We know more, but not enough, about the tax treatment of Asian American families
These disparities arise because the tax code favors certain types of income, expenses, and family characteristics–factors that often vary by race and ethnicity. These disparities arise because the tax code favors certain types of income, expenses, and family characteristics–factors that often vary by race and ethnicity.
Despite being the fastest-growing racial group in the country, Asian American households remain an understudied population in tax policy research. Around 24 million Americans or 7 percent of US residents identify as Asian or Asian combined with another race. We found that Asian American households who are in the top 20% of the income distribution pay a higher tax rate on average than white households. This is largely because they earn a greater portion of their income through labor earnings. White households, however, are more likely to have tax-favored assets. The triennial Survey of Consumer Finance had previously assigned all Asian American households into the “Other racial” category. The 2022 SCF oversamples minorities and is the first wave to present specific data for households in three separate categories: Asian American, American Indian or Alaska Native, or Native Hawaiian or Pacific Islander.
Researchers can now explore the impact of the tax code on Asian American taxpayers relative to white taxpayers. Our analysis relies on the 2022 SCF, a methodology that converts households into tax-filing units, and NBER’s TAXSIM model. The small number of Asian Americans included in the SCF sample of 2022 limits the level of detail of our statistical analysis. But that limit highlights the need for more specific data and research.
Differences in income distribution
Figure 1 compares the expanded income (EI) distribution of Asian American and white households. EI includes adjusted gross earnings, cash and near-cash payments, and untaxed capital income sources such as unrealized gains and imputed rental income from owning a house. This finding challenges the “model minority” stereotype that all Asian American families are financially well-off. This finding challenges the “model minority” stereotype that all Asian American families are financially well-off.
Differences in average tax rate
Figure 2 shows the average tax rate (ATR, or the ratio of income tax liability to EI) for Asian American and white households.
The ATR for both groups generally increases with income, reflecting the progressive nature federal income tax. Asian American households in the top 60% of the income distribution pay higher ATRs compared to white households. The difference in ATR is statistically significant for only the top quintile of the income distribution (at the 10% level, which we chose because of the small sample size). The higher ATR arises because, relative to white households, Asian American households earn a greater share of their income from fully-taxed labor income (earned from working) rather than tax-favored capital income (earned from sources including realized or unrealized capital gains, unreported business income, or imputed rent on owner-occupied housing).
Contributing factors to tax disparities
While differences in the composition and level of income matter when assessing the tax treatment of Asian American households, other factors may also contribute these differences.
For example, the tax code generally favors single-earner married couples, but the labor force participation of Asian American women is higher than that of white women. This could lead to a higher incidence of marriage penalties in Asian households. Other differences may be due to the younger age distribution among Asian Americans in comparison to white Americans. Asian American households own fewer homes, but owe a higher amount when they do. This could be because many Asian Americans live in high-cost cities like San Francisco. This suggests potential differences in the use of the mortgage interest deduction.
Asian American households are also less likely to hold tax-preferred retirement accounts, and their households are more likely to be multigenerational, which may cause confusion about which adults are eligible for benefits. In fact, a recent Treasury study found that low-income Asian Americans are less likely to receive the Earned Income Tax Credit and Child Tax Credit than any other low-income racial group.
There’s much more to learn
While these preliminary findings show how the tax code affects Asian American and white households differently, researchers need more data to conduct deeper analyses. There may be disparities between income tax liabilities among the diverse Asian American population. The cultural norms, socioeconomic conditions, and lived experiences of Asian American families vary widely. In March 2024, Biden’s administration updated Statistical Policy Directive No. Researchers can perform more nuanced analyses with these detailed data, which further debunks the myth of a “model minority”. With these detailed data, researchers can perform more nuanced analyses that further debunk the “model minority” myth.
Policymakers should use this research to better understand the economic needs of low-income Asian American families, particularly the most vulnerable among them. That includes the uncertainty faced by undocumented immigrants and the high poverty rates among Burmese (19 percent) and Hmong (17 percent) Americans.
Examining differences in tax treatments between Asian American subgroups will allow researchers to capture the diverse experiences and needs of these communities, enabling the development of responsive policies.
