On January 4, 2026 three tax economists walked into a conference room at the Philadelphia Marriott Downtown with a result that ran against the usual shape of the federal income tax.
William Gale, Oliver Hall and John Sabelhaus, researchers affiliated with the Brookings Institution and the Urban-Brookings Tax Policy Center, had compared Black and White households using Federal Reserve data and a model of the federal tax system. At lower incomes, Black households generally faced lower average income-tax rates. As incomes rose, the relationship reversed.
Among households in the 90th through 99th percentiles of the researchers’ broad income measure, the gap reached about 1.3 percentage points. Within the top 1 percent, it reached 5 percentage points.
Their paper, published by the American Economic Association in May 2026, traced most of the gap to the source of the money itself. Gale, Hall and Sabelhaus found that “untaxed forms of income accrue disproportionately to White households” across most income levels.
For Black households building wealth primarily from earnings, the finding reaches far below the top 1 percent. A salary, a retirement account, an investment portfolio, a home and an inheritance can all add to net worth. Federal tax law treats each differently.
Where the Income Came From Changed the Tax Bill
A household’s adjusted gross income doesn’t capture all of the economic gains it receives during a year.
Stock can increase in value without being sold. A privately held business can become more valuable. Other forms of income may receive exclusions, deductions or preferential tax rates. Gale, Hall and Sabelhaus built a broader measure they called expanded income to capture more of those resources.
The difference was enormous. Across the Federal Reserve data they studied, aggregate expanded income was roughly 90 to 100 percent larger than aggregate adjusted gross income.
White households received a greater share of that expanded income through untaxed or tax-preferred capital income. Black households received a greater share through fully taxable labor income.
The researchers then controlled for those differences. Once they accounted for the share of income that was fully taxable and the share coming through tax-preferred capital, the Black-White difference in average tax rates was essentially eliminated through the 99th percentile.
The federal income-tax code applies the same rules to taxpayers with the same filing status, deductions and sources of income. Gale, Hall and Sabelhaus wrote that a race-neutral system can still produce different outcomes when the things that determine tax liability are distributed differently across groups.
The Treasury Department had found evidence of the same divide three years earlier.
Treasury Found the Largest Capital-Gains Benefits Flowed Disproportionately to White Families
In January 2023, the Treasury Department released its first analysis of major federal tax breaks by race and ethnicity.
The department had to build a new method to do it. Federal tax returns don’t record a taxpayer’s race. Treasury researchers combined other information to estimate racial and ethnic classifications, then examined eight major tax expenditures, the government’s term for deductions, exclusions, credits, preferential rates and other provisions that reduce taxes.
Preferential rates on capital gains and qualified dividends stood out.
Treasury found that White families were generally more likely to benefit from those rates across the income distribution and received larger benefits at high incomes, where the preference becomes especially valuable. Its Office of Tax Analysis estimated the federal tax expenditure from preferential capital-gains and dividend rates at $146 billion for fiscal 2023.
Lily Batchelder, then Treasury’s assistant secretary for tax policy, and Greg Leiserson, deputy assistant secretary for tax analysis, wrote in the department’s release accompanying the research that “more work remains to be done” to identify why the differences occur.
Income, wealth, employers, family structure and access to credit could all contribute, they wrote. Treasury’s racial classifications were also estimates, adding another source of uncertainty.
The result nevertheless pointed in the same direction as the 2026 Brookings research. A dollar earned at work can enter the tax system differently from a dollar created by an asset.
Black Families Still Own Fewer of the Assets Producing Tax-Preferred Income
The Federal Reserve’s Survey of Consumer Finances shows where some of that difference begins.
In 2022, 65.6 percent of White families owned stock, compared with 39.2 percent of Black families. Business ownership stood at about 16 percent for White families and 11 percent for Black families.
Black ownership of both stocks and businesses had increased since 2019. The balances held by newer owners were often smaller, however, and the Federal Reserve found that investment income contributed much more to income growth among White families from 2019 through 2022.
Federal Reserve economists Aditya Aladangady, Andrew Chang and Jacob Krimmel wrote in their analysis of the 2022 survey that investment income was “far less” important to income growth among non-White families, who held fewer investment assets.
Retirement ownership followed another uneven pattern. Among families ages 35 to 54 in the Fed’s 2019 survey, 65 percent of White families owned a retirement account. Forty-four percent of Black families did.
Those numbers describe ownership, not financial skill. Employer access, job tenure, compensation, available cash and other labor-market conditions all affect whether a household can accumulate assets inside a retirement plan.
For the Black households that do build substantial retirement balances, another difference appears later.
A Retirement Millionaire Can Still Be Carrying Decades of Untaxed Salary
Traditional workplace retirement plans have helped millions of workers turn earnings into financial assets.
The federal government encourages that accumulation by allowing workers to defer taxes. Traditional 401(k) contributions can reduce current taxable income, investments grow without annual federal income tax inside the account, and withdrawals generally become taxable income later.
In 2026, workers can put as much as $24,500 into a 401(k), 403(b), federal Thrift Savings Plan or many governmental 457 plans. Decades of contributions, employer matches and investment growth can push a successful saver past $1 million.
Part of that balance still represents income on which federal tax has been postponed.
A different tax rule applies to long-term gains on taxable investments. Those gains can fall into federal brackets of 0, 15 or 20 percent when they are realized, although higher-income investors may also owe the 3.8 percent Net Investment Income Tax.
The comparison has limits. A worker may receive a large tax benefit from contributing to a traditional retirement plan during high-earning years and later withdraw at a lower tax rate. Investors can lose money, and taxable portfolios can generate significant tax bills when assets are sold.
The Brookings researchers weren’t comparing a “good” form of wealth with a “bad” one. Their result came from the different tax treatment attached to different sources of economic income.
Inheritance Adds a Tax Advantage Before the Heir Makes a Decision
Family wealth can alter the starting point before anyone chooses an investment account.
Federal Reserve researchers reported in 2020 that 29.9 percent of White families had received an inheritance or substantial gift, compared with 10.1 percent of Black families. White families were also almost three times as likely to expect an inheritance.
Family money can arrive years before a bequest. Parents can pay college tuition, supply a down payment or provide cash during an emergency. The Fed found that 71.9 percent of White families said they could obtain $3,000 from relatives or friends in an emergency, compared with 40.9 percent of Black families.
Tax law adds another layer when appreciated property passes at death.
Under Internal Revenue Service rules for inherited property, the tax basis of an inherited asset generally resets to its fair market value when the owner dies. Appreciation that occurred during the previous owner’s lifetime can therefore disappear from the capital gain eventually calculated against the heir.
An asset given away while the owner is alive generally carries the donor’s old basis instead.
Urban Institute researchers found that large gifts and inheritances explained about 12 percent of the Black-White wealth difference in one analysis. Their estimate left most of the gap unexplained, but it placed family transfers among several mechanisms shaping different balance sheets before taxes are calculated.
Professional Income Doesn’t Recreate an Inherited Balance Sheet
The gap doesn’t disappear among households with college degrees and professional incomes.
A Federal Reserve working paper published in January 2026 examined a broader concept of wealth that included financial assets, housing, expected earnings, Social Security, pensions, annuities and other resources. Its authors found that growth in comprehensive wealth through retirement was driven largely by White and college-educated households. Black and Hispanic households followed flatter trajectories.
Education and earnings remain important drivers of wealth. They coexist with differences in homeownership, retirement participation, investment assets and family transfers.
The tax study presented in Philadelphia adds income composition to that list.
A professional who builds wealth primarily by converting salary into retirement assets is moving money through a different tax path from a household receiving appreciated property, business equity or a larger stream of investment gains.
Direct national data comparing first-generation millionaires with heirs by the tax characteristics of their portfolios don’t yet exist. The Federal Reserve does document large differences in family transfers, and both Treasury and the Brookings researchers have identified differences in the types of income reaching the tax system.
The First Million Creates New Balance-Sheet Decisions
For households still accumulating assets, federal tax rules create several forms of ownership before retirement arrives.
Traditional retirement accounts defer taxes. Roth accounts generally collect taxes before the money enters and allow qualified withdrawals to come out tax-free. Taxable investments can create capital gains. Homeowners can qualify for an exclusion on part of the gain from a primary residence. Businesses carry another set of tax and liquidity characteristics.
The Internal Revenue Service doesn’t combine those assets into a household net-worth figure and assign a millionaire tax rate. Federal income taxes follow the income produced, realized or withdrawn from them.
The practical decision therefore appears during accumulation.
Tax researchers and retirement institutions commonly describe holding assets with different tax treatments as tax diversification. The household gains more choices over which assets produce taxable income in a particular year, especially during a job change, a lower-income period or retirement.
Traditional accounts can remain valuable within that mix. The research database for this story found no support for treating pretax retirement saving as a mistake, and federal rules continue to give workers substantial incentives to use it.
For first-generation wealth builders, the relevant information sits one level below the account balance: how much wealth is tied to future ordinary income, how much can be accessed without creating taxable income, and how much depends on selling an appreciating asset.
Gale, Hall and Sabelhaus reached their central result by making the same move. They stopped comparing households only by how much economic income they had and separated that income by type.
The Black-White tax gap they found at high incomes largely disappeared after they did.
Sources: American Economic Association; Brookings Institution; Urban-Brookings Tax Policy Center; Board of Governors of the Federal Reserve System; U.S. Department of the Treasury; Internal Revenue Service; Urban Institute.
