Taxation and the Family: Has the personal exemption kept up with prices and incomes?
As the federal government expanded greatly in the postwar era, individual income taxes rose, and the personal exemption, which was fixed in nominal dollars, failed to keep pace with growing personal income or rising prices. Lawmakers increased it only occasionally before finally indexing it to increases in prices beginning in 1981.
- Had the personal exemption been indexed to prices beginning in 1948, its value in 2011 would have been roughly 50 percent higher than it was: $5,499 rather than the actual $3,650 (see figure). Setting the exemption at that higher level would, however, reduce annual revenues by more than $53 billion.
- Had the personal exemption been indexed to personal income per capita since 1948, it would have been $17,189 in 2011, more than four times what it actually is, and annual revenues would fall more than $235 billion below current levels.
- Congress has, however, partially offset the erosion of the personal exemption with other changes to the tax code. Most importantly, it created the child credit and the earned income tax credit, both of which have helped to hold down taxes, particularly for larger, low- and middle-income households that are most affected by the falling real value of the exemption.