How the Inflation Reduction Act’s Tax Reforms Can Help Close the Racial Wealth Gap – Just Taxes Blog

Read as PDF

Last month, President Biden signed into law one of the most transformative and progressive tax law packages in decades. The Inflation Reduction Act (IRA) created a new minimum tax on the largest corporations to ensure they pay taxes on the profits they report to shareholders, established a new tax on stock buybacks to prevent corporate profits from going untaxed and provided the Internal Revenue Service (IRS) with financial resources to crack down on tax evasion by wealthy corporations and households.[1]

The tax justice victories in the IRA are also victories for racial justice. While much attention has focused on the equity impacts of the bill’s health and climate provisions,[2] the corporate tax reforms will help narrow the racial wealth gap. Ballooning corporate equity values have been a powerful driver widening the racial wealth gap in recent years. To the extent that those values have been inflated partly through tax avoidance that pads corporate profits, the IRA’s measures to crack down on that avoidance will help advance racial equity.

Centuries of discrimination have prevented people of color from building wealth, leaving them economically disadvantaged compared to their white peers.[3] Taxes have played a role in creating and sustaining it, and they can also play a role in narrowing that gap.

Over the past three decades, the racial wealth gap has widened, driven by growing corporate equity value held in stocks and mutual funds. While fairness and justice concerns are paramount, the detriments of the racial wealth gap are broader reaching. Researchers have shown that this problem stunts the growth of our economy.[4]

In 1990, the average net worth of white households was 3.9 times that of Black households and 4.5 times that of Hispanic households. By 2022, those gaps had grown to 4.1 and 5.0, respectively. However, if corporate equities were not included, the gap between white and Black households would have shrunk over the same time from 3.6 to 3.0, and between white and Hispanic households it would have shrunk from 4.2 to 3.6.

This growth in the racial wealth gap is likely driven by the households at the very top. This is suggested by a recent Treasury Department analysis, which looked at the same racial wealth gaps but examined median, rather than mean (average) wealth.[5] Because the median wealth for each group is simply the wealth of the family at the mid-point of the distribution (meaning half the families in the group have more wealth and half have less wealth), the median is less distorted by extreme wealth of those at the very top. Whereas we find the mean racial wealth gaps to grow slightly over the past 30 years, Treasury finds that median racial wealth gaps are mostly unchanged over that period. (Treasury did, …….