Federal wealth-building policies work well – for the wealthy
A new report by the Institute for Policy Studies grabbed headlines with a bold assertion: “Without change, African-American and Latino families won’t match white wealth for centuries.” Centuries! Less heralded in the media but more relevant to speeding the journey to greater equity was the report’s exploration of federal and federally sanctioned policies that have protected the economic interests of predominantly white Americans and restricted access to wealth for people of color. [For in-depth comparisons of the top 1% and the bottom 99% in King County, Washington state, and the U.S., see Communities Count’s latest home page Spotlight.]
Income pays the bills, but wealth is a better indicator of economic security and opportunity. Wealth provides an economic buffer that, according to the report, “helps families get through lean times and empowers them to climb the economic ladder. Wealth is money in the bank, a first home, a college degree and retirement security – it’s the countless opportunities afforded by having savings and investments.”
In 2013, mean wealth for white households was 7 times greater than for Black households and 6 times greater than for Latino households. If current trends continue, wealth disparities in 2043 will be even more extreme – an 11-fold difference between Blacks and whites and a 7-fold difference between Latinos and whites.
The report documents disparities in home ownership, employment, income (and differential returns on income), economic resilience, educational attainment (and returns on education), business ownership (and value of businesses owned), retirement savings (and access to employer-sponsored retirement plans), and exposure to “wealth-stripping products and services.”
Many of these disparities can be traced to past and/or ongoing discrimination. But the heart of the report is its hard-nosed focus on policy.
Federal wealth-building investments after the Great Depression
The report details the huge investments made by the federal government to help American households recover from the Great Depression and World War II. And it describes how these investments, by design or accident, could not be accessed equitably by people of color. For example,
- Real-estate “redlining” – a widespread discriminatory practice sanctioned by the Federal Housing Administration (FHA) – restricted access to mortgages by racial and ethnic-group minorities, differentially excluding them from “the opportunity to invest in the largest driver of wealth in this country: a home.” From 1934 until redlining was banned by the Fair Housing Act of 1968, households of color received just 2% of FHA loans. [See Public Health Insider for possible associations between redlining and health outcomes in King County.]
- The Social Security Act of 1935 excluded farmworkers and domestic workers (primarily people of color) from coverage.
- The Fair Labor Standards Act of 1938 excluded several tip-based professions (such as shoe shiners, domestic workers, servers, and Pullman porters – all with predominantly Black workers) from the U.S.’s first minimum-wage protections.
- The benefits of 1944 G.I. Bill – which has provided millions of veterans with access to low-cost home mortgages, low-interest business loans, tuition assistance, unemployment compensation, and support for living expenses while in school – were not distributed fairly. Biased local administration prevented many veterans of color from getting home loans, business loans, and placement in skilled and semiskilled jobs.
Current wealth-building policies: Is history repeating itself?
Through the federal tax code, the U.S. spends “more than a half trillion dollars annually to help households build wealth,” according to the report. But many current wealth-building policies “continue to heavily favor households that do not need help building wealth while doing little or nothing for low-wealth households of color.”
Annual taxation-related expenditures to build wealth include programs to support home ownership, increase accessible savings through investments and inheritances, give preferential treatment to retirement plans, and support higher education. Using educational support as an example, the authors point out that 90% of higher education tax spending is in the form of after-purchase subsidies that can only be used by those who have the resources to front the costs of tuition, books, and other qualified expenses – something that may not be possible for many working families.
Suggestions for the future
After demonstrating the power of past federal policies, the report’s authors propose specific actions to align wealth-building policies with the needs of those who are not already wealthy:
- Audit federal policies “to understand the role current federal policies play in perpetuating or closing the racial wealth divide.”
- “Replace the mortgage interest and real estate tax deductions with tax benefits that encourage and support home ownership among low-wealth families and communities of color.”
- Expand eligibility for the Earned Income Tax Credit (EITC) to low-wealth workers and those without dependents; allow families to save a portion of their EITC as emergency savings.
- Provide a simple, safe, and affordable retirement savings product to low-wealth families and households of color.
- At birth, provide every child with a Children’s Savings Account (CSA).
- Expand existing progressive taxes.
- Explore a dedicated wealth tax.
The report was jointly produced by the Institute for Policy Studies, the Corporation for Enterprise Development (cfed), and the Racial Wealth Divide Initiative, a cfed program.
See recent Communities Count updates of national median wealth trends, mean wealth trends, race/ethnicity wealth trends, and mean and median race/ethnicity wealth trends by age. COMING SOON: Communities Count blog about the impact of state and local tax policies on inequality.