.
It is well past the time that the Senate Finance Committee act upon the
call of the 2015 Senate Finance Committee Bipartisan Tax Working Group
on International Tax, and finally accord to Americans living outside
the United States the full attention, concern, and respect to which
they are entitled as U.S. citizens. It is also well past time to put an
end to the taxation and banking policies that penalize them so
---------------------------------------------------------------------------
severely.
The best solution to this problem is for the United States to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. Taxing non-resident
citizens is ``Mission Impossible,'' as it is impossible to fairly
administer an extraterritorial tax system and afford non-resident U.S.
citizens the rights guaranteed by the Taxpayer Bill of Rights (IRC
Sec. 7803(a)(3)), by multiple human rights instruments and by the U.S.
Constitution.\7\
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\7\ Laura Snyder, Karen Alpert, and John Richardson, ``Mission
Impossible: Extraterritorial Taxation and the IRS,'' 170 Tax Notes
Federal 1827 (March 22, 2021), available at SSRN: https://ssrn.com/
abstract=3828673.
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Thank you for your attention to these matters.
Respectfully submitted by:
Stop Extraterritorial American Taxation (SEAT) Board Members (info@
seatnow.org):
Dr. Laura Snyder (President)
Dr. Karen Alpert
Suzanne Herman
David Johnstone
Keith Redmond
John Richardson
______
Letter Submitted by Ronald Walther
U.S. Senate
Committee on Finance
I am a proud American citizen who lives outside the United States. To
be clear: I am an individual. I am not a corporation. I am not a
multinational. I did not move from the United States to avoid paying
U.S. taxes. But, by moving from the United States, I am automatically
subject to the U.S. Extraterritorial tax regime--a regime that imposes
more punitive taxation and reporting on Americans living abroad--than
is imposed on American residents. This is because the Internal Revenue
Code treats all things foreign to the United States punitively.
I moved from the United States because my parents returned to their
homeland. In fact, am a full tax resident the country where I live.
But, because I actually live and work in Germany. I am required to pay
taxes and assume responsibility for my financial and retirement
planning here, where I live. My income, financial and retirement assets
are foreign to the United States, but are local to me. Because my
income and financial assets, although local to me, are foreign to the
United States I am subject to the U.S. Extraterritorial tax regime. As
such, I am subject to constant stress and fear of penalties should I
make mistakes in complying with the Internal Revenue Code. Furthermore,
I find it very difficult to find competent professional help. The help
I can find is very expensive (often costing more than $500 a year).
I know that you will find it difficult to relate to this. However,
because and only because, I live outside the United States, my
difficulties include the following:
Difficulty in maintaining bank/financial accounts where I live:
FATCA has provided incentives for banks in my
country to refuse to deal with U.S. citizens.
Punitive Taxation on non-U.S. mutual funds.
Being able to participate in non-U.S. pensions and still get the
benefits of tax deferral available to my neighbours.
Taxation on the sale of my principal residence which is not
taxed in the country where I live.
Difficulty in carrying on a business. It is normal for people in
my country to carry on business through small business corporations--
which are taxed punitively by the IRS (GILTI).
Having the retirement savings in my corporation effectively
confiscated by the 965 Transition Tax.
Being subject to income based on phantom capital gains. (Because
I am required to live my life tethered to the U.S. dollar, fluctuations
in the exchange rate can result in unexpected fake income).
To be clear, I am and will always be a proud American. But, I find it
very difficult to maintain compliance with both the U.S. Internal
Revenue Code and the tax code of my country of residence. Because of
this dual tax obligation, I am finding it very difficult to save and
invest for retirement. What one country gives, the other country takes.
The necessity of complying with both tax regimes means that I get the
worst of each tax regime. As a result, I feel that I am being forced to
consider whether it is possible to retain my U.S. citizenship. No proud
American should be forced to choose between his cherished U.S.
citizenship and the need to engage in responsible financial/retirement
planning.
It is terribly unfair, that because I live outside the United States,
that I am forced to choose between my responsibilities to plan for
retirement and my responsibilities under the Internal Revenue Code. Why
should I be subject to additional requirements that resident Americans
are not? I am not living in the United States and using services in the
United States. I have even been denied a COVID-19 vaccine from the U.S.
Government (because I don't live in the United States) while being
required to pay taxes to the United States!
The U.S. Extraterritorial tax system is terribly unfair.
A great American writer, the late Pat Conroy, began his book ``The
Prince of Tides'' with the words: ``My wound is geography. It is also
my anchorage, my port of call.''
Although, my U.S. citizenship is my anchorage and my port of call. The
unfair U.S. extraterritorial tax regime--triggered by my geography--is
most definitely my wound.
Please fix this extreme injustice!
______
Letter Submitted by Susan P. Williams
U.S. Senate
Committee on Finance
I am a proud American citizen who lives outside the United States. To
be clear: I am an individual. I am not a corporation. I am not a
multinational. I did not move from the United States to avoid paying
U.S. taxes. But, by moving from the United States, I am automatically
subject to the U.S. Extraterritorial tax regime--a regime that imposes
more punitive taxation and reporting on Americans living abroad--than
is imposed on American residents. This is because the Internal Revenue
Code treats all things foreign to the United States punitively.
I moved from the United States because I fell in love with a Welshman.
We married and settled in Wales in 1981. I am a full tax resident in
the UK, the country where I live. Because I have lived and worked in
the UK for 40 years, I have been required to pay taxes and assume
responsibility for my financial and retirement planning here, where I
live. My income, financial and retirement assets are foreign to the
United States, but are local to me. Because my income and financial
assets, although local to me, are foreign to the United States I am
subject to the U.S. Extraterritorial tax regime. As such, I am subject
to constant stress and fear of penalties should I make mistakes in
complying with the Internal Revenue Code. Furthermore, I find it very
difficult to find competent professional help. The help I can find is
very expensive and I am living on a modest retirement pension. The last
time I had assistance to complete my tax return was in 2018 and the
cost was =1,000 (approx. $1,450). As my annual income is only =18,000
this represents a huge portion of my income, and I have not been able
to afford assistance since that time.
I know that you will find it difficult to relate to this. However,
because and only because, I live outside the United States, my
difficulties include the following:
Difficulty in maintaining bank/financial accounts where I live:
FATCA has provided incentives for banks in my
country to refuse to deal with US citizens. I live in fear that I will
lose banking services here where I live.
Punitive Taxation on non-US mutual funds. I have made
investments in Mutual funds here in the UK, where I live, as many
people do. I did this years ago, and have since discovered I will have
to forfeit much of their value when I cash them in. My American
relatives who live in the United States also have Mutual Funds but are
not subject to the awful PFIC rules.
Being able to participate in non-U.S. pensions and still get the
benefits of tax deferral available to my American relatives residing in
the United States.
Taxation on the sale of my principal residence which is not
taxed in the country where I live.
Being subject to income based on phantom capital gains. (Because
I am required to live my life tethered to the U.S. dollar, fluctuations
in the exchange rate can result in unexpected fake income)
The inability to have a bank account in the United States. This
is denied to people who do not live in the United States.
The inability to open an IRS account--this cannot be done
without a cell phone registered to a U.S. address. As I live in the UK
I do not have a U.S. address.
The inability to receive payments from the IRS into my bank
account. This is because the IRS will not make payments to ``foreign''
bank accounts, and, as stated above, I am unable to open a U.S. bank
account.
The inability to open a U.S. social security online account.
This is not possible when living outside of the United States.
The ability to contact the IRS by phone without incurring a
large phone bill. There is no toll-number available to people
telephoning from outside the United States.
To be clear, I am and will always be a proud American. But, I find it
very difficult to maintain compliance with both the U.S. Internal
Revenue Code and the tax code of my country of residence. Because of
this dual tax obligation, I am finding it very difficult to save and
invest for retirement. What one country gives, the other country takes.
The necessity of complying with both tax regimes means that I get the
worst of each tax regime. As a result, I feel that I am being forced to
consider whether it is possible to retain my U.S. citizenship. No proud
American should be forced to choose between his cherished U.S.
citizenship and the need to engage in responsible financial/retirement
planning. It makes me feel quite sick to consider giving up my U.S.
nationality, but if things go much further my hand will be forced. How
can anyone function if banking services are denied to them?
It is terribly unfair, that because I live outside the United States,
that I am forced to choose between my responsibilities to plan for
retirement and my responsibilities under the Internal Revenue Code. Why
should I be subject to additional requirements that resident Americans
are not? I am not living in the United States and using services in the
United States. I have even been denied a COVID-19 vaccine from the U.S.
Government (because I don't live in the United States) while being
required to pay taxes to the United States!
The U.S. Extraterritorial tax system is terribly unfair.
Many people take the view that I have ``chosen'' to live outside the
USA and so should bear the consequences. Actually, I am in a ``mixed
marriage'' and if my husband I choose to live together, then at least
one of us must live in a ``foreign'' country. In my case, it is me!
Please help!
Susan P. Williams
______
Letter Submitted by Genelle Windsor
CBT (Citizen Based taxation) The U.S. requires that its citizens
fill out tax returns and pay tax if they live outside of the U.S.
Americans living outside of the U.S. are required to fill in tax
returns and FBAR financial reporting.
FATCA is introduced to require banks outside of the U.S. to
report the bank details of accounts held by Americans. This includes
Americans who are residents and tax payers in countries outside of the
U.S.
The banks are fined if they do not report on accounts of
Americans or if they report incorrectly.
The banks outside of the U.S. decide that they do not want to
pay large fines for mistakes in reporting.
Banks close accounts of Americans and do not accept Americans as
new customers.
Conclusion: Americans who are law-abiding tax-paying residents
of countries outside the U.S. cannot open bank accounts with many banks
and their accounts that they have had for a long time can be closed at
any time.
This is descrimination against all Americans who choose to live outside
of the United States. The United States should adopt an RBT (Residency
Based Taxation) like most of the countries in the world. Taxes are
levied for goods and services. Americans living outside of the U.S. pay
taxes where they reside and receive goods and services. Americans
living outside of the U.S. can pay taxes to the U.S., but not receive
any goods or services because they don't live in the U.S. The laws are
designed to get large corporations to pay tax in the country where they
do business. Individuals U.S. citizens get caught up in the law and end
up having their bank accounts closed because of it. Please change the
law so that Americans living outside of the U.S. do not have to fear
that their bank will close their accounts and then they would have no
way of paying their taxes in the country where they reside.
[all]