individual income tax rates are the tax rates that apply by law to various
levels of taxable income. Statutory rates help determine marginal
effective (or effective) tax rates, which most economists believe have a
greater impact on the economic behavior of taxpayers than statutory rates.
Effective rates reflect the net effect of special tax provisions on statutory
rates. They are to be distinguished from average tax rates, which measure
a taxpayer’s 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 1986. Of particular importance 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), and the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010 (TRUC; P.L. 111-312). TRA86
made major changes in the income tax rate structure. EGTRRA established what
are referred to as the Bush-era tax cuts for individuals. And TRUC
extended those cuts for another two years, through 2012. If Congress takes
no action before then, statutory individual tax rates will revert to the
levels created by OBRA93.
There are six statutory individual income tax rates in 2012 for ordinary
income: 10%, 15%, 25%, 28%, 33%, and 35%. Income from long-term capital
gains and dividends is taxed at a rate of 15% in 2012. In addition, the
individual alternative minimum tax system (AMT), which functions like a
parallel income tax system but with a more compressed rate structure and a
broader tax base than the regular income tax, taxes income above an
exemption threshold in 2012 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. The primary advantage of
such a mechanism is that it helps prevent tax increases and unintended
changes in the distribution of the tax burden that stem from inflation
alone. Indexed elements include tax rate brackets, personal exemptions and
their phaseout thresholds, standard deductions, and the itemized deduction
limitation threshold, among others. One key element that is not indexed
for inflation is the exemption amounts for the AMT. As a result, Congress
has passed increases in those amounts in nearly every year since 2001 to avoid
large increases in the number of taxpayers subject to the AMT.
This report summarizes tax brackets and other key elements of the individual
income tax that determine taxpayers’ effective tax rates going back to
1988. These elements include personal exemptions and standard deductions.
The report was originally written by Gregg A. Esenwein and was maintained
for a few years by Maxim Shvedov. It is updated annually to reflect the most recent
indexation adjustments and any statutory changes.
Date of Report: July 16, 2012
Number of Pages: 48 Order Number: RL34498 Price: $29.95
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