Disparities by race, ethnicity, and sex exist among taxpayers in their eligibility for and amount of family-oriented tax credits and certain other tax attributes, the U.S. Government Accountability Office (GAO) found in a study.
Those findings were only estimates, however, the GAO cautioned, extrapolated and simulated from U.S. Census data. And the report could only point to potential eligibility and amounts of the tax attributes, not their actual use by taxpayers.
More direct study of tax equity is stymied by the fact that the IRS is allowed to collect only the data it needs to administer the tax laws, which do not take demographic characteristics into account, the GAO noted. Yet the government and nongovernmental stakeholders have an interest in disaggregating tax data along those lines to determine whether tax policies' effects — including unintended ones — disproportionately advantage or disadvantage particular groups.
Accordingly, much of the GAO's study, Lack of Data Limits Ability to Analyze Effects of Tax Policies on Households by Demographic Characteristics (Rep't No. GAO-22-104553), released Wednesday explored ways tax data might be linked to taxpayers' race, ethnicity, and sex while protecting that information's privacy and security. It was issued to leaders of several congressional committees, as well as to officials of the IRS, Treasury, and others.
In a statement Wednesday, Sen. Ron Wyden, D-Ore., who chairs the Senate Finance Committee, welcomed the study.
"Policy is most often made through the tax code, but we don't have concrete data on how the countless credits and deductions benefit different demographic groups," Wyden said. "If we're going to improve policy as it relates to child care, education, and housing, we need a clear picture."
The study also follows the release last month of Treasury's initial annual progress report of its Equity Action Plan, which also noted the lack of reliable data on the race, ethnicity, gender, and other demographic characteristics of individual taxpayers. As Treasury then reported and the GAO reiterated, Treasury's Office of Tax Policy is working to develop methods for analyzing the demographic effects of tax policy and administration.
Both documents were spurred by President Joe Biden's Executive Order 13985, "Advancing Racial Equity and Support for Underserved Communities Through the Federal Government."
An additional impetus for the GAO's study was Wyden's request under the GAO's mandate under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, to oversee and monitor the act's COVID-19-related provisions.
As part of the study, the GAO interviewed 21 experts and reviewed relevant literature, including previous studies that in some cases have found implicit bias in the Internal Revenue Code.
Besides being currently unauthorized, asking about taxpayers' race, ethnicity, and sex directly on tax returns and forms or even in separate IRS surveys is not recommended, most IRS officials and experts agreed, according to the GAO. Some pointed to the possibility of real or perceived bias on that score by IRS examiners. Although some suggested the data could be shielded from examiners and safeguarded from other nonresearch uses, most were leery of the possibility of inadvertent access to it within the IRS and taxpayers' adverse reactions.
"IRS officials expressed concern that any direct collection of demographic information by the agency could significantly compromise voluntary compliance," the GAO stated.
However, other federal agencies amass relevant data that could be matched with the IRS's, the GAO said. For example, Treasury's Office of Tax Analysis has matched economic data with that for sex and age from the Social Security Administration (SSA). The SSA also maintains data on race that is voluntarily provided on applications for Social Security numbers.
The U.S. Census Bureau collects information on race, ethnicity, and sex, and its American Community Survey asks detailed questions about various sources and amounts of income. The IRS is already working with the Census Bureau to analyze demographics of recipients of the first round of economic impact payments, and the agencies have an agreement to produce annual estimates of participation in the earned income tax credit (EITC).
The Census Bureau's 2017 data was relied upon by the GAO in its own estimates of the demographic characteristics of claimants of the EITC, the child tax credit (CTC) and additional (refundable portion) CTC, and other "wealth-oriented" provisions, including capital gains and itemized deductions.
The GAO found disparities in each of the tax attributes, even when it controlled for income variations. For example, Hispanic households appeared likely to claim the EITC for higher average amounts than most other households, and Asian households had lower rates of eligibility.
With respect to the CTC, white households had higher amounts than most other households. Specifically, middle-income white households had higher amounts than Black and Hispanic households. White households also had higher rates of eligibility than Asian, Black, American Indian, and Native Alaskan households. The additional CTC reversed that dynamic: Hispanic households had higher amounts than Asian, Black, and white households, and Asian and white households had lower rates of eligibility than most other households.
Although previous researchers have indicated that white households are the most likely to benefit from preferential capital gains rates, the GAO estimated that white households had a lower amount of capital gains in some income quintiles. The GAO noted, however, that this and some other findings were subject to a 95% confidence interval, which gave a wide range to upper and lower bounds for these dollar amounts.
Approximately 75% of households claiming itemized deductions rather than the standard deduction were white, the GAO estimated, and they and Asian households were more likely to itemize than other households.
The GAO also applied 2018 tax year rules to the 2017 Census data to estimate effects of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. By that measure, the TCJA appeared to have exerted little effect on the racial, ethnic, and sex distribution of the tax credits and attributes studied, the GAO said.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.