A guiding principle of the income tax ever since it was enacted in 1913 has been the idea that wealthy taxpayers should pay a higher proportion of their incomes than the less well-to-do.
That notion, known as progressivity, received a considerable jolt Tuesday when President Reagan told an audience in Madrid that the tax-simplification proposal he will submit to Congress, probably next week, will "not only cut rates but make them less progressive.
"We believe that there is nothing progressive about tax rates that discourage people from climbing up the ladder of success."
Although the speech had been reviewed by White House and Treasury Department officials, aides traveling with Reagan could not explain exactly what the president meant. It was not clear whether the statement marked a significant change in tax policy or a misuse of the term "progressive." Reagan may, some analysts suggested, just have been praising the virtues of lower tax rates.
The concept of progressivity was a prominent feature of the 1913 tax law. The tax rate was 1 percent on income of less than $20,000, rising to 7 percent on income of more than $500,000, a gargantuan sum in those times. The personal exemption was $3,000, even larger than it is today. That effectively excluded all but the wealthy from the tax rolls.
Rates have bounced around since then -- the top rate was 90 percent during World War II -- but the notion of progressivity is deeply ingrained in the American political psyche.
"We think the issue of progressivity draws a line between Democratic tax reform and Republican tax reform," said Rep. Charles Schumer (D-N.Y.). With Rep. Marty Russo (D-Ill.), he held a press conference yesterday to hawk the virtues of their 25 percent minimum-tax bill for individuals and corporations.
Reagan's remarks came as a surprise in Washington because the early version of the administration's simplification plan would not shift the tax burden from one income class to another. Fairness has been an avowed goal of tax reformers of both parties.
However, Treasury officials rewriting the plan have been having trouble making it come out neutral among income groups as a result of the compromises they have been making. The restoration of such tax benefits as lower rates for capital gains and a smaller-than-first-proposed increase in the personal exemption have tilted the plan toward wealthier taxpayers, a shift Treasury officials hope to reverse before the official announcement.
Sponsors of the two principal congressional plans also say their proposals would not change the tax burden much. The bill sponsored by Rep. Richard A. Gephardt (D-Mo.) and Sen. Bill Bradley (D-N.J.) calls for three rates of 14, 26 and 30 percent, with all deductions taken against the 14 percent rate.
The measure authored by Rep. Jack Kemp (R-N.Y.) and Sen. Robert W. Kasten Jr. (R-Wis.) has one rate of 24 percent, but taxpayers could exclude 20 percent of their wages up to the Social Security maximum, now $39,600. A large increase in the personal exemption also would add to progressivity, but the plan still would reduce the tax burden on those with incomes greater than $100,000 by 10 percent, a Kemp aide said.
Reagan's statement also served to underscore the fact that the tax system in general has become less progressive in the last five years or so, as a result of Reagan's tax cut and other changes.