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Advancing Equity Analysis in Tax Policy

By Deputy Secretary Wally Adeyemo and Assistant Secretary for Tax Policy Lily Batchelder

President Biden promised to build the country back better and to do so equitably. For far too long, the economy has left behind people of color and other disadvantaged communities because of structural barriers to opportunities, a dynamic which the pandemic exacerbated. Taking steps to reduce those barriers must flow through every part of the government. Recognizing that such inequity has both moral and economic components, Secretary Yellen is committed to helping unlock the potential of disadvantaged communities. Doing so will not only make our economy fairer, but also stronger, more competitive, and more resilient. 

Under his first executive order, President Biden directed agencies to examine their policies and programs to identify whether and how they perpetuate barriers to equal opportunity. Having the right data to measure and advance equity is essential to completing this task. Challenges abound in doing so, however, since many federal datasets do not include race, ethnicity, or other key demographic variables. In a first of its kind interagency working group, Treasury has begun work to change this by examining the tax system through a racial equity lens. This interagency work is part of the Equitable Data Working Group, created by the executive order to organize work addressing key equity data challenges. As part of today’s Freedman’s Bank Forum, we are providing an update on these efforts.

Our work on equity analysis of tax policy starts by examining implementation of several rounds of stimulus payments, called Economic Impact Payments (EIPs). These stimulus payments provided Americans with relief from the pandemic, putting money directly into their bank accounts so that they can pay bills, put food on their tables, and otherwise provide for their families. Most of the EIPs were provided automatically to those whose eligibility could be determined using tax return information from prior years. But this strategy alone would have left out millions of Americans because many lower-income individuals—among whom people of color are disproportionately represented—are not required to file tax returns. To address this challenge, Treasury and the IRS partnered with other federal agencies and community organizations—and conducted significant outreach—ultimately making more than 26 million payments to those who did not file tax returns in 2019 or 2020.

While these delivery advances were path-breaking, we can always learn from our work to do even better in the future. To this end, Treasury’s Office of Tax Policy (OTP), with support from the IRS Research, Applied Analytics and Statistics (RAAS) Division, is examining whether and how eligible adults and families received an EIP, and is estimating equity impacts of a letter campaign about such payments. Once this work is completed, we plan to publish statistics on the composition of EIP recipients, including estimates of race and ethnicity and other demographic characteristics. As with all research using tax data, this report will carefully follow long-standing data protection protocols to prevent disclosure of taxpayer information. OTP hopes to have results on the first and second round of EIPs in 2022, with results on the third round in 2023. In addition, Treasury is working with the Census Bureau to develop individual-level analysis of those who received the first round of EIPs.

In a second and related line of work, OTP is attempting to develop a general and reliable empirical methodology for analyzing the racial/ethnic equity implications of tax policy and tax administration questions, which could ultimately enable a better understanding of the effectiveness and equity of a variety of tax provisions. To be successful, this project requires developing accurate demographic data to associate with individual tax records. Because data on race and ethnicity are not collected as part of the tax system, OTP is working with agencies across the federal government to pursue several approaches simultaneously. These include (1) trying to develop reliable methods to impute race and ethnicity for tax data, (2) partnering with other data producers to obtain microdata on race and ethnicity that can be used to validate the imputations when legally feasible, (3) when microdata cannot be obtained, partnering with data producers to obtain aggregated data that include race and ethnicity for possible analysis and to validate imputations.

This work on developing a model to impute demographic data on to tax data is a key component of the EIP research. Imputation of race, ethnicity, gender, and other demographic characteristics is necessary because the IRS does not collect this information and current laws prohibit the IRS from acquiring it from other agencies. Instead, OTP is developing an approach to take tax data and make a data-informed prediction of demographic characteristics of each tax unit so that we can better understand the equity impacts of different policies. OTP is then validating the imputations against various administrative data sources, using the results to further refine the methodology.

Once validated, this work could result in several further research streams. In addition to analyzing all three EIP payments, OTP hopes to deploy this methodology in other similar contexts, for example by examining the equity impacts of the monthly Child Tax Credit. This work will extend over several years as data become available. Together, the analyses could help shed light on how limitations in data might have affected the equitable distribution of payments and whether improvements could be made in their delivery.

While this work is still preliminary, eventually OTP hopes the imputation model will enable greater public analysis of racial and ethnic disparities. When combined with publicly released information from Statistics on Income, the imputation code or other appropriately protected output could enable outside researchers, and not just government researchers, to more easily analyze the demographic and equity effects of a variety of tax provisions, shedding sunlight on policy choices and trade-offs.

Ensuring tax policy advances opportunity is crucial to creating a fair and prosperous economy. Secretary Yellen and the entire Treasury Department are firmly committed to an equitable federal tax system, and the efforts described here will begin to further that goal.