A reader writes:

These folks aren't just racists.  By indulging themselves in this behavior, in company, when they know that's frowned upon and simply impolite, reveals what they're really up to: they get a kick out of shocking you.  What I have done for many years is simply to "pull a Colbert" (before there was a Colbert): out-do them in their absurd rants, take it up to 11, be even more outrageous, in any way you can.  Admittedly, not everyone can pull this off.  It takes a slightly demented personality, a very good sense of humor, you have to have the gift of satire, be willing to get theatrical.  But if you can pull  it off you will genuinely scare these people and they'll never try to get your goat again.  It also invites your audience – the other family members – to laugh at these people, rather than to waste time trying to refute them.  Holiday parties aren't seminars, and racists don't go off at them just because they're in error – they do it because they want to make a scene.  Take away their toy.