How Taxes Can Adress Inequality
Tax policy can be a powerful tool for addressing the District’s extreme inequality. But right now, federal and DC tax codes tend to treat income that comes from wealth more favorably than income that comes from work and do little to tax wealth directly.
People in power intentionally shaped the earliest state and local tax systems, as well as the federal tax code, to maintain the economic dominance of wealthy, white landowners. While our tax system doesn’t speak to race explicitly, it continues to reflect that history by privileging high-income and wealthy households through advantageous treatment of inherited wealth, capital gains, dividends, corporate and non-corporate business income, and property ownership, among other things. This allows higher-income residents—who are predominantly white—to build more wealth, increase the value of existing assets, and increase the wealth that they pass to future generations, compounding racial inequity in wealth and income.
Just 1,500 households in DC hold nearly half of all wealth in the District. But there are many ways to address the under-taxation of the wealthy, reduce the taxes paid by households with low and middle incomes, and raise the collective resources we need to provide public services. Here are a few:
A progressive income tax – one that asks more of households with the highest incomes – is the starting point of an equitable tax code. While DC has a relatively progressive income tax, the wealthiest residents still pay a smaller share of their income in taxes than do middle-income earners.
By boosting the after-tax incomes of families, a DC Child Tax Credit could substantially reduce child poverty, especially among Black children, who are the vast majority of children living in poverty in DC.
The federal and DC tax codes also protect the wealthy by limiting what they tax. To fix that, DC could:
Strengthen the estate tax, which is meant to apply when a person dies and passes their assets on. This would help minimize the generational wealth transfer that largely reinforces inequality.
End the special tax preference for capital gains (or the increase in value of things like stocks, bonds and business equity) that have not been cashed in and that nationally almost entirely benefits the top 1 percent of households.
Increase the property tax rate on very high-value homes, otherwise known as a “mansion tax.”