Tax Preference As White Privilege in the United States, 1921–1965

Abstract

Tax Preference As White Privilege in the United States, 1921–1965 Julia Ott Whiteness is also a matter of what is behind, as a form of inheritance, which affects how bodies arrive in spaces and worlds. We accumulate behinds, just as what is behind is an effect of past accumulations.1 —Sara Ahmed Inequality—in income, wealth, opportunity, consumption, health, security, political voice, and environment—presents the most pressing social challenge of our day. And it counts among the hottest areas of research in the social sciences.2 Capitalism may tend towards inequality, [End Page 92] as economist Thomas Piketty's exhaustive account suggests.3 Even so, the historical record makes it plain that public and private policies shape distributions of income, wealth, and wellbeing. This article examines the history of one particular policy that has contributed substantially to the concentration of income and wealth among the richest households—almost entirely white—in the United States: the preferential tax rate for capital gains. Since 1922, the IRS has allowed taxpayers to keep a greater portion of the gains they make from investments (so-called capital gains) than they keep from their wages and salaries (so-called earned, or ordinary, income). This is because capital gains are taxed at lower tax rate than the same amount of money is taxed when it is earned as salary or wage income (figure 1).4 For nearly a century, the reduced rates levied on gains from investment have undercut the progressivity of the U.S. tax code.5 Because the [End Page 93] Click for larger view View full resolution Figure 1. Income tax rates in the United States, 1918–2018 Source: Tax Policy Center, "Historical Highest Marginal Income Tax Rates" (March 22, 2017), https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates; Tax Policy Center, "Historical Capital Gains and Taxes (May 5, 2017), https://www.taxpolicycenter.org/statistics/historical-capital-gains-and-taxes; Citizens for Tax Justice, "Federal Top Income Tax Rates Since 1913" (November 2011), https://www.ctj.org/pdf/regcg.pdf. wealthiest households earn the bulk of capital gains every year, this tax break benefits the rich overwhelmingly.6 Between 1922 and 2017, the top 10 percent of the income distribution received, on average, 84.2 percent of all realized capital gains, while the top 1 percent took, on average, 61.1 percent of all realized capital gains in the same period (compared to 38.2 percent and 13.0 percent, respectively, of all other income, excluding capital [End Page 94] gains) (figure 2). In every year since 1922, the tax preference for capital gains added several percentage points to the share of after-tax income taken by the top 1 percent and the top 10 percent of the income distribution (figure 3). Since 1989, the capital gains preference has been the single largest contributor to the rise in after-tax income inequality in the United States.7 This feature of the tax code also swells the bank accounts of the wealthiest because of how it affects the compensation of the highest earners. In the United States, partners in private investment funds (like venture capital, hedge funds, and private equity) often receive compensation in the form of a share of their clients' capital gains (so-called "carried interest"), and therefore, they pay the lesser tax rate. The preference for capital gains also encourages corporate executives to take stock-based compensation, anticipating that future gains will be taxed preferentially. With so much of their income and wealth dependent upon the performance of their company's stock, corporate executives focus on that performance in the short term at the expense of the long-term success of the corporation.8 They funnel corporate resources into pay-outs to shareholders like themselves in the form of dividends and buybacks intended to buoy share prices. Today, "the stock market delivers money from corporations to investors, not the other way around," in the words of economist J. W. Mason.9 The financial sector wields outsized and adverse influence over U.S. corporations, thanks in part to the tax break for capital gains for individuals and households. Given the overrepresentation of white...