Individual Income Tax Rates and Other Key Elements of the Federal Individual Income Tax: 1988 to 2019 Tax Years
Released: 2019-02-08T00:00:00

Summary: Statutory individual income tax rates are the tax rates that apply by law to various amounts of taxable income. Statutory rates form the basis of marginal effective and average effective tax rates, which most economists believe have a greater impact on the economic behavior of companies and individuals than do statutory rates. Marginal effective rates capture the net effect of special tax provisions on statutory rates. They differ from average effective rates, which measure someone's overall income tax burden.

Current statutory and effective individual tax rates are the result of the Tax Reform Act of 1986 (TRA86; P.L. 99-514) and several tax laws that have been enacted since then. Of particular importance among the latter are the Omnibus Budget Reconciliation Act of 1990 (OBRA90; P.L. 101-508), the Omnibus Budget Reconciliation Act of 1993 (OBRA93; P.L. 103-66), the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16), the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUC; P.L. 111-312), the American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240), and the tax rate changes contained in the 2017 tax revision (P.L. 115-97). TRA86 altered the income tax rate structure. EGTRRA established what are referred to as the Bush-era tax cuts for individuals. TRUC extended those cuts for another two years, through 2012. ATRA permanently extended the Bush-era tax rates for taxpayers with taxable incomes below $400,000 for single filers and $450,000 for joint filers but reinstated the 39.6% top rate established by OBRA93 for taxpayers with taxable incomes equal to or above those amounts. And P.L. 115-97 lowered individual tax rates for all income groups except those subject to the 10% and 35% brackets under previous law.

Ordinary income is taxed at seven statutory individual income tax rates, from 2018 to 2026: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. (Starting in 2026, these rates will revert to their levels in 2017.) Income from long-term capital gains and dividends is taxed at 0% for single filers with capital gains below $39,375 (below $78,750 for joint filers), 15% for single filers with capital gains between $39,375 and $434,550 (between $78,750 and $488,850 for joint filers), and 20% for single filers with capital gains above $434,550 (above $488,850 for joint filers). Since 2013, a 3.8% tax has been imposed on the lesser of net investment income received by individuals, estates, or trusts, or the amount of their modified adjusted gross incomes above $250,000 for joint filers and $125,000 for single filers. In addition, the individual alternative minimum tax (AMT), which functions like a separate income tax in that its rate structure is narrower and tax base broader than those of the regular income tax, applies to income above exemption amounts in 2019 of $111,700 for joint filers and $71,700 for single filers; the AMT taxes income at two rates: 26% and 28%.

Tax rates and the income brackets to which they apply are not the only elements of the individual income tax that determine the tax liabilities of taxpayers. Personal exemptions, exclusions, deductions, credits, and certain other elements have an effect as well. Some of these elements are indexed for inflation. Congress added annual indexation to the individual income tax in 1981, using the Consumer Price Index for All Urban Consumers. Such a mechanism helps prevent tax increases and unintended shifts in the distribution of the tax burden that are driven by inflation alone. The indexed elements are tax rate brackets, personal exemptions and their phaseout threshold, standard deductions, the itemized deduction limitation threshold, and the exemption amounts for the AMT. Starting in 2018, these items are indexed for inflation with the Chained Consumer Price Index for All Urban Consumers.

This report summarizes the tax brackets and other key elements of the individual income tax that help determine taxpayers' marginal and average effective tax rates going back to 1988. It will be updated to reflect indexation adjustments and changes in the taxation of individual income.


subsections: section_title: Three Commonly Used Concepts of Tax Rates and How They Differ
paragraphs: In analyzing the effects of U.S. individual income tax rates, it is important to be clear about which rates are being discussed. Among tax analysts, the three most widely used measures are statutory rates (STRs), marginal effective rates (MERs), and average effective rates (AERs). Each has its own applications. Those interested in how individual income taxes affect the economic behavior of households should have a clear understanding of the ways in which the three rates differ and the implications of these differences for the economic analysis of income taxes.

STRs are the rates prescribed by law that apply to specified ranges of taxable income. For any individual, the applicable rate depends on her/his taxable income. Since the federal income tax is progressive in nature, taxpayers with relatively low taxable incomes face lower STRs than do taxpayers with relatively high taxable incomes.

Effective rates, by contrast, whether marginal or average, measure how STRs are affected by tax provisions that modify someone's taxable income or tax liability. A taxpayer's MER shows the percentage of an additional dollar of income that is taxed, while her/his AER indicates how much of her/his total income is taxed. In general, someone's average tax rate is lower than her/his marginal tax rate. 

Still, for many individuals, the interaction between special provisions in the tax code and their specific financial circumstances leads to differences between their effective and statutory rates. Among the provisions that can drive a wedge between the two rates are the earned income tax credit (EITC), the alternative minimum tax (AMT), and personal exemptions and deductions. Personal circumstances that can cause MERs to diverge from STRs include the sources of income, itemized deductions, the number of children (if any) eligible for the child tax credit and the EITC, and filing status. 

Most economists believe that taxpayers change their economic behavior in response to MERs, not to statutory rates. Drawing on a standard model of consumer behavior, they argue that a person's MER influences important decisions concerning whether and how much to work, how much to spend, and how much to save. For example, someone's MER may help determine whether he takes on an overtime shift, bargains for wages and benefits, takes a second job, or even enters the labor force. The idea that MERs help shape an individual's economic behavior can be extended to an entire tax system, including federal payroll and excise taxes and state and local taxes. A broader analysis along these lines, however, goes beyond the scope of this report.

section_title: Major Legislation Affecting Individual Statutory Rates Since 1986
paragraphs: The current income tax is largely a product of the Tax Reform Act of 1986 (TRA86; P.L. 99-514 ). Among other things, the act reduced the individual tax rate structure to two statutory rates: 15% and 28%. TRA86 also imposed a 5% surcharge on the taxable income of certain upper-income households, effectively adding a third marginal tax rate of 33%.

Since the enactment of TRA86, several other major changes in the federal individual income tax rate structure have been made. The Omnibus Budget Reconciliation Act of 1990 (OBRA90; P.L. 101-508 ) eliminated the 5% surcharge and replaced it with a statutory rate of 31%. In addition, OBRA90 imposed a limit on the amount of itemized deductions upper-income households could claim and accelerated the phaseout of personal exemptions for upper-income households. These provisions had the effect of raising effective tax rates above statutory tax rates for affected taxpayers.

The Omnibus Budget Reconciliation Act of 1993 (OBRA93; P.L. 103-66 ) added two new statutory rates at the upper end of the income scale: 36% and 39.6%. It also delayed the indexation of the two new tax brackets for one year and permanently extended the limitation on itemized deductions and the accelerated phaseout of the personal exemption from OBRA90.

Eight years later, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16 ) added a new 10% statutory rate. It also included a phased-in reduction in the top four statutory rates to 25%, 28%, 33%, and 35%. Several other provisions of the act modified the tax brackets and limitations on personal exemptions and deductions for higher-income taxpayers. 

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27 ), the Working Families Tax Relief Act of 2004 (WFTRA; P.L. 108-311 ), and the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA; P.L. 109-222 ) collectively accelerated and extended the tax rate reductions enacted under EGTRRA through 2010. 

Under a last-minute agreement between President Obama and congressional leaders from both parties, Congress extended the Bush-era individual income tax cuts through 2012 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUC; P.L. 111-312 ). 

Facing the unwanted prospect of an across-the-board increase in all STRs, the 112 th Congress permanently extended (through the American Taxpayer Relief Act of 2012 [ATRA; P.L. 112-240 ]) each of the Bush-era STRs, with one exception: the top rate increased from 35% to 39.6%. 

Six years passed before Congress made another significant change in individual income tax rates. Through P.L. 115-97 , often referred to as the Tax Cuts and Jobs Act, Congress temporarily reduced five of the seven individual income tax rates under prior law. For tax years beginning after December 31, 2017, and before January 1, 2026, individual income tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%; they are set to return to the levels that applied in 2017, for tax years beginning on or after January 1, 2026. 

Each act is described in greater detail below.
subsections: section_title: Tax Reform Act of 1986
paragraphs: Among its many changes, TRA86 simplified the individual income tax rate structure for tax years after 1987 by replacing the 14 nonzero statutory rates that applied to the 1985 and 1986 tax years with two such rates: 15% and 28%. Table 3 shows the key elements of the 1988 tax rate structure. These rates applied to capital income as well as to labor income. 

Although TRA86 established only two statutory individual marginal income tax rates, it included a 5% surcharge on the taxable income of certain upper-income households. This surcharge effectively created a third statutory tax rate of 33% (a 28% statutory tax rate plus a 5% surcharge).

Because the surcharge phased in over a certain range of income and then phased out as income increased, statutory tax rates rose to 33% but then fell back to 28%, producing what was known as an income tax rate "bubble." The intent of the surcharge was two-fold: (1) to prevent TRA86 from changing the distribution of the income tax burden among income groups, relative to the distribution under pre-1986 tax law, and (2) to meet specific revenue targets.

More specifically, the surcharge was designed to eliminate the tax benefits of both the 15% tax bracket and the personal exemption for upper-income households. For joint returns in 1988, the phaseout of the 15% tax rate started when taxable income exceeded $71,900 and ended when it reached $149,250. For single returns, the 15% tax bracket phased out when taxable income was between $47,050 and $97,620. For heads of households, the phaseout occurred when taxable income fell in the range of $67,200 to $134,930. 

The phaseout of the personal exemption started immediately after the phaseout of the 15% tax bracket and occurred sequentially for each exemption. This meant that the taxable income range over which the 5% surcharge offset personal exemptions depended on the number of personal exemptions claimed on the tax return. For example, on a joint return claiming two personal exemptions, the 5% surcharge would apply to taxable income between $149,250 and $171,090 ($149,250 plus two times $10,920). On a joint return with four personal exemptions, the 5% surcharge would apply to taxable income between $149,250 and $192,930 ($149,250 plus four times $10,920).

To demonstrate how the 5% surcharge worked to "phase out" the tax benefits of the 15% tax bracket, consider the following example based on joint returns for 1988. The difference between taxing the first $29,750 of taxable income at 28% instead of 15% was $3,867.50 (obtained as $29,750 multiplied by 13%, the difference between 28% and 15%). Five percent of the difference between the upper and lower phaseout limits also equaled $3,867.50 ($149,250 less $71,900 multiplied by 5%). Hence, assessing the 5% surcharge on taxable income between $78,400 and $162,770 was equivalent to taxing the first $32,450 of taxable income at 28% rather than 15%.

section_title: Omnibus Budget Reconciliation Act of 1990
paragraphs: OBRA90 created a three-tiered statutory marginal income tax rate structure. The rates were 15%, 28%, and 31% and applied to tax years beginning in 1991 and thereafter (see Table 5 ). OBRA90 eliminated the tax rate bubble created by TRA86, and replaced it with a limitation on itemized deductions and a new approach to phasing out the tax benefits of the personal exemption for upper-income households.

OBRA90 also reintroduced a tax-rate differential for capital gains income. The act limited the tax on capital gains income to a maximum of 28%, starting in 1991. Under TRA86, capital gains was treated as ordinary income and taxed at regular rates that peaked at 33%.

OBRA90's limitation on itemized deductions was based on a taxpayer's adjusted gross income (AGI). For tax years starting in 1991 to 1995, allowable deductions were reduced by 3% of the amount by which a taxpayer's AGI exceeded $100,000 (or $50,000 in the case of married couples filing separate returns). For example, if a taxpayer's AGI in 1991 was $110,000, then his itemized deductions would have been reduced by $300 ($110,000 less $100,000 multiplied by .03). This provision effectively raised the marginal income tax rate of affected taxpayers by approximately one percentage point. A dollar of income in excess of $100,000 was taxed as if it were $1.03, since in addition to the tax on an extra dollar of income, the taxpayer lost a tax deduction by giving up $0.03 of itemized deductions.

This limitation was scheduled to expire after tax year 1995 under OBRA90, but was later extended. Allowable deductions for medical expenses, casualty and theft losses, and investment interest were not subject to this limitation. For tax years after 1991, the $100,000 threshold was indexed for inflation.

OBRA90 phased out the tax benefits of the personal exemption for higher-income households. Each personal exemption was phased out by a factor of 2% for each $2,500 (or fraction thereof) by which a taxpayer's AGI exceeded a given threshold amount. In 1991, the threshold amounts were $150,000 for a joint return, $100,000 for a single return, and $125,000 for a head-of- household return. Starting in 1992, these amounts were indexed for inflation. The phaseout provision was scheduled to expire at the end of 1995.

A simple example illustrated how the personal exemption phaseout increased the tax burden on affected taxpayers. In 1991, a joint household whose AGI was $183,000 would have lost 28% of their total personal exemptions. The AGI amount in excess of the threshold in this instance would have been $33,000, or $183,000 AGI minus the $150,000 threshold limit. The $33,000 excess divided by $2,500 would produce a factor of 13.2, which when rounded up would equal 14. This figure is multiplied by 2% to arrive at the final disallowance amount of 28%. Hence, if the family had claimed two personal exemptions, which at $2,150 each would have totaled $4,300, they would have been allowed to deduct $3,096 ($4,300 total personal exemptions less the $1,204 disallowance, which is 28% of the total).

section_title: Omnibus Budget Reconciliation Act of 1993
paragraphs: OBRA93 made several changes in the individual marginal income tax rate structure. First, it added two new marginal tax rates, 36% and 39.6%, at the upper end of the income spectrum. The 39.6% tax bracket was the result of adding a 10% surtax to the 36% rate for taxpayers with taxable incomes over $250,000 in 1993. 

Although OBRA93 was enacted in August 1993, the increase in the top marginal tax rates was made effective retroactively to January 1, 1993. Affected taxpayers, however, were not assessed penalties for underpayment of 1993 taxes resulting from the tax rate increase. Taxpayers were also allowed to pay any additional 1993 taxes in three equal installments over a two-year period.

Second, OBRA93 delayed indexation of the new top marginal income tax brackets for one year. Hence, the nominal dollar tax brackets for the 36% and 39.6% marginal tax rates remained at the same level for both tax years 1993 and 1994.

Finally, OBRA93 made permanent both the itemized deduction limitation and the phaseout of the tax benefits from personal exemptions.

section_title: Economic Growth and Tax Relief Reconciliation Act of 2001
paragraphs: EGTRRA made several major changes to the marginal tax rate structure. Many of the act's provisions were set to phase in over a period of time, but subsequent legislation, described in the next section, overrode the schedule originally set by EGTRRA. All of the EGTRRA provisions, as amended, were set to expire at the end of 2010.

First, the 2001 act created a new 10% bracket. It applied, beginning in tax year 2002, to the first $12,000 of taxable income for married couples filing jointly, the first $10,000 of taxable income for heads of households, and the first $6,000 of taxable income for single individuals. For tax year 2001, the act created a "rate reduction tax credit," mimicking the effects of the 10% tax rate bracket for most taxpayers.

EGTRRA gradually phased in and expanded the bracket over several years, but in 2003-2007, these provisions of EGTRRA were accelerated by subsequent legislation. In 2008, EGTRRA became effective again, setting the 10% marginal tax rate bracket at $7,000 for single filers and $14,000 for joint filers. Starting with tax year 2009, these bracket amounts were indexed for inflation.

Second, the 2001 act gradually reduced the top four marginal income tax rates. Under prior income tax law, the top four marginal tax rates were 28%, 31%, 36%, and 39.6%. When fully phased in, the 2001 act reduced the top four marginal income tax rates to 25%, 28%, 33%, and 35%. Once again, under EGTRRA the reductions were scheduled to take place in 2001 through 2006, but subsequent legislation accelerated the EGTRRA phase-in schedule.

Third, EGTRRA also repealed the limitation on itemized deductions and personal exemptions for high-income taxpayers. The repeal was phased in between 2006 and 2009. The limitation was completely repealed for 2010, but it was scheduled to reappear again in 2011, once the EGTRRA's tax cuts expire.

Fourth, some of the act's measures designed to reduce the marriage penalty affected the rate bracket structure. The act increased the income range of the 15% tax bracket for married couples filing joint returns to twice the income range of the 15% tax bracket for single returns. Under EGTRRA, this provision was scheduled to phase in from 2005 to 2008, but subsequent legislation accelerated the phase-in. Under EGTRRA, the upper dollar limit of the 15% tax bracket for joint returns was set at 180% of the upper dollar limit of the 15% tax bracket for single returns in 2005, 187% of that limit in 2006, 193% of that limit in 2007, and 200% of that limit in 2008 and subsequent years.

Finally, the 2001 act increased the standard deduction for joint returns to twice the size of the standard deduction for single returns. The change was scheduled to be phased in over a five-year period, 2005 to 2009, but it was accelerated by the subsequent bills as well. This had the effect of raising the lower income threshold of the lowest tax bracket for married taxpayers.

section_title: Jobs and Growth Tax Relief Reconciliation Act of 2003
paragraphs: JGTRRA accelerated several changes to the individual income tax rate structure that were first enacted under EGTRRA. It moved forward to 2003 the tax rate reductions, the expansion of the 10% tax bracket, and the widening of the 15% tax bracket for joint returns to make it double the width of the 15% tax bracket for single returns. Under EGTRRA, some of these changes would not have been fully phased in until 2009.

JGTRRA also lowered the tax rates for long-term capital gains and dividends. It reduced the top rate to 15%, and allowed a rate of 0% for certain low-income taxpayers.

section_title: Working Families Tax Relief Act of 2004
paragraphs: WFTRA extended several tax provisions of JGTRRA that were scheduled to expire at the end of 2004. It extended the expansion of the 10% income tax bracket through 2007, at which point EGTRRA's relevant provisions would be fully phased in, maintaining a constant amount of tax relief.

WFTRA also extended marriage penalty relief under EGTRRA from 2005 to 2008. The standard deduction for a married couple filing jointly was set to be equal to double the standard deduction for an unmarried single filer over that period. In addition, the act made the size of the 15% tax bracket for joint filers double that of the tax bracket for single filers from 2005 to 2007. As a result, in both cases, the marriage penalty relief extended from 2005 to 2010, before ending under the EGTRRA sunset provision.

section_title: Tax Increase Prevention and Reconciliation Act of 2005
paragraphs: The reductions in tax rates for long-term capital gains and dividends under JGTRRA were set to expire at the end of 2008; TIPRA extended them through the end of 2010.

section_title: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
paragraphs: A last-minute agreement in 2010 between President Obama and congressional leaders of both parties cleared the way for an extension of all the Bush-era individual tax cuts through the end of 2012. TRUC served as the legislative vehicle for the extension.

section_title: American Taxpayer Relief Act of 2012
paragraphs: Facing a reversion of each statutory individual income tax rate to its level before the enactment of EGTRRA starting January 1, 2013, Congress and President Obama agreed on legislation (ATRA) to extend permanently each of the Bush-era rates and restore the top marginal tax rate to its pre-EGTRRA level of 39.6%. 

The act also permanently extended the repeal of the phaseout of the personal exemption included in EGTRRA, but it restricted the repeal of the phaseout to taxpayers with AGIs of $250,000 or less for single filers and $300,000 or less for married couples filing jointly. Taxpayers with AGIs above these inflation-adjusted amounts were subject to the phaseout. The same rule applied to the repeal under EGTRRA of the Pease limitation on the amount of itemized deductions an upper-income taxpayer could take.

section_title: P.L. 115-97
paragraphs: Individual marginal income tax rates did not change after ATRA until the enactment of P.L. 115-97 in December 2017. The act made significant changes to a number of individual income tax provisions, including individual tax rates and the standard deduction. For tax years beginning in 2018 and ending before 2027, the individual income tax rate structure consists of seven brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. (The rates are scheduled to revert to their levels in 2017 starting in 2026.) For individuals receiving income from passthrough businesses (i.e., partnerships, S corporations, and sole proprietorships), the current rates can be adjusted downward as a result of a new deduction under Section 199A; the deduction is equal to up to 20% of a noncorporate business owner's qualified income from a qualified trade or business.

The 2017 tax revision also made the following changes in these key elements of the individual income tax for the 2018 to 2025 tax years: 

It terminated the personal exemption (which was $4,050 in 2017). It increased the standard deduction (which is indexed for inflation using the chained consumer price index for urban consumers) for nonitemizers to $24,000 for joint filers and $18,000 for head-of-household filers, and $12,000 for single filers, from 2018 to 2025. It eliminated the deduction for miscellaneous expenses from 2018 through 2025. It suspended the overall limit on itemized deductions for certain high-income taxpayers.

section_title: Effects of Inflation on Income Tax Liabilities
paragraphs: During periods of relatively high inflation, a progressive income tax based on tax brackets set in nominal dollars can lead to automatic tax increases, and these increases can lead to unintended changes in the overall distribution of the tax burden by income class. This is because nominal incomes rise faster than real incomes, all other things being equal. As a result, tax burdens for taxpayers become larger than what lawmakers had intended when they established existing statutory tax rates. In the absence of indexation of the elements of the tax code determining the tax burdens of individuals, an increasing share of taxpayers will face growing tax liabilities because their nominal incomes are rising, irrespective of what happens to their real incomes.

The effects of inflation on income tax liabilities can be substantial, even in periods of low inflation, such as the last two decades. According to the Bureau of Labor Statistics, $1,000 in November 1988 had the buying power of $2,095.08 in November 2018. Year-to-year changes can be negligible, but over a decade or so, those changes can add up to make a substantial difference through the power of compounding.

A simplified hypothetical example illustrates the impact that a lack of indexation can have over time for the tax burdens (as measured by the average income tax rate) of individual taxpayers. The results are summarized in Table 1 . Assume that the individual income tax structure from 1988 applied without indexation (or any other changes) in 2017. Also assume that a household with a husband, wife, and two children had an adjusted gross income (AGI) of $35,000 in 1988, was eligible for no tax credits, and filed a joint tax return. If the family took the standard deduction, then its taxable income would have been $22,200 ($35,000 minus the standard deduction of $5,000 and four personal exemptions at $1,950 apiece), and its tax liability would have been $3,330. As a result, the household's average tax rate was 9.5% ($3,330 divided by $35,000 income) in 1988.

Next consider what would happen to the household's tax burden in 2017 if the family's income had kept up with inflation but the 1988 tax structure had remained in place, with no indexation for inflation. The family's AGI would have been $71,766: $35,000 x 2.05 (the rise in the general price level as measured by the Consumer Price Index for all Urban Consumers (CPI-U) from 1988 to 2017). Its taxable income would have been $58,966; its tax liability would have totaled $12,643; and its average tax rate would have reached 17.6%. 

So in the absence of the indexation of the key income tax elements when the family's AGI rose in step with the rate of consumer inflation, keeping the buying power of its income constant, the family's income tax burden increased by 85% from 1988 to 2017. This difference exemplifies what is known as "bracket creep," an effect that is accelerated during periods of high inflation.

Under an indexed individual income tax, however, the household would have experienced no change in their tax burden. With an inflation adjustment equal to the rise in the CPI-U, the value of the standard deduction for a joint return would have increased from $5,000 in 1988 to $10,252 in 2017, and the personal exemption for each family member would have increased from $1,950 to $3,998. Under these circumstances, the family's 2017 taxable income would have been $45,522 ($71,766 in income less the inflation-adjusted standard deduction and four personal exemptions). Tax brackets would have adjusted as well. Based on this taxable income and the adjusted brackets, their income tax liability would have been $6,828, yielding an average tax rate of 9.5%, the same as in 1988. While the nominal household's amount of income and tax owed rose, the value of both in 1988 dollars stayed approximately the same.

Congress added indexation to the individual income tax as a part of the package of statutory tax rate reductions included in the Economic Recovery Tax Act of 1981. The U.S. rate of inflation was exceptionally high at the time, and this condition influenced congressional deliberations on the benefits of tax indexation. As the Joint Committee on Taxation noted in its explanation of the act:

The Congress believed that "automatic" tax increases resulting from the effects of inflation were unfair to taxpayers, since their tax burden as a percentage of income could increase during intervals between tax reduction legislation, with an adverse effect on incentives to work and invest. In addition, the Federal Government was provided with an automatic increase in its aggregate revenue, which in turn created pressure for further spending.

Since 1981, the list of indexed elements has gradually expanded and now includes more than three dozen tax items. TRA86 extended indexation to some newly created tax provisions, including the standard deductions for the elderly and the blind and the EITC. EGTRRA indexed the phaseout amounts for the EITC, starting in 2008.

 Table 2 lists the major indexed tax items and notes the first year of the adjustment. 

Indexing may compound the complexity of the individual income tax, but, given its benefits to taxpayers over time, this effect is arguably a minor matter. The year-to-year changes in dollar amounts are usually small, so taxpayers seldom, if ever, face unexpected changes that might materially affect them. On the revenue side, of course, indexing results in lower government receipts.

But some key elements of the tax remain unadjusted for inflation. One such element is the child tax credit. Under current law, the amount of the credit itself and the phaseout thresholds for higher-income taxpayers are not adjusted for inflation. But the earned income threshold used in calculating the credit's refundable amount has been adjusted for inflation since 2001. Consequently, under current law, inflation erodes the value of the credit and reduces the number of eligible taxpayers over time. Another element not indexed for inflation is the threshold amounts for determining who pays the 3.8% tax on net investment income that was added in 2013.

section_title: The Mechanics of Indexation
paragraphs: Most elements are indexed using the technical calculation described below. In some instances, the calculation methodology differs somewhat. Examples include the EITC or transportation benefits. The variations are insignificant, as long as they do not lead to systematic deviations from the actual rate of inflation.

The adjustment for tax years before 2019 was based on the percentage by which the average Consumer Price Index for All Urban Consumers (CPI-U) in the 12 months ending on August 31 of the preceding year exceeded the average CPI-U during a 12-month base period. Not all indexed tax elements used the same base period, as shown in Table 2 .

With the exception of the EITC, inflation adjustments were rounded down to the nearest multiple of $50. Although rounding down affected the accuracy of any given year's inflation adjustment, the effect was not cumulative since each year's adjustment reflected the total inflation that occurred between the adjustment year and the base period.

For example, the adjustment factor for the personal exemption in 2017 was calculated as follows. By law, the base period for this factor was September 1987 through August 1988, when the average CPI-U was 116.6. The average CPI-U for September 2015 through August 2016, on which the 2017 value is based, was 238.6. Thus, the inflation adjustment factor in 2017 was 2.05 (238.6/116.6). This factor was then applied to $2,000, the value of the exemption in 1989, resulting in a personal exemption of $4,080 for the 2017 tax year. Rounding this number down to the nearest multiple of $50 produced the final value of the exemption in 2017: $4,050.

For tax years beginning after December 31, 2018, a different consumer price index will be used to adjust the values of income tax elements subject to indexation. Under a provision of P.L. 115-97 , the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) replaces the CPI-U for this purpose. 

Both indices were designed by the Bureau of Labor Statistics (BLS) to measure price changes faced by the average urban consumer. Each of them tracks the prices of about 80,000 goods and services each month in cities throughout the United States. The BLS bases the indices on a fixed basket of goods and services obtained from a survey of the spending patterns of 7,000 American families. The survey determines which goods and services go into the basket and how much weight should be assigned to each item in calculating the overall change in prices. The market basket for the CPI-U is revised every two years.

Many analysts have argued that the CPI-U overstates rises in the cost of living because it does not fully account for the changes consumers make in their buying patterns when the price of one item in the market basket goes up or the price of another goes down. When this tendency to substitute lower-priced items for other items whose prices have increased is ignored, the impact on consumers of inflation is overstated.

The chained CPI-U is better at capturing changes in consumer spending patterns tied to price increases or decreases. This is because it compares details about what a consumer buys in the period before a price change with details about what he/she buys in the period after the change. In essence, the BLS calculates one measure of inflation for the first-period basket and a second measure of inflation for the second-period basket and then takes the average. The basket after the price change may contain different amounts of some items, as consumers respond to increases or decreases in the prices of other items in the same categories. For instance, the second-period basket may include more chicken than the first-period basket did when the price of beef increases while the price of chicken remains unchanged. This substitution softens the impact of the price rise for beef on the overall measure of inflation. The chained CPI-U does this every month, creating an index that links these changes from month to month. As a result, the index reflects shifts in consumer buying patterns between months and between basket items. It also leads to lower estimates of the rate of increase in the cost of living over time, since the chained CPI-U is built around the tendency of consumers in general to purchase lower-priced items that can be substituted for items whose prices have risen. From 2000 to 2012, the annual average for the chained CPI-U rose by 29.4%. In the same period, the CPI-U's annual average increased by 33.3%.

Many analysts have noted that using the chained CPI-U to adjust the amount of individual income tax elements for inflation has one significant drawback: the index is revised several times, while the CPI-U is never revised. A final reading for the chained CPI-U is released between 10 and 16 months after its initial release. Consequently, starting in 2018, tax elements that are adjusted for inflation are indexed to a preliminary estimate that could be significantly revised. 

Switching to the chained CPI-U to adjust key tax elements for inflation is likely to result in more bracket creep than would occur if the elements were still adjusted for inflation using the CPI-U. Since the chained CPI-U increases more slowly than the CPI-U, tax bracket thresholds are likely to rise by smaller amounts from one year to the next. More individual taxpayers will be pushed into higher tax brackets than they would be if the CPI-U were still used for inflation adjustment. One significant result is an increase in federal tax revenue over time. The Joint Committee on Taxation has estimated that the revenue gain from switching to the chained CPI-U will total $134 billion from FY2018 to FY2027.

Since the onset of the Great Recession in late 2007, the annual U.S. inflation rate has fluctuated between -0.4% and 3.2%, as measured by the CPI-U. Negative inflation, or deflation, occurred in 2009 relative to 2008. Deflation denotes a decrease in the general price level. As a result, the inflation adjustments in 2010 were very small or nonexistent. Several other federal programs experienced similar situations, even though they do not use the same indexing methodology. For example, there was no cost-of-living adjustment for Social Security benefits in 2010.

If the United States were to experience a period of sustained deflation, the income tax elements could decline in constant dollars. By law, however, the elements cannot fall below their base-year values. Since their current values are much higher than their base values, which were established years ago in some cases, and the near-term outlook for inflation is projecting rates below 3%, this limitation is unlikely to come into play anytime soon for most indexed elements.

section_title: Tax Rate Schedules for the 1988 Through 2019 Tax Years
paragraphs: The following tables present the personal exemption amounts, standard deductions, and statutory marginal tax rates schedules for each tax year from 1988 through 2019.


Question-summary annotations: questions: question: What are statutory individual income tax rates?
answer: Statutory individual income tax rates are the tax rates that apply by law to various amounts of taxable income.

question: What is the relationship between statutory rates, marginal rates, and average effective rates?
answer: Statutory rates form the basis of marginal effective and average effective tax rates, which most economists believe have a greater impact on the economic behavior of companies and individuals than do statutory rates.
child_questions: question: What are marginal effective rates?
answer: Marginal effective rates capture the net effect of special tax provisions on statutory rates.

question: What are average effective rates?
answer: They differ from average effective rates, which measure someone's overall income tax burden.

questions: question: What led to current statutory and effective individual tax rates?
answer: Current statutory and effective individual tax rates are the result of the Tax Reform Act of 1986 (TRA86; P.L. 99-514) and several tax laws that have been enacted since then. Of particular importance among the latter are the Omnibus Budget Reconciliation Act of 1990 (OBRA90; P.L. 101-508), the Omnibus Budget Reconciliation Act of 1993 (OBRA93; P.L. 103-66), the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16), the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUC; P.L. 111-312), the American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240), and the tax rate changes contained in the 2017 tax revision (P.L. 115-97).
child_questions: question: What did TRA86 accomplish?
answer: TRA86 altered the income tax rate structure.

question: Why is EGTRAA important?
answer: EGTRRA established what are referred to as the Bush-era tax cuts for individuals.

question: What did TRUC put into law?
answer: TRUC extended those cuts for another two years, through 2012.

question: What was set forth by ATRA?
answer: ATRA permanently extended the Bush-era tax rates for taxpayers with taxable incomes below $400,000 for single filers and $450,000 for joint filers but reinstated the 39.6% top rate established by OBRA93 for taxpayers with taxable incomes equal to or above those amounts.

question: What did P.L. 115-97 do?
answer: And P.L. 115-97 lowered individual tax rates for all income groups except those subject to the 10% and 35% brackets under previous law.

questions: question: Besides tax rates and income brackets, what else affects the tax liabilities of taxpayers?
answer: Tax rates and the income brackets to which they apply are not the only elements of the individual income tax that determine the tax liabilities of taxpayers. Personal exemptions, exclusions, deductions, credits, and certain other elements have an effect as well.

question: How is inflation taken into account for taxes?
answer: Some of these elements are indexed for inflation. Congress added annual indexation to the individual income tax in 1981, using the Consumer Price Index for All Urban Consumers.
child_questions: question: What does annual indexation accomplish?
answer: Such a mechanism helps prevent tax increases and unintended shifts in the distribution of the tax burden that are driven by inflation alone.

question: What elements are indexed for inflation?
answer: The indexed elements are tax rate brackets, personal exemptions and their phaseout threshold, standard deductions, the itemized deduction limitation threshold, and the exemption amounts for the AMT.Starting in 2018, these items are indexed for inflation with the Chained Consumer Price Index for All Urban Consumers.