The Tax Code And Economic Justice In America

Francine J. Lipman, a law professor at the University of Nevada, Las Vegas, talks with Darrick Hamilton, a stratification economist and the New School’s incoming Henry Cohen Professor of Economics and Urban Policy, about the intersection of U.S. tax policy and racial wealth inequality.

This post has been edited for length and clarity.

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. I read a critical tax scholar speaking about occupational segregation. You and I, Darrick, have been on a lot of panels. We’ve worked hard to try to bring into the discussion scholars of color, especially scholars of color who are in tax, finance, and economics. Shockingly, there are so few. It’s occupational segregation.

When you look at the statistics, they’re really appalling. The percentage of Black tax partners in CPA firms is 0.3 percent. That’s less than 1 percent. The percentage of Black law partners is better, but still horrible at 2.1 percent. Similarly, Black attorneys make up 5 percent of all lawyers. Black women lawyers are only 1.9 percent. This occupational segregation has ramifications.

What are the demographics in economics? How can we make this better?

Darrick Hamilton: I don’t know the numbers off the top of my head. However, what I’m pretty sure I know is that in any given year, there is never more than 16 Black economists that graduate with a PhD. I think it’s typically like eight U.S.-born Black economists graduate with a PhD in economics. That speaks to perhaps a pipeline issue, but we need to understand that pipeline issues are endogenous. They don’t just appear amorphously. There’s a mechanism and reason for which they arise.

Also, if we look in the ranks of full professors and tenured professors, we’re going to find even greater scarcity in the discipline. That’s clear and 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.

Why does it matter? Why do we care? The first answer is obvious. 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. A recognition that people enter endeavors with some preconceived notions of how things work, some experiences that they bring into the questions they ask, and some understandings of phenomena that are specific to the background from which they come.

If we want to have better ideas in the discipline and 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. If economics is charged with understanding distribution of resources, then I think as a discipline, we should be doing better. For the social good, we should be advocating for diversity and inclusion.

Let me make one final last point as it relates to 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. 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 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’s not a discipline that attracts people who might be interested in understanding this question.

If it’s vacuous, that would limit it to only those type of explanations. 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: 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 are dying at a horrifically higher rate. Businesses are going down, because as you say, lack of access to capital.

What is so frustrating, but perhaps hopeful, is COVID-19 has put pressure on this. Your work and others’ is now getting attention from The New York Times and front line media with the presidential race. Your work is getting adopted, and we’re seeing this in tax proposals. Talk about the pros and cons of that.

Darrick Hamilton: COVID-19 is amplifying underlying structures that were already in existence. The fact that Black people, as well as Latinx populations, have limited resources to begin with. As a result of those limited resources, 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, in 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.

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.

A final point is that with these preexisting conditions they get — and by preexisting, I mean racism — amplified under a pandemic like COVID-19. I’d like to make the point that these things are choices. With virtually every economic downturn, we can make a policy decision to not have these racial disparities. 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. We need to understand that as well.

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. 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. Many of these issues are systemic institutionalized racism; that is not new. It’s over 400 years old. It has to take Herculean efforts to start to move this elephant in a more progressive manner. How does your work 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’s separable from subsidies. In fact, they very well could be the same. But they should not be separable in our concept.

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, 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. We shouldn’t arbitrarily cut them off. 

Governments that are well functioning should promote economic inclusion, civic engagement, and social equity. They should be promoting our shared prosperity. The tax code should be front and center in promoting that. Colleagues and I have been working on guaranteed income and using our tax code in a way that literally eliminates poverty. We already have guaranteed income somewhat in place with the earned income tax credit structure.

The EITC structure could be modified in a way that does not politically arbitrarily cut 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 of resources where poverty can be eliminated. We can use the tax code to do so with the existing EITC structure.

Not only can we eliminate poverty with our tax code, we can also extend the EITC. Not just as an anti-poverty 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 EITC structured.

Tax Day should be a day similar to voting that everybody takes part in. It’s part of your civic duty. Why do we arbitrarily exclude people at the low end? 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. While baby bonds are an 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.

Why don’t you tell us what baby bonds are, and then 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. Whether Treasury is administering through the IRS or Social Security, these become political implementation ideas that clever people can figure out ways to implement.

We talked about earlier that a big source of inequality is capital itself. 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 is capital itself. That creative worker will generally have to sell their idea in the form of wages to an entrepreneur who can implement it.

Baby bonds are intended 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.

It would be a trust held by the federal government. It would be funded based on the family financial position which you’re born into. It would be universal like Social Security, promoting a stakeholder society, civic engagement, economic inclusion, and social equity. But the accounts would be ceded in a way that offers those with the least resources the most.

When they become a young adult, they would be able to use these resources to get into either home ownership, to start a business, to finance 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. 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.

If I juxtapose it with refundable child tax credits, I would say two things. Both are necessary and they’re complements. By design, families can’t use baby bonds when the child is just that: a child. Ironically, 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. 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. The people can rightfully say, “Well, what about when a child is growing up?”

My response to that is there is no silver bullet American policy. We need a package of goods 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. But it takes a village. 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. We are ceding resources in an unequitable way that’s not promoting social equity, economic inclusion, and civic engagement. We could think about our tax policy not just from a collection standpoint, but as a mechanism to fuel, seed, and stimulate. 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: As you described, it’s going to take lifelong menu of capital accumulation from baby bonds, to some sort of EITC or 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, housing, and more. The return on that investment is phenomenal.

As you said, once these baby bonds mature and a young adult thinks about starting their education or their business, they have some capital. 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? How can we help push these issues forward in a positive manner?

Darrick Hamilton: 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.

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. Even with tax policy where we offer tax incentives like homeownership credits and Opportunity Zones, where we incentivize businesses to come into certain areas so that they could generate economic development.

I’m critical of these because using these incentives, you often subsidize people who might not have the same objective as social welfare objectives to begin with. I’m 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 also capture, as opposed to using those resources in a direct way to provide capital to these communities in the first place. That’s the fundamental problem. They’re under capitalized. If they had the capital, they probably could be able to do it themselves.

You might very well be hastening gentrification in your attempt to provide economic development for a community. Those individuals could be somebody just graduating from college, 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.

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.

What can we be hopeful about? 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.

What are those elements? Healthcare. Housing. This doesn’t guarantee a penthouse apartment, but it guarantees adequate housing. People should not be hungry in the 21st century. That’s why we should literally eliminate poverty. We have the resources to do it. 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. 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 or gender. This is where we need to evolve. Economic rights is a critical ingredient in order for us to reach that.

We think about markets as if they’re dogmatic. They’re 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.

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 work 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.

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: 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, and tax law professors. We all have to come together to think critically.

Are these ideas practicable? What’s the effect on the street with these policies? If we can tease out this enthusiasm, 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.