The 2017 TCJA and Racial Disparities in Federal Income Taxation: Zipcode-Level Evidence

• In Event: Do Policy Levers Close Racial Gaps? Evidence Across Wealth, Taxation, and Higher Education

Abstract

Despite widespread concern that the U.S. federal income tax system imposes a disproportionate burden on Black Americans relative to white Americans, race remains unobservable on individual income tax returns, fundamentally constraining empirical efforts to quantify racial disparities in federal tax incidence. This paper addresses this identification challenge by constructing a ZIP-code-level panel dataset that merges IRS Statistics of Income records with racial composition estimates from the American Community Survey, and exploiting the 2017 Tax Cuts and Jobs Act (TCJA) as a plausibly exogenous policy shock to estimate the heterogeneous distributional effects of federal tax reform across racial groups.

Although the TCJA of 2017 was designed as a universal reform — restructuring marginal rate schedules, substantially expanding the standard deduction, and doubling the child tax credit — its distributional consequences vary systematically across racial groups. By compelling households to choose between the standard deduction and itemized deductions, the Act's net fiscal benefits are structurally conditioned by the differential distribution of homeownership rates and mortgage interest deductibility — both of which reflect well-documented racial disparities in housing policy and historical mortgage market discrimination. The expansion of the child tax credit, while nominally universal in its application, similarly interacts with pre-existing disparities in family structure and earned income levels that are unevenly distributed across racial groups.

Examining IRS income tax statistics from 2010 to 2020, we first document a persistent racial tax disparity spanning more than a decade. Black Americans did not benefit equally from the Act's provisions and, in several dimensions, experienced a worsening of their relative tax position under the current tax system. Further analysis reveals that these disparities are partially mediated by household structure, filing status, and capital gains. Notably, the intended-beneficiary provisions of the TCJA — such as the Earned Income Tax Credit and child credits — have only a limited effect in narrowing racial disparities once household income levels are controlled for. These findings suggest that facially race-neutral tax policy can reinforce and deepen structural inequities when designed without accounting for the unequal distribution of economic characteristics across racial groups.

Authors

• Man Xu, University of Macau
  Presenting Author

• Yonghong Wu, University of Macau
  Non-Presenting Co-Author