The Washington PostDemocracy Dies in Darkness

While tax breaks favoring the rich may appear race-neutral, they aren’t

Many ‘investment’ tax breaks in the U.S. tax code embody structural racism

President Biden arrives with Senate Majority Leader Charles E. Schumer (D-N.Y.) at the U.S. Capitol in Washington on Wednesday. (Tom Brenner/Pool/EPA-EFE/Shutterstock)

On Tuesday night, top Senate Democrats led by Majority Leader Charles E. Schumer (D-N.Y.), Budget Committee Chairman Bernie Sanders (I-Vt.) and Sen. Mark R. Warner (D-Va.) announced a $3.5 trillion budget blueprint to fund President Biden’s plans for an array of programs targeting education, climate action, health care and more. If the legislation passes, it appears almost certain that taxes on the wealthiest households and on large inheritances will increase.

Sanders declared Tuesday night’s agreement “a pivotal moment in American history.” And it will be, if tax breaks favoring the rich end. While they appear neutral with respect to race, these deeply buried provisions of the tax code actually comprise some of the most durable and robust components of structural racism in the United States.

The tax advantages enjoyed by the wealthiest Americans, recently covered by ProPublica, are not the by-product of a broken system. Instead, our tax code operates as it was designed. Early sponsors of the preferential tax rate for capital gains intended for this tax provision to secure White wealth, and white supremacy, across generations.

In the 1930s, stalwart segregationists on the Senate Finance Committee seized upon the tax preference for income from capital gains, which had originally been enacted in 1921, as a safeguard of White wealth and white supremacy. When President Franklin D. Roosevelt pushed to raise top marginal tax rates on the highest salaries and on undistributed corporate profits, Chairman Pat Harrison (D-Miss.) and his colleagues conspired to lighten the total tax burden on wealthy Whites. They succeeded with the Revenue Act of 1938, which slashed taxes on capital gains despite the ongoing Great Depression.

Thanks to the all-White, one-party political system in the South and seniority rules within the Senate, ultraconservative Southern Democrats — Harrison, Walter F. George (Ga.), and Harry Byrd Sr. (Va.) — ruled this crucial committee almost uninterrupted for the next three decades. Their power enabled them to preserve and to expand tax breaks for capital gains to counter challenges to the supremacy of White wealth posed by the New Deal and subsequent liberal programs.

It wasn’t just proposals for progressive taxation that alarmed the ultraconservatives; it was also the programs those taxes funded.

In the 1930s and 1940s, liberal policymakers bestowed new federal entitlements and protections — including Social Security benefits, collective bargaining rights, the minimum wage, mortgage guarantees, the GI Bill and the expansion of public education — upon workers and their families. These policies predominantly targeted Whites, though not exclusively, thanks to pressure by what was known as Roosevelt’s Black Cabinet.

Ultraconservatives on the Finance Committee sought to systemically exclude African Americans from New Deal programs to avoid challenging Jim Crow segregation directly. Still, they feared these liberal programs might embolden poor White Southerners to reach across racial lines and challenge low-wage apartheid and its patrician champions in the Senate — just as they had done during Reconstruction.

As the ultraconservative Southerners worked to shore up racial and economic hierarchies, they also battled for control of the national Democratic Party with the leaders of the multiracial industrial labor movement in the urban North and Midwest. From the 1940s into the 1960s, George and Byrd answered demands for anti-lynching legislation, the end of all-White primaries in the South, voting rights and desegregation of civic life with vociferous calls for “massive resistance,” a complete and total refusal of racial integration by White southerners and their political leaders.

At the same time, George and Byrd turned again to tax breaks to buoy White wealth. In 1942 and 1943, the Senate Finance Committee cut tax rates on capital gains despite the need for revenue to fund World War II. For the next two decades, they repelled every attack on tax breaks for capital gains launched by the left.

The ultraconservative White chairmen of the Senate Finance Committee came to view investors as a constituency that could be mobilized, across the Mason-Dixon Line, against liberalism and the threats it posed to class and racial hierarchies. In return, Northern investors applauded these Southern senators for defending White wealth and white supremacy. “No one wants to invest money if he is going to have a gang of meddlers after him … who will destroy his investments” by taxing his gains to fund “socially minded” programs, wrote one Chicagoan in 1937. A New Yorker predicted in 1938 that if the “agencies” favoring “confiscatory” capital gains and inheritance taxes succeeded, they would “next move” to “reform the South.”

Beginning in the 1940s, members of the New York Stock Exchange showed their appreciation by funneling secret, illegal campaign contributions, first to George and then to Byrd, to keep them in power. Stockbroker E.F. Hutton almost convinced the Virginian to run against Roosevelt as a Republican. Instead, Byrd helped command the bipartisan ultraconservative bloc in the Senate that checked liberal efforts to extend even basic federal protections to African Americans until the mid-1960s.

This history has been obscured by a tendency to pine for the low levels of income inequality experienced in the United States during the middle of the 20th century. But if we look at wealth instead of income, we discover that ultraconservatives’ success. The share of total wealth held by the top 1 percent — an almost exclusively White group — held steady around 30 percent throughout the same period. In 1963, Black households held only 1.9 percent of the assets owned by U.S. households (and only 0.9 percent of the stock).

In other words, when Byrd left office in 1965, African Americans stood virtually no chance of benefiting from the preferential treatment of capital gains.

It remains the same today.

In 2020, the top 1 percent of earners received 78 percent of the benefits derived from tax breaks for capital gains. Within that top 1 percent, only 1.4 percent of households are Black. Other tax provisions related to capital gains — particularly loopholes for stock-based compensation and what are known as “carried interest” — engorge the after-tax incomes of corporate executives and fund managers, positions held overwhelmingly by White men.

Racial income gaps harden into persistent racial wealth gaps as tax breaks for investors quicken the accumulation of wealth by the most affluent White households. Their children avoid student debt; parental resources help them start a business or buy a home. When the next generation receives gifts or inheritances, they escape taxation on any unrealized capital gains accrued by parents. In 2019, nearly 30 percent of White families in the United States reported receiving an inheritance or gift, compared to only 10 percent of Black families, according to the Federal Reserve. Today, Black families’ median and mean wealth stands at less than 15 percent that of White families.

None of this is accidental.

Harrison, George and Byrd all understood that oligarchy and white supremacy sustained one another, feeding together at democracy’s expense. As chairmen of the Senate Finance Committee, they shaped the federal tax code to preserve White wealth. At the same time, they stymied programs that might bridge racial gaps in income, wealth, health and education. While tax breaks for investment might appear neutral with respect to race, their impact is biased against Black households — just as their sponsors intended.