Researchers show how the tax system can exacerbate disparities between households of different races and ethnicities, even though the Internal Revenue Code does not explicitly favor racial groups. It shows. These disparities occur because tax laws favor certain types of income, expenses, and family characteristics, and these factors often differ by race and ethnicity.
Despite being the fastest growing racial group in the country, Asian American households remain an understudied population in tax policy. Approximately 24 million Americans, or 7% of the U.S. population, identify as Asian, either as Asian or in combination with other races. Using newly available data, we find that among American households in the top 20% of the income distribution, Asian American households pay a higher average personal tax rate than white households. This is mainly because they earn more from labor income. White households are more likely to own tax-advantaged assets.
How do we know? Previously, the triennial Survey of Consumer Finances (SCF) assigned information about all Asian American households to the “other” racial category. The 2022 SCF oversamples minorities, with the first wave presenting specific data for households in three categories: Asian American, American Indian, Alaska Native, Native Hawaiian, and Pacific Islander. It is.
Researchers can now examine the impact of tax laws on Asian American taxpayers compared to white taxpayers. Our analysis uses 2022 SCF data, an established methodology for converting households into tax filing units, and NBER’s TAXSIM microsimulation model. Still, the small number of Asian Americans included in the 2022 SCF sample limits the level of detail in the statistical analysis. However, this limitation highlights the need for more specific data and research.
Differences in income distribution
Figure 1 compares expanded income (EI) distributions for Asian American and white households. EI includes adjusted gross income, cash and near-cash benefits, and nontaxable capital income sources such as unrealized capital gains from homeownership and imputed rent.
Asian American taxpayers have a bimodal distribution. That is, they primarily fall into two main areas of this distribution, and their incomes differ more widely than white taxpayers. Although the majority of Asian Americans are in the top 20% of the distribution, a significant proportion are in the bottom 20-40% of the distribution, highlighting the diversity within the Asian American community. Masu. This finding challenges the “model minority” stereotype that all Asian American families are economically well-off.
Difference in average tax rate
Figure 2 shows the average tax rate (ATR, or ratio of income tax burden to EI) for Asian American and white households.
Reflecting the progressivity of the federal income tax, the ATR typically increases with income for both groups. Among people in the top 60% of the income distribution, Asian American households pay a higher ATR than white households. However, subsequent regression analysis (not shown) showed that this difference was statistically significant only for the top quintile (at the 10% level, a criterion chosen based on the limited sample size). I am. The higher ATR is because, compared to white households, Asian American households receive tax-advantaged capital income (realized or unrealized capital gains, undeclared business income, or home ownership). imputed rent).
Factors behind tax disparity
Although differences in the composition and level of income are important when assessing the tax treatment of Asian American households, other factors may also contribute to these differences.
For example, tax laws generally favor single-earner couples, but labor force participation rates for Asian American women are higher than for white women. This makes Asian families more likely to experience marriage penalties. The younger age distribution of Asian Americans compared to white Americans may cause other differences. Asian American households are less likely to own a home, but when they do own a home, they have more debt, perhaps because the majority of Asian Americans live in cities like San Francisco. This may be due to living in an expensive area. This suggests potential differences in the use of mortgage interest deductions.
Asian American households are also less likely to have tax-advantaged retirement accounts and households are more likely to be multigenerational, leading to confusion about which adults are eligible to receive benefits. may occur. In fact, a recent Treasury Department study found that low-income Asian Americans are less likely to receive the Earned Income Tax Credit and Child Tax Credit than other low-income racial groups.
There’s still a lot to learn
These preliminary findings show how the tax law differentially impacts Asian American and white households, but researchers need more data to conduct a deeper analysis. is. Within the diverse Asian American population, disparities in income tax burdens may exist. Cultural norms, socioeconomic status, and life experiences vary widely among Asian American families from different countries and regions.
In March 2024, the Biden administration updated Statistics Policy Directive No. 15 to expand the “Asian American” category into subgroups such as Chinese, Asian Indian, Filipino, Vietnamese, Korean, and Japanese. Mandated federal data for disaggregation. With these detailed data, researchers can perform more nuanced analyzes to further debunk the “model minority” myth.
Policymakers should use this research to better understand the economic needs of low-income Asian American households, especially the most vulnerable among them. This includes the uncertainty faced by undocumented immigrants and the high poverty rates among Burmese (19%) and Hmong (17%) Americans.
Examining differences in tax treatment among subgroups of Asian Americans allows researchers to understand the diverse experiences and needs of these communities, allowing them to develop responsive policies. .
