"Progressivity" in terms of tax structure refers to a code which decrees that the more you earn, the more you pay as a percentage of your income. Our income tax code as of year 2002 has 6 rates: 10%, 15%, 27%, 30%, 35%, and 38.6%. To see how much more is paid in federal income taxes by people who earn more, see the 1998 data released on October 16, 2000, by the IRS. When the tax rates are left unchanged over several years, tax burdens rise by themselves because people earn more and find themselves paying higher rates. As a result, tax collections rise at a faster rate than the taxpayers' income. (This is called "bracket creep.") So while the nation's income has increased at 6.2 percent clip over the past decade, income tax collections have grown by 7.9 percent. Any nation with a progressive tax code, then, must enact periodic tax cuts (sometimes handled by automatic adjustments in the brackets) unless it wants the government to collect and spend an ever-larger fraction of the nation's income. In addition to causing these "autopilot" tax increases, progressivity creates much of the tax code's complexity, but the income tax code has been progressive since its inception. (Source: The Tax Foundation, Washington DC, www.taxfoundation.org) Note that the 2001 tax bill increases the progressivity by adding a 10% tax bracket.
"Progressivity" is a reflection of compassion in our laws. The idea is that those that have less should not only pay less, but they should pay a lower percentage of their income. In fact, many low- income families pay no income tax at all.
The problem that we have today is that the consequences of earning money are more than just higher tax rates, and these consequences are not always limited to the highest income individuals. For this discussion, let us consider any benefits lost as a "tax." The loss of benefits operates like a tax on an individual's financial situation. When there are several areas where there are "taxes" for earning money, they may combine to create an unintentionally high marginal "tax" rate. (The marginal tax rate is the tax rate that applies to the next dollar earned, as opposed to an average tax rate that is just the total tax divided by the total income. The marginal tax rate is important in understanding a person's motive for earning more money, because it determines that portion of that additional money that he gets to keep.) In fact, the National Center for Policy Analysis has found a situation where the marginal "tax" rate actually exceeds 100 percent. They also found a situation where a person in the 15% income tax bracket actually has a total marginal "tax" rate of 83%!1 (The 15% income tax bracket was the lowest income bracket (at the time of the study) for people earning enough money to pay any income tax, so these people are not those with high income.) And these numbers do not include state income taxes for those in states with income tax.
These rates are higher than anyone intended. What can be done? This ComingTogether Plan eliminates this problem through simplicity. There is only one consequence of earning money, and it is the same no matter what the individual's situation might be!