What is the "Black Tax” and How Do We Begin to Address It?

Financial Awareness Day was on August 14th, and it should come as no surprise that the average White household has an estimated $841k more in wealth than the mean Black household. This sums up to a staggering $14 trillion wealth gap that exists for 17 million Black households across the country, and the gap is only getting wider.

The “Black Tax” is the financial cost of discrimination against Black people driven by conscious and unconscious bias from individuals, institutions and corporations and continues to affect every aspect of modern life, including housing, living conditions, education, access to technology, healthcare, food insecurity, transportation, pollution, work-life balance, politics and commerce. Worse, not only is the Black community denied financial freedom in the present time, but the impact is also compounded by the inability to leave a legacy to future generations.

When taking out loans, Black people are treated as if their credit score is 71 points lower than it actually is and they often pay substantially higher interest rates over the life of a loan which results in less disposable income. In addition to higher interest rates, Black homeowners face unreasonable hurdles on the path to building wealth. When searching for homes, they are told about 20% fewer homes and then shown about 20% fewer homes as compared to White people and have a higher rate of denial than their White counterparts despite similar credit scores. Across the spectrum, Black people have faced discrimination getting hired and face a wage gap even when they find employment. The Black Tax is so pervasive that Black employees with a bachelor’s degree earn, on average, $50,108 compared to their white coworkers’ $61,176. Black employees also need more years of experience, according to the 2021 McKinsey & Co. study on diversity and inclusion at work.

Racial inequality isn’t just bad for Black families; it’s bad news for the broader US economy, too. If we can close the wealth gap over the next decade, we could add almost $5.7 trillion to the US economy and an additional $1.5 trillion per year thereafter, according to McKinsey & Co. estimates.

The data is very clear and has been for decades. The prevailing issue is that we need a new set of actions, plans and policies. But before that, a new way of thinking.

First, we must fully comprehend how the wealth gap was established through 250 years of unpaid forced labor imposed on millions of enslaved Black people, followed by a Jim Crow regime that lasted another 75 years, relegating Black Americans to the lowest-paying occupations in the country and exacting trillions more from newly freed people and their descendants.

For decades, Black Americans have been left out of government programs designed to help citizens build wealth, including Social Security and other New Deal legislation of the 1930s, causing each generation to fall further behind. Through the 1862 Homestead Act, more than 1.5 million white homesteaders claimed 246 million acres—close to the size of Texas and California combined—valued at $1.6 trillion today, while Black Americans only received about 0.27% of that massive land distribution. The GI Bill in 1944 almost completely excluded Black veterans from funds for jobs training, college education and housing, costing up to another $45 billion for these servicepersons and inheritors.

Extraordinarily high levels of labor market discrimination has cost Black Americans more than $4 trillion in today’s dollars and a massive underinvestment in the education of millions of Black children starved the Black community of critical resources, making it exceedingly difficult for businesses to thrive when their customer base struggled with a lack of economic resources and limited spending power. Even when Black people have tried to start their own businesses and networks to create wealth, their progress has been blocked or dismantled—often violently.

Since the start of slavery, discrimination has cost Black Americans an estimated $70 trillion, and it isn’t only at the lower- and middle-income levels. Among the top 10 percent of earners, the current median net worth of white families is $1,789,300, whereas a Black family earning the same income has a median net worth less than one fifth of that, at $343,160. In fact, a White head of household who is a high school dropout is more likely to have an overall higher amount of wealth than that of a Black high school dropout, which is largely due to inherited wealth.

In analyzing the past and present economic impact of discrimination against Black people, which I wrote about in The Black Tax: The Cost of Being Black in America, I’ve built an economic framework for generating wealth in the Black community called PHD: “Purchase, Hire, Deposit.” The aim of this framework is to purchase, hire and deposit in ways that create jobs, expand businesses and provide capital (at scale) in the Black community.

For individuals, it means using your personal spend and influence with companies and political representatives to increase the demand for products and services from Black firms and to do business with Black-owned banks, credit unions, etc.

For companies and corporations, the PHD framework requires a significant increase in Black representation on payrolls at all levels and a dramatic increase in supply chain spend with Black companies. It entails placing deposits in financial institutions that provide liquidity in the Black community, driving allocation of pension assets to Black asset management firms, and utilizing supplier financing to provide working capital to Black firms in their supply chain. At present, less than two percent of corporate and government supply chain spend is with Black businesses, $4 out of every $10,000 in the US banking system is in a Black Bank, and less than one percent of all fund allocations are with Black asset managers. Participation rates of Black people often hover at two percent in almost all high-growth, high-income fields.

Diminishing the underlying structural barriers and utilizing the PHD economic framework would pave the way for Americans to help increase the amount and quality of jobs, robustness of businesses and the availability and affordability of capital in the Black community that has been denied for so long.

This, of course, would require a paradigm shift across the American electorate. Before we can dismantle the barriers, we must begin to have far more substantive conversations and augment the curriculum in educational institutions at all levels to help us understand in a quantitative way how we’ve arrived at a place where Black people continue to face high levels of discrimination in almost every area that is critical for wealth accumulation. In doing so, the “pie” will actually become significantly larger for everyone, adding trillions of dollars to both our national income and national wealth. This will put us in the best position to design, fund, execute and sustain the most effective policies, plans and programs to reduce and, ultimately, eliminate “The Black Tax.”

Shawn D. Rochester is a seasoned corporate development and strategy executive, a best-selling author of The Black Tax: The Cost of Being Black in America, a sought-after speaker and an economic development advocate.