Final answer:
Federal income tax rates vary according to different ranges of income, known as tax brackets. The U.S. employs a progressive taxation system in which higher income brackets are subject to higher tax rates. The tax brackets are adjusted for inflation to prevent bracket creep.
Step-by-step explanation:
Different federal income tax rates apply to different ranges of income, also known as tax brackets. The United States uses a progressive taxation system, meaning that as an individual's income increases, they pay a higher percentage of that income in federal taxes. This is evident in the tax brackets set by the Internal Revenue Service (IRS), where in 2020, for a married couple filing jointly, the income ranges were taxed progressively at increasing rates from 10% up through 37% for the highest earners.
For example, the IRS tax tables outline that in 2017, a single person would owe 10% of taxable income from $0 to $9,325, then 15% on income from $9,326 to $37,950, and so on, with the rates increasing at higher income levels. This system ensures that those who earn more contribute a larger portion of their income to federal revenues, embodying the principle of tax equity.
The concept of indexing in government programs, including the tax system, is to adjust for inflation. As inflation occurs, the IRS adjusts tax brackets to ensure that individuals do not move into a higher tax bracket solely due to inflation rather than an actual increase in real income. This prevents what is known as 'bracket creep' where people pay a higher percentage of their income in taxes without an actual increase in purchasing power.