Reframing the Debate about ACA

As in my recent posts, I want to focus on members of the "professional class," which I define as being in a household with income between the 80th percentile and the 99th percentile in the income distribution. These people are comfortable income-wise but probably wouldn't consider themselves rich.  My household is in this category. 

For the purposes of illustration, I produced the graphs below.  I use TurboTax for doing our Federal tax return, and I have copies of the returns from 2010 through 2024.  TurboTax produces summary information, which I used in the graphs.  Note that there are 15 data points, but for readability those are connected with straight line segments.  

In the graph, Adjusted Gross Income (AGI) is Gross Income less Exemptions.  Early on my kids were still dependents on our tax return.  Later, they weren't.  Taxable Income is AGI less Deductions.  The two track each other reasonably closely.  Total Tax is what was paid to the Federal Government in Income Tax.  Also note that while the even numbered years are clearly indicated on the horizontal axis, I deliberately removed the income level numbers on the vertical axis, to preserve a modicum of privacy for me.  I think you'll get the idea without knowing the specific numbers.

Now, one specific qualifier about our income.  I received quite a windfall in 2010, which was sufficient to put us into a higher tax bracket.  We received another windfall, though not as large, in 2020.  After the year with the windfall our income dropped, and then rose gradually thereafter.  It would actually be easier to make the point I want to emphasize by not including 2010 in the graph, but I thought it better to plot all the data I had available.

Also, everything that is plotted is in nominal income, meaning there is no adjustment for inflation.  The dollar values are in the year that the income is being reported.

The graph below takes the information from the first graph and then plots average tax rates.  Effective tax rate is Total Tax/AGI, while Tax Rate on Taxable Income is Total Tax/Taxable Income.  Again, the two curves track each other reasonably well.

Now we can get to the point. From 2012-2017 the Effective Tax Rate was about 18% and rose somewhat in this time period so the last couple of years it actually was above 19%.  Then, from 2018 onward the Effective Tax Rate was below 17% and then from 2021-2025 it was below 15%. 

Suppose the tax experience for my household was typical of those in the Professional Class.  Then we might conclude that the Effective Tax Rate was higher in Obama's second term than it was during Trump's first term and it remained lower during Biden't term in office.  

It is said that one shouldn't look a gift horse in the mouth.  But I'm going to do that here.  I know of know economic efficiency argument for the reduction in taxes during Trump's first term.  When Biden took office, amid the horror of Covid, one could make an argument that the economy needed fiscal stimulus, though tax cuts for members of the Professional Class, who likely have substantial savings, are probably not a very good way to stimulate the economy.  

So, from an efficiency perspective, why not return to the tax rates as they were when Obama was President?  The debacle with ACA is real enough, but there is insufficient discussion on the tax revenue side of the equation.  

If people in the Professional Class saw these graphs and took the message from them I'm trying to send, would they agree to a rise in tax rates back to the their levels a decade ago?  How can one be so cruel to people of modest means so as to preserve this gift horse?  That seems to me the question we should be asking.