Sometimes our political leaders have to hear the obvious. In mid-May, members of the United States Congressional Joint Economic Committee (which was constructed to be bipartisan in 1946) heard testimony about why Black people have less wealth than white people. Chair Rep. Don Beyer (D-VA) introduced the hearing saying, “Much of the racial wealth divide today is explained by…decades of systemic racism and exclusion in our country, with policies such as redlining, restrictive covenants and other forms of housing discrimination playing a role.”
Kind of obvious that decades of racial discrimination impedes wealth accumulation. But what I found fascinating was what particular factors the scholars and members of Congress emphasized during the hearing. Did members of Congress understand the role it has in maintaining and creating the racial wealth gap through the tax code?
Baby Bonds Could Help Close The Racial Wealth Gap
The tax code helps create the racial wealth gap because it disadvantages Black Americans by exempting capital gains on home sales, its treatment of income for married couples, “and the tax incentives provided for employer-sponsored retirement plans.” I did note that Rep. Beyer was on to Congress’s role; he called out the tax incentives for employer-sponsored retirement plans as a culprit.
The Ranking Member Senator Mike Lee (R-UT) comments were a bit more general, he called for better education; quoting Martin Luther King, “a productive and happy life is not something you find, it is something you make.” I think he was inferring that Congress had the responsibility to increase opportunity for those with less wealth so they can accumulate wealth on their own and stop there.
In response to the hope that education alone would solve the racial wealth gap my colleague at The New School, economist Darrick Hamilton, said that education-alone approach had been tried and although Black communities have made great gains, the MBA-holding Black worker still had much less wealth than the average white worker.
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My research leads me to agree with Prof. Hamilton. Wealth comes from a lot more sources than education and the gap is too large to be fixed by future education, as important as it is. Hamilton testified acknowledging the racial wealth gap, “will be empty if not accompanied by some form of material redress: Reparations provides a retrospective, direct, and parsimonious approach to address the Black-white racial wealth gap.”
Hamilton said, “Straight up reparations in the form of baby bonds or baby trusts provide an economic birthright to capital. The capital finance provided by baby trusts is intended to deliver a more egalitarian and ‘authentic’ pathway to economic security, independent of a family financial position or societal patriarchy in which an individual is born.” Baby bonds get at the heart of the disadvantages Black families face at birth to accumulate wealth.
After hundreds of years of slavery, racist public policies and discriminatory labor practices, Black families do not have the silver spoon of equity to pass on. Baby bonds account for this “stolen” capital, by providing those born into lower-wealth families with a government-funded account at birth with a $1,000 contribution. The account would receive more contributions over time and benefit from compound interest.
Fixing the Upside Down Retirement Tax Deduction Could Help Close Racial Wealth Gaps
Also testifying was Mehrsa Baradaran, Professor of Law at University of California, Irvine. I nodded in agreement, as any expert would, when she said the first step in fixing the racial wealth gap is to acknowledge that public policy created the racial wealth gap, so public policy has to fix it. Changing the tax code acknowledges the disadvantages Black workers have when trying to accumulate retirement wealth. The tax code, which was set up to encourage retirement savings, was well-intentioned but has had adverse effects on Latino, Black and indigenous communities.
Rep. Beyer at the beginning of the hearing called out retirement tax incentives as a source of racial wealth inequality. Since the government exempts retirement contributions from the income tax, those with the highest incomes receive the highest subsidy; meaning tax savings are skewed more heavily to the rich. The top 20% get about 70% of the tax benefit.
The most important sources of wealth for the typical American family is not in the stock market or exotic bitcoin, most Americans have prosaic wealth in the form of home equity, retirement accounts, and Social Security— the standby for all workers. I recently presented these new wealth numbers to the United States Senate on Banking at a hearing on “Who Wins on Wall Street? GameStop GME , Robinhood, and the State of Retail Investing.” To illustrate who benefits from market gains, my research shows how few Americans have direct holdings in the stock market. Me and my team at The New School’s Schwartz Center find home equity, personal retirement savings, and Social Security are the largest components of wealth.
For near retiree households the three make up 88% of wealth for those in the lower half of the income distribution, 78% for the middle class, and 43% for those in the top 10%. And for half of all households with workers nearing retirement, Social Security is the most important source of household wealth. While white workers, on average, have 83% more net wealth than non-white workers, the racial Social Security wealth gap is only 13%. White workers have eight times the wealth in business, and four times the wealth in directly-held stocks than non-white workers and 58% more housing wealth and 2.4 times the wealth from retirement plans, like 401(k)s, compared to non-white workers. It is clear Social Security is the most equitably distributed source of wealth for Americans nearing retirement.
Universal Retirement Accounts Could Help Close Racial Wealth Gaps
However, Social Security is not enough to live on and baby bonds would likely only cover housing investments for low-income and Black individuals. We are then left with one last aspect contributing to wealth inequality, personal retirement savings. To help narrow this gap, we must make fair savings vehicles accessible to all workers, not just those who are lucky enough to work at jobs offering retirement benefits. Universal pensions would address this issue.
As I discuss in the Washington Post, universal pension programs modeled after the federal government’s Thrift Savings Plan (TSP), would involve automatized tax-deferred contributions to be withheld from workers’ paycheck. The government would then match that contribution up to 5 percent of their annual salary. By default, those contributions go into a very low-expense mutual fund appropriate for the age of the employee.
Multiple deliberately discriminatory policies and economic structures were created to maintain the racial wealth gap. To shrink it and counteract its historical basis, we will need even bolder efforts. Innovations in public policy like baby bonds, fair tax policies, and universal pensions are a good start.