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How Bernie Sanders’ Tax Plan Can Close the Huge Racial Wealth Gap

America needs a new tax policy that would get our financial house in order while fostering racial and economic fairness.
 
 
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Last week I argued that the debate over taxes—a tussle at the heart of the current “fiscal cliff” discussions—is  actually one about racial justice. Since questions of right and wrong must ultimately become about action, what America needs is a new tax policy that would get our financial house in order while fostering racial and economic fairness. The deficit reduction  plan of independent United States Sen. Bernie Sanders would do just that.

The core inequity Sander’s plan tackles is that the United States taxes capital gains—income earned from wealth—less than income earned from work. This differential has had broad racial implications.

Average white wealth is  20 times greater than that of African Americans, and 14 times greater than that of Latinos. In taxing wealth at a lower rate than we tax work, America is hardening existing racial disparities into an economic caste system with less mobility and longer odds at success for the non-rich. According to Nobel Prize-winning economist Joseph Stiglitz, the United States has less economic mobility—the degree to which a person can move from being poor to rich—than any other advanced economy on the planet.

By taxing capital gains at the same rate as income earned from work, Sanders’ plan would upend our tax system’s current values and moves our entire economic system closer to the one we all want.

Grand Bargain

The idea of taxing work more than wealth was proposed by President Ronald Reagan and enacted by a Democratic Congress. Reagan swept to victory in 1980 by  racialzing the issue of taxes in order to get the votes of the white working class, but once in office his biggest economic favors were reserved for the rich.

As Janet Novack of Forbes Magazine writes, “The capital gains tax rate is crucial because no other … tax expenditure benefits the rich nearly as much as the special rate on capital gains.”

During Reagan’s two terms in office, capital gains reductions were twice the size of tax cuts for work-related income, in percentage terms.

Though the capital gains tax rate would fluctuate up and down under subsequent Republican and Democratic administrations, it has always stayed below the top income tax rate.

Democratic acceptance of Reagan’s tax ideas for the past three decades has transformed the racial wealth gap into a chasm. For whites and blacks,  it’s now twice as big as in 1980.

This process of relative wealth destruction between whites and non-whites was aided by the financial crisis of 2008—itself spawned by Reagan’s policies—which sent black and Latino wealth to the lowest level ever recorded, and poverty to highs not seen in decades.

However you look at it, Reagan’s tax policies tanked black and brown wealth.

Current Plans

Disappointingly, tax plans drafted by both President Obama and the GOP would maintain the capital gains tax differential enacted 30 years ago. Republicans are pushing for no increase in capital gains; President Obama has signaled a willingness to allow it rise to over 20 percent. But this would still be at almost half of his proposed top income tax rate of 39 percent.

Moreover, the capital gains tax rate is only a cornerstone of a broader tax code that is overwhelmingly skewed to the rich.

During the past 30 years, the top income tax rate for the wealthy has been reduced by half from 70 percent in 1980 to where it now rests in the upper 30s. Additionally, tax deductions in health and housing—nominally geared toward the middle class—actually benefit the most privileged among us.

 
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