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The Tax Code and Economic Justice in America

David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: taxes and racial inequality. Although many Americans view tax through the lens of paying and filing taxes, tax policy and law touch nearly every aspect of life. The birth of a new child brings an additional tax credit. Or the death of a loved one often leaves the bereaved to grapple with taxes on the estate. But the current nature of some tax policies and laws can reinforce inequality in America, highlighting the need for diversity in the tax field, and economics at large, to move beyond the status quo. Here to talk more about this subject is Francine Lipman, a professor of law at the University of Nevada, Las Vegas. Francine, welcome back to the podcast.

Francine Lipman: Thank you, Dave. It's great to be back.

David Stewart: All right, now, you recently did an interview for us on this subject. Can you tell our listeners about your guest?

Francine Lipman: I was thrilled to have the chance to interview Dr. Darrick Hamilton, who's a preeminent stratification economist. As of September 1, he's returning to The New School as a university professor, and he's going to launch a new center for The New School dealing with the study of race and economics.

David Stewart: All right. Could you give listeners a little preview of what you're going to talk about?

Francine Lipman: Absolutely. It's a great podcast. Dr. Hamilton helps me think critically about tax. Specifically, what we do is we connect the dots for systemic racism in the tax system to racial wealth inequality. Dr. Hamilton has compelling empirical evidence that has demonstrated that a college graduate who is Black has less wealth than a white high school dropout. And this is predominantly because of systemic racism in the tax system as well as truly throughout just about all of our systems. Dr. Hamilton helps me think more critically about how we can push the tax system to be equal for all taxpayers.

David Stewart: All right. Let's go to that interview.

Francine Lipman: Darrick, it's great to have you again in a discussion. I've been thinking a lot about diversity and inclusion, and unfortunately, the lack of diversity and inclusion in certain industries. And I read a critical tax scholar speaking about occupational segregation. And you and I, Darrick, have been on a lot of panels. And you know that we've worked hard to try to bring into the discussion scholars of color, especially scholars of color who are in tax, finance, economics. And shockingly, there are so few. It's occupational segregation.

When you look at the statistics, they're really appalling. Black tax partners in CPA firms: 0.3 percent, less than 1 percent. One third of 1 percent. Black law partners, better, but still horrible: 2.1 percent. And 1.8 percent are equity partners. So, a lot of these Black law partners are segregated into non-equity. So, not sharing in the profits. Similarly, Black attorneys: 5 percent of all lawyers. And Black women lawyers: only 1.9 percent. This occupational segregation has ramifications. So, what are the demographics in economics? How can we make this better?

Darrick Hamilton: The demographics in economics. I don't know the numbers off the top of my head. However, what I pretty sure I know is that in any given year, there is never more than literally 16 Black economists that graduate with a PhD. And there have been years when it has been four or zero as well. I think it's typically like eight U.S.-born Black economists that graduate with a PhD in economics. So that speaks to perhaps a pipeline issue, but we need to understand that pipeline issues are endogenous. They don't just appear amorphously -- that there's a mechanism and reason for which they arise.

And then also, if we look, as you have described with the legal profession, if we disaggregate within occupation. So if we look in the ranks of full professors, the ranks of tenured professor, we're going to find even greater scarcity in the discipline. That's clear, that's evident. There's been a lot of reports describing gender, but the dimensions of race and gender are abysmal, and even more with regards to race, when we look at a field like economics.

So, let's think about even the question of why does it matter? Why do we care? The first answer is obvious. The first answer is we want elite positions desegregated. We would want equity with regards to having access to professional jobs that are considered desirable, or even elite for that matter.

But then there's another reason why it's valuable, and that is moving us beyond the status quo of ideas. That a recognition that people enter endeavors with some preconceived notions of how things work, some experiences that they bring into the questions they ask, some understandings of phenomena that are specific to the background from which they come. So if we want to have better ideas in the discipline, if we want to have better understanding of economic relationships, then we should be promoting people who come in with fresh and new ideas to move us beyond the status quo, particularly in a context where we've had growing inequality in this country for so long. And if economics is charged with understanding distribution of resources, then I think as a discipline, we should be doing better. So for the social good, we should be advocating for diversity and inclusion.

And then let me make one final last point as it relates to what we began with, which is this so-called pipeline issue and the ways in which it can be endogenous or relational to the aspects of the structure itself. The explanation in economics for persistent group inequality oftentimes comes down to some human capital explanation. That the orthodoxy is that if markets are functioning correctly, then you have a fair, efficient distribution of resources. Those that are deserving get rewarded. Those that are undeserving will have to find something else to do over time because the markets should sanction them away. This is part of the orthodoxy.

So, if you are from say a subaltern Black background, and the discipline is telling you that the reason for this persistent inequality has to do with deficits within Black people -- either they don't have the skillset or they have some cultural aspect that is detrimental to their success -- then that becomes off putting in and of itself. That that's not a discipline that attracts people who might be interested in understanding this question. If it's vacuous would limit it to only those type of explanations. And that's ironic because we need those people to come up with alternative theories and understandings, not that white people can't. But as I mentioned, there's value to coming to problems with diverse perspectives so that you can have greater insights on how to address them beyond the status quo.

Francine Lipman: Unfortunately I'm, as you know, I try to be a positive, hopeful person. I do think COVID-19 has put such pressure on our economy that we're seeing these fractures between race and gender literally explode on the front lines. Black essential workers dying at a horrifically higher rate. Businesses going down, because as you say, lack of access to capital. And just the anger and frustration with the continuous nonstop unrelenting murder of Black men and women from the police force. And what is so frustrating, but perhaps hopeful, is COVID-19 has put pressure on this so we're seeing this. And your work and others is now getting New York Times attention and front line media with the presidential race. Your work is getting adopted, and we're seeing this in tax proposals. And so, talk about the pros and cons of that.

Darrick Hamilton: The other aspect is COVID-19 is amplifying underlying structures that were already in existence. The fact that Black people are, as well as Latinx populations, have limited resources to begin with. And as a result of that limited resource, people might say, "Well, they're more vulnerable because of preexisting conditions." Well, preexisting conditions have preexisting conditions. They aren't just random. They result from lack of resources as well as the context in which they engage in health and get treated differently in that engagement. We need to understand that. Our conception of what we say is given, endogenous, or preexisting is not. It is part of a larger system, which people have less access to resources and are treated differently. That needs to be crystal clear. But I guess the larger point is that COVID-19 amplified existing disparities that are already latent in a way that are obviously racialized.

And then a couple of other points on that is probably our political economy response is racialized. What we deem essential workers and our tolerance for when we're willing to open up an economy or not is very racialized. Our tolerance for how much public support we're going to intervene with to protect workers and people is very racialized. I think we need to understand that as well. And then, a final point is that with these preexisting conditions they get — and by preexisting, I mean, racism. They get amplified under a pandemic like COVID-19. I'd like to make the point that these things are choices. That with virtually every economic downturn, we can make a policy decision to not have these racial disparities, that these things are not inevitable.

We can intervene in ways so as to be protective in a way that includes shared prosperity, regardless of one's race, gender, or class position. During economic downturns, we typically end up in a recovery that's unequitable. Where those with capital, those that are white, end up recovering faster and, sadly, might very well be made better off than when we started in a relative sense. So, we need to understand that as well. That in this COVID-19 pandemic, we don't have to have a recovery like we had in the Great Recession, which led to even greater inequality. We could have a more equitable recovery. And with that more equitable recovery, we will be more resilient in a widespread manner for the next pandemic because we'll have better resourced people throughout the population.

Francine Lipman: Absolutely. And so many of these issues are systemic institutionalized racism that is not new. It's over 400 years old. And so, it's got to take Herculean efforts to start to move this elephant in a more progressive manner. So, how does your work and your research and your compelling empirical evidence inform tax reform?

Darrick Hamilton: I think we need to start with value. And also a recognition that tax policy is the premier, biggest fiscal tool that governments have. We think about tax credits in a way that separable from subsidies. When in fact they very well could be the same or a double-edged sword. But they should not be separable in our concept.

So to begin with, when we have a tax credit, everything should be refundable. It's arbitrary and silly to cut it off for people who don't have as much tax liability. We should certainly be able to, in fairness, be able to offer their fair-- and I don't even like the word fair share — but they should be offered their full benefit from the tax code regardless of their income. And we shouldn't arbitrarily cut them off. That should be front and center. Period.

Then thinking about values. We want a tax code — governments that are well-functioning should promote economic inclusion, civic engagement, and social equity. They should be promoting our shared prosperity. And the tax code should be front and center in promoting that. So, colleagues and I have been working on guaranteed income. Using our tax code in a way that literally eliminates poverty. And we already have guaranteed income somewhat in place with the Earned Income Tax Credit structure.

Now the Earned Income Tax Credit structure could be modified in a way that 1) does not arbitrarily, and I'm using the word arbitrarily almost in quotes, but maybe politically arbitrarily, cuts off those people who are not working. Work requirements is a political choice. We should, in my view, literally get rid of poverty in America. The nation is wealthy enough and has a great deal amount of resources where poverty can be eliminated. And we can use the tax code to do so with the existing Earned Income Tax Credit structure. So, not only can we eliminate poverty with our tax code, we can also extend the Earned Income Tax Credit. Not just as an antipoverty program, but as a mechanism to lift families up to the middle class. We can index to the median income in a way that's lifting others up to the middle class by offering them income support, not in a universal basic income framework, but in a gradational framework, similar to how we have the Earned Income Tax Credit structured.

So, let me summarize really quickly. Literally eliminate poverty. And then second, lift families up to the middle class with a guaranteed income approach that is different from UBI because those that are wealthy, if they get a basic income that's the same as somebody who is poor, you are pretty much subsidizing their wealth. A poor person by definition is subsistent and consumes. A wealthy person can use that additional income to invest and therefore lead to even greater inequality. Also it's kind of inflationary. It's almost the definition of inflation to literally give everybody in the economy the same income.

So, using the tax code in a way that is civically engaged, why shouldn't everybody — you know, Tax Day should be a day similar to voting that everybody takes part in. It's part of your civic duty. And why do we arbitrarily exclude people at the low end? I mean, it's kind of a rhetorical question, but in my view of a well-functioning democracy, they would be included. Not to be taxed. They already are taxed with consumption tax, but they should get a refundable income through our EITC structure that guarantees income and eliminates poverty.

Francine Lipman: One of the concepts that you've pushed out broadly and successfully is baby bonds. So, while a baby bonds are a infusion of capital at birth, it's done outside of the tax system. But it's remindful to me of the refundable child tax credit. So, why don't you tell us what baby bonds are, and then maybe compare and contrast with refundable child tax credits and maybe pros and cons for each?

Darrick Hamilton: Whether it's through our tax code or not, again, these could be design issues if we so desired. Right? Whether Treasury is administering through IRS or through Social Security, these become political implementation ideas that clever people can figure out ways to implement. But the basic idea of baby bonds is we talked about earlier that a big source of inequality is capital itself. That some people have an endowment that allows them to purchase an asset that will passively appreciate over their lifetime. The difference between a renter and a homeowner is often a down payment. The difference between a worker who is very creative and an entrepreneur was capital itself. That creative worker will generally have to sell their idea in the form of wages to an entrepreneur who can implement it.

So, what baby bonds is intended to do is to provide everyone with a capital foundation, irrespective of their race, gender, or family that they're born into when they are a young adult. Trust funds for every American.

That's what this is. So, it would be a trust held by the federal government. It would be funded based on the family financial position in which you're born into. So, it would be universal like Social Security, promoting a stakeholder society, promoting civic engagement, similar to the value I described earlier, economic inclusion, and social equity. But the accounts would be ceded in a way that offers those with the least resources the most. And when they become a young adult, they would be able to use these resources to get into either homeownership; some capital to start a business; financing a debt-free education so that you can have a managerial or professional job that affords you some of the retirement savings that might come along with that job like a 401k, for instance. Or you can roll it over in a retirement IRA type account until you're ready to use it or until you become retired. That's the basic concept.

So, if I juxtapose it with refundable child tax credits, I would say that two things. 1) both are necessary and they're compliments. So, baby bonds do not — by design, families can't use them when the child is just that: a child. Ironically, it's intended to, in some ways, I'm going to use a word that tax attorneys know a lot about, divorce. It's intended to divorce children from the families in which they're born in a way that they will have financial capital waiting for them that they get to use and it's not dependent on the choices that their parents make, good or otherwise. Of course, it doesn't exclude other forms of savings the parents can do for their children, but this in and of itself is reserved strictly for the child. And the people can rightfully say, "Well, what about when a child is growing up?" And my response to that is there is no silver bullet American policy. That we need a package of good that is aimed to address insecurity in its various domains.

Francine Lipman: Absolutely. I think that too often, we want sound bite answers to really complicated problems. And it takes a village. And it's going to take a menu of different solutions.

Darrick Hamilton: Many of us only conceive of tax in its collection capacities. We don't consider the fact that it cedes assets in so many domains: home mortgage deductions, differences in ways in which we tax capital gains versus wages. These are all subsidies towards asset promotion. The problem isn't that we do this. The problem is to whom it's distributed. That's the problem. That we are ceding resources in an unequitable way. In a way that's not promoting social equity, economic inclusion, and even civic engagement. That we could think about our tax policy, not just from collection standpoint, but as a mechanism to fuel, to seed, to stimulate. And we can do it in a much more equitable way through programs not only like baby bonds, but similar to baby bonds, that provide asset security in more egalitarian ways.

Francine Lipman: So, as you described, it's going to take lifelong menu of capital accumulation. Birth from — for baby bonds, some sort of Earned Income Tax Credit, child tax credit. As we know, between zero and three, or zero and five, vulnerable children truly need an infusion of capital into their household just so they have decent growth, decent nutrition and housing, and etc. And the return on that investment is phenomenal. And then as you said, once these baby bonds mature and a young adult thinks about starting their education or their business, they have some capital. So what words of wisdom or inspiration do you have for these challenging times for communities of color and advocates like myself and like many folks who are listening for justice and equality for all? What can we do? And how can we help push these issues forward in a positive manner?

Darrick Hamilton: I love that question. Before I answer, let me say something about incentives and some irony associated with incentives. We have structures where professions are incentivized to not communicate with each other. To try to distinguish themselves from each other so as to produce value, whether fictive or actual, to how important they are and why they're necessary and needed. And that's ironic because to solve these problems, we need not just deaf and esoteric approaches that are limited to one domain or one field, but rather being able to talk to each other in interdisciplinary ways.

Another aspect of this incentives is a lot of our public policy attempts to try to incentivize or coerce behavior. And even with tax policy where we offer tax incentives of say, we'll give a homeownership credits, we'll give, and this is a policy I'm not fond of, Opportunity Zones, where we incentivize businesses to come into certain areas so that they could generate economic development.

And why I'm critical of these is that using these incentives, you often subsidize people who might not have the same objective as social welfare objectives to begin with. Not casting judgment, but at the end of the day, they are for-profit entities and will invest in trying to use those incentives to benefit and then also capture. As opposed to using those resources in a direct way to provide capital to these communities in the first place. Because as I've mentioned, that's the fundamental problem. They're under capitalized. And if they had the capital, they probably and could be able to do it themselves.

And then one other point about the incentives because I think this is an important one that's not well-pervasive in our thought. Even something like a first time homebuyer's tax credit, if you don't have the initial endowment, then you don't necessarily benefit from it to begin with. In other words, you have some households that have so few resources that they aren't eligible to benefit from the tax credit because they won't have enough of a down payment. We need to think about that when we design policy.

You might very well be hastening gentrification in your attempt to provide economic development for a community. Because those individuals who could be somebody just graduating from college and well-situated with a professional degree, as well as a family that can provide them resources for a down payment, they might be best positioned to benefit from that tax credit than the community you're intending to benefit in the first place.

And we do this with local taxes as well. We provide tax abatements. We very well may be hastening gentrification. Well-meaning people need to fundamentally understand that this isn't a question of always incentives and responding to being coerced, but rather capital endowment itself.

So, wanted to get that across. And then areas for hope. What can we be hopeful about? What I think the ultimate solution is the legal profession is well steeped in thinking about civil rights, thinking about political rights. The evolution for a well-functioning democracy in the 21st century is the fulfillment of economic rights. Knowing that there will be not a sorting process of access, of quantity and quality, of elements that are fundamental for people to have agency in their lives. And what are those elements? Healthcare. Housing. This doesn't guarantee a penthouse apartment. But it guarantees adequate housing. Food. People should not be hungry in the 21st century. That's why we should literally eliminate poverty. And we have the resources to do it. So, it's a conceptualization that the fulfillment of human rights requires that people are adequately resourced so that they can have true agency.

We talk about the market as if it facilitates choice and freedom. But if you don't have resources, you are at the whim of markets. You don't have choice and freedom. To have authentic agency in your life you need a baseline level of resources. Period. And when we evolve to that point, that is a well-enlightened 21st century society that does not stratify us in a way that makes groups vulnerable based on their race, gender. This is where we need to evolve. And economic rights is a critical ingredient in order for us to reach that.

I promise this is the last thing I'm going to say unless asked again. That is, we think about markets as if they're dogmatic. That this is natural, they're efficient, they're fair, they're colorblind. They separate those into deserving and undeserving, and that's almost a dogmatic expectation and understanding of the way things work.

And as I mentioned, I challenged us to question that, to push back on that. Here's where I think we need to be dogmatic. Justice, commit to justice as a matter of faith. When asked the question of can this politically in this day and time given the way we are? If it's just and you believe in it, commit to it. I shouldn't preach and tell other people what to do. I can speak from my own perspective. That becomes a question that is valuable with regards to planning. But for me, regardless of whether a policy that is just will occur today, tomorrow, or 30 years from now, I'm going to commit to it as a matter of faith because I believe in justice.

Francine Lipman: And what's so interesting about these goals, the economic justice, is that it is going to require everyone in the tent. Enrolled agents, CPAs, attorneys, tax professionals, economists, academics, tax law professors. We all have to come together to think critically. And as you said, are these ideas practicable? What's the effect on the street with these policies? So if we can tease out this enthusiasm and join Dr. Hamilton and myself, and let's make some good trouble.

Darrick Hamilton: Thank you, Francine. I'm so happy that you are my colleague, and even more important, my friend. Pleasure to always speak with you.

Francine Lipman: The feeling is mutual.

David Stewart: If you'd like to hear an extended version of this interview, check out the Tax Analysts YouTube page. Now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what will you have for us?

Faye McCray: Thank you, Dave. In Tax Notes Federal, three professors from the University of Houston-Victoria summarize the relief available to self-employed individuals with employees. David Mattingly explores cross-border tax aspects of blocker entities. In Tax Notes State, Tram Le examines how states are trying to generate revenue by imposing tax on digital goods and services. Stephen Kranz, Lauren Ferrante, and Kathleen Quinn argue that the Commonwealth Court of Pennsylvania erred in its recent Synthes ruling by failing to analyze the plain language of the statute at issue. In Tax Notes International, Lewis Greenwald and Hayley Glennie discuss the ins and outs of claiming an IRC section 165(g) worthless stock deduction. Tatiana Falcão considers whether proposals to tax the digital economy could be expanded to the international shipping industry. And on the Opinions page, Joseph Thorndike takes a closer look at the Republican Party and discusses how quickly and thoroughly a party can change its governing philosophy when exigent circumstances change. Stephanie Soong Johnston and Robert Goulder discuss the recent Apple state aid decision.

David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at do that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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