In August 2021, Planning for a Diverse and Equitable Future shared 40 Acres and a Mule: Reparations and the Estate Tax as an introduction to wealth disparity resulting from slavery and Jim Crow laws, the history of reparations, and the connection to wealth transfer and wealth taxation. This video, A Proposal to Repair Racial Wealth Disparity, continues the conversation with recommendations to address racial wealth disparity in the U.S.
ACTEC Fellows Sarah Moore Johnson, Raymond C. Odom, and Professor Phyllis Taite present their extensive research on a solution to historic wealth inequities. They offer recommendations for creating new tax incentives to help fund reparation projects, the data to show how tax policy has systematically shifted wealth to white households, and why the wealth tax should be a tool to correct wealth disparity.
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- RESEARCH USED IN THIS PRESENTATION
- GET INVOLVED
- COMMUNITIES ADDRESSING THE ISSUE
Terrence M. Franklin: In August 2021, Planning for a Diverse and Equitable Future shared 40 Acres and a Mule: Reparations and the Estate Tax, which offered an overview of the wealth disparity resulting from slavery and Jim Crow laws. ACTEC Fellows Sarah Moore Johnson and Raymond Odom presented their research on slavery, post-slavery US history, reparations, and the wealth gap.
Today, we share Part Two of that presentation: “A Proposal to Repair Racial Wealth Disparity.” Joining Sarah and Ray is ACTEC Fellow Professor Phyllis Taite. Their presentation will propose a new solution to historic wealth disparity, take a deep dive into where the funds for reparations would come from, and offer insights as to why reparations are critical for the health of our country. Sarah, please share your thoughts on how reparations might work.
ACTEC Fellow Sarah: In our first video, we touched on some of the broken promises that our government made to former slaves regarding the opportunity to own land, both after the Civil War and as a result of the GI Bill and New Deal. Ray described the progress of HR 40 – the Congressional bill to study Black reparations. While we wait for HR 40 to make its way through Congress, many local governments are exploring reparations. The State of California and the municipalities of Evanston, Illinois, Asheville, North Carolina, and Providence, Rhode Island have all passed reparative legislation and about 20 other cities are considering it.
Not only are reparations moving forward at the state and local level, but also corporations like JP Morgan Chase, Lloyds of London, and private institutions are getting into the mix. For example, Georgetown University has been in the news for its efforts to redress a sale that its founders made back in 1838 of 272 enslaved people. The sale was done in order to save the school from bankruptcy. The Jesuits and the University have pledged to raise $1 billion for a newly created Descendants Trust & Reconciliation Foundation. The Episcopal Church and many community foundations are also designing and implementing reparations initiatives.
Section 170(c)(1) of the Internal Revenue Code allows a charitable contribution deduction for payments to federal, state, and local governments if the payment is made for exclusively public purposes. If the government were to declare that repaying its debt to its Black citizens is a public purpose, then private individuals and companies would be able to help fund the cost of reparations.
We came up with two ideas for charitable incentives that would allow private citizens to redistribute wealth. One solves for the community building aspect of reparations and another allows for direct reparative payments to eligible recipients.
On the community building side, we have our idea for a new type of charity - a 501(c)(40) Reparations Organization. Code Section 501(c) currently ends at subsection (29). We propose to reserve an additional subsections, set them aside, and create subsection 501(c)(40) to commemorate the forgotten 40 acres and HR 40.
We envision that Reparations Organizations would carry out the recommendations of the HR 40 commission by addressing the specific problems created by decades of institutional racism. They might provide economic assistance, educational opportunities, health care initiatives, or criminal justice reforms. These organizations could be permitted to make expenditures for communities at large or they could make direct payments to individuals.
Thousands of existing charitable organizations serving Black communities would automatically qualify as 501(c)(40)s, and we expect new organizations would be established as well.
To maximize charitable contributions to Reparations Organizations, we would propose eliminating the AGI (Adjusted Gross Income) limitation, so that a person could reduce their annual income tax liability to zero by contributing to 501(c)(40)s. On the gift and estate tax side, we would propose a credit, rather than a deduction, so that for every dollar paid to a 501(c)(40), a person would have an extra tax-free dollar to give to their heirs. These advantageous charitable incentives would be reflective of the fact that the contributor is not just being benevolent, they are helping the federal government pay a debt it owes to Black citizens.
Direct Payments to Eligible Recipients
On the direct payments side, we had the idea that direct payments made to eligible recipients, whether paid by the government or by a new Reparations Organization or a charitably inclined individual or corporation could be deposited in a 501(c)(40) account for the benefit of the eligible recipient of reparations, using a structure similar to what we already have in place for 529 Plans.
Private contributions to 501(c)(40) accounts could be eligible for the same income, gift and estate tax incentives that I just mentioned – no AGI limit and a credit instead of a deduction for transfer tax purposes.
Recipients could invest the funds as with a 529 Plans. Perhaps the plans could also grow income tax-free, and tax-free distributions could be made for qualifying expenses that meet those directives of the HR 40 Commission, maybe debt repayment, home purchases, education, and health care could be permitted expenditures.
Given that we anticipate direct payments to individuals could be made from multiple sources- some from the government, some from private contributors and some from charitable reparations organizations- and to promote equity and fairness we would recommend a maximum contribution limit per recipient, just like you have with 529 Plans, but here the limit would be tied to the target amount of direct payments recommended by the HR 40 Commission. Say the government determined that its debt to eligible recipients was $160,000 per person, that’s the median disparity between white and black wealth in our country today.
Say one of my clients did genealogical research and identified the descendants of their family’s former slaves. My client could fund a 501(c)(40) account for each of these descendants in the amount of $160,000 each and receive a charitable deduction. The recipients of those 501(c)(40) accounts would then be ineligible to receive further benefits from the government or Reparations Organizations, thus freeing up more public funds for other eligible recipients.
Finally, we anticipate that these 501(c)(40) accounts would be transferrable at death by beneficiary designation, thus allowing more Black Americans to enjoy the financial security that an inheritance brings.
If done properly, the cost of reparations is estimated by economists to be in the range of 3 to 20 trillion dollars. This seems daunting but remember that it does not have to be done all at once, and as Phyllis will tell us, the government can find the money for it if it chooses to do so.
Professor Phyllis Taite: Thank you, Sarah. You know, I was invited to participate in this project because I’ve been publishing and presenting on tax policy and social justice for more than 15 years, so my contribution to this project is an extension of that research. The Institute of Policy Study reports that the median white family owns 41 times more wealth than the median black family. And with that proper context and data, the leading presumptions place the burden on the racial and ethnic minorities to save more and be more responsible with their finances, but that doesn’t give an accurate depiction of the systemic problems that contribute to the racial wealth gap.
For example, homeownership is an important way to build wealth and financial mobility. But as Sarah has told us before, America has a long history of redlining, fair housing problems, and racially restrictive covenants that negatively impact the homeownership rates. The Census Bureau reports that homeownership rates for whites were significantly higher than rates of people of color, and that disparity has persisted over time. And there are several homeownership-based tax subsidies: you have the Mortgage Interest Deduction, the Principal Residence Exclusion, and the Real Property Tax Deduction. These are expensive expenditures and the taxpayers who benefit the most are the ones who need the least amount of assistance.
Which households benefit the most? The taxpayers who itemize. And studies show that the people who have the highest homeownership rates and the people who itemize are households with average household incomes of $150,000. Now, this makes them eligible to claim the mortgage interest deduction and the property tax deduction.
These same taxpayers are the ones who are most likely to benefit from capital gains preferences. Capital gains is another way that tax policy contributes to the racial wealth gap by subsidizing the wealthy through preferential rates, deferrals, and, in certain cases, a complete exclusion such as the principal residence exclusion in the 10-14 stepped-up provisions. And the US Census Bureau reports that the households with income over $150,000 are overwhelmingly white. Now, government expenditures are subsidizing these homeownership and capital gains preferences for the wealthiest households. And the expenditures are estimated – just between the years 2016 and 2020 – of over $1.56 trillion. So, it’s not a matter of the government not having the funds to subsidize. It's a matter of who the government wants to subsidize, and this is even more evidence about tax policy over transfer taxes.
Transfer tax is yet another way that tax policy subsidizes the wealthy and contributes to the racial wealth gap. Between 1997 and 2022, we’ve seen significant increases in exemption amounts from $625,000 to over $12 million now, and a decrease in rates from 70 percent down to 40 percent. They were as low as 35 percent at one point. So, we’re reducing the tax liability for the wealthiest through the transfer taxes. The Tax Policy Center also reports there’s a substantial reduction in taxable returns from 50,000 in 2001 down to 1,900 in 2020, and tax liability from $23 billion in 2001 to $16 billion by 2020. This impact is seen in the government revenue. Between 1950 and 2019, the Tax Policy Center reports that payroll and income tax has carried the burden that has expanded over time, and the vast majority of taxpayers earn their income through wages and salaries.
Meanwhile, corporate tax liability and estates’ liability has been reduced over that same period. We clearly see race and class bias in tax policy. As such, government policies have contributed to the racial wealth gap, and while Sarah has provided methods for the general public to contribute, this does not relieve the government’s burden to right these historical wrongs. Tax policy has systematically shifted wealth to the wealthiest white households. It’s perverse to have a policy designed to subsidize high-income households that exclude the same benefit to low-income households. Instead, tax policy should reflect societal values. Now you’re going to hear from Ray, who’s going to guide us through a process to help us right these historical problems.
Raymond C. Odom: Thank you, Phyllis. There have been two lines of thought and pressure that our government has asserted from its very beginning. The first was the pressure to deny wealth accumulation and concentration among families of enslaved and formerly enslaved Africans. This government action we've talked about in the "Forgotten 40" presentation as a broken promise to repair and restore formerly enslaved people. On the other hand, there's been another line of historical pressure that all of us who are in the area of wealth transfer and estate work are also aware of, and that is our country's overarching desire to prevent the concentration of wealth among America's richest Americans. This concentration of wealth creates an aristocracy, and that distorts power dynamics within our country. Literally, wealth disparity undermines democracy. The estate tax was a tax specifically designed from its inception to prevent wealth concentration.
So, to make it a simpler proposition: we have on the one hand, a clear and overarching theft by the American government of wealth from enslaved and formerly enslaved Africans. That theft, I'd like to call "stolen wealth." And on the other hand, we have an overarching and continual pattern in our government, starting with the elimination of primogeniture, which is wealth going to the oldest male child. The pattern was to prevent wealth concentration. I call that preventing "swollen wealth." So, the conclusion of our presentation is that America should earmark the estate tax on "swollen wealth" to repay the "stolen wealth" of the government's broken promises. "Swollen wealth" should pay for "stolen wealth."
Estate Tax and Wealth Disparity
And so, we started with the idea that the estate tax itself was designed from its inception to deal with wealth disparity. There is no other federal tax that I'm aware of that has such a strong nonrevenue purpose. Certainly, no other federal tax was specifically designed to eliminate wealth disparity. Interestingly, it is no coincidence that America's wealth disparity started with slavery and then greatly expanded during the time that Civil War reconstruction was being deconstructed. From 1865 to 1965, the "stolen wealth" of the broken reparation promises was codified through the tacit support of the domestic terrorism of Jim Crow policies, separate but equal segregation, racial redlining, and mass incarceration. All of these ongoing acts of wealth theft have coincided with a time in America when wealth was being concentrated to the richest 400 Americans.
The concentration of wealth between 1890 and 1910 led to the estate tax being passed in 1917. Now we find that as estate tax has increased its exemptions and lowered the number of people subject to the tax, wealth disparity has increased in the 21st century, the same way that it did at the beginning of the 20th century. And therefore, our call is for America to use the estate tax to address wealth disparity. Let me be clear, our idea – our proposal – is to use the estate tax, again, a tax designed from its inception to deal with wealth disparity, to target the wealth disparity of the most disparaged people group in America.
And that group happens to be the people of the Forgotten 40 broken promise: the descendants of African enslaved people and black people subject to historic wealth deprivation. By aiming this particular tax – earmarking it for this group of people – we believe that the tax will best accomplish its original purpose. Some may say, "But isn't that being a little bit too specific? Are we not solving the race problem by talking more about race?" Yes and no. What we're actually doing is aiming the tax designed to prevent a problem (wealth disparity) at the group that is most affected by the problem. And most importantly, we believe this small earmarking will be a good start to solving the problem of racial inequity and racial inequality.
And so, for us, the tax law changes mentioned by Sarah and Phyllis coupled with our principal proposal for the earmarking of the estate tax for reparation amounts determined by HR 40 (or similar bills passed by Congress) are the best ways to use estate taxation to address racial wealth disparity. Most importantly, earmarking estate tax for reparative relief converts estate tax from a tax that is half dead and half alive (called by one commentator a "zombie tax,") a tax that is constantly up and down and up and down (based on the protest of the few – one-tenth of one percent of Americans who are affected by the tax) - it converts that tax to an effective reallocation of wealth that works for all Americans to address the one malady, wealth disparity, which is the most detrimental to our overall health as a country. That's how we believe the "Forgotten 40" promises ought to be remembered. Thanks for listening.
Terrence M. Franklin: Thank you, Sarah, Phyllis, and Ray. Obviously, much thought, debate, and research have gone into this proposal. So, what steps can we take to address the racial wealth disparity problem?
- Educate yourself on the issue.
- Contact your congressional representative to express your thoughts.
- Familiarize yourself with the work of organizations like the National African-American Reparations Commission
Please visit ACTEC, actec.org/diversity for more information on this topic and some of the references our presenters used in their research. And make sure you subscribe to ACTEC's YouTube channel to be informed of new videos as they become available.