Has the personal exemption kept up with prices and incomes?
Both the relative and the real value of the personal exemption have fallen since its creation in 1913, although other tax credits have helped offset its reduction. The personal exemption is now indexed to inflation.
As the federal government expanded in the postwar era, individual income taxes rose, and the personal exemption, which was fixed in nominal dollars, failed to keep pace with changes in personal income. Lawmakers increased it only occasionally before finally indexing it to increases in prices, beginning in 1981.
The personal exemption in 1948 was $600. Had it been indexed to prices beginning in 1948, its value in 2014 would have been $5,950 rather than the actual $3,950 (figure 1). Setting the exemption at that higher level would, however, reduce revenues by about $62 billion.
Had the personal exemption been indexed to personal income per capita since 1948, it would have been $18,950 in 2014, more than four times what it actually is, and annual revenues would fall more than $283 billion below current levels.
Congress has partially offset the erosion of the personal exemption with other changes to the tax code. Most importantly, it created the child tax credit and the earned income tax credit, both of which have helped to hold down taxes for larger, low- and middle-income households that are most affected by the falling real value of the exemption.
U.S. Bureau of Economic Analysis. 2014. “National Income and Product Account Tables: Table 2.1. Personal Income and Its Disposition.” Washington, DC: U.S. Department of Commerce.
Bureau of Labor Statistics. 2015. “CPI Detailed Report.” Washington, DC: Bureau of Labor Statistics.
Statistics of Income. 2013. “SOI Tax Stats – Historical Table 23.” Washington, DC: Internal Revenue Service.
Urban-Brookings Tax Policy Center. 2015. “Historical Individual Income Tax Parameters.” Washington, DC: Tax Policy Center.
Urban-Brookings Tax Policy Center. “Microsimulation Model, version 0515-3.”
Carasso, Adam, and C. Eugene Steuerle. 2003. “Personal Exemption Not What It Used to Be.” Tax Notes, April 28.
Steuerle, C. Eugene. 2008. Contemporary U.S. Tax Policy. 2nd ed. Washington, DC: Urban Institute Press.