Among tax analysts, the three most widely used measures are statutory rates (STRs), marginal effective rates (MERs), and average effective rates (AERs). 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. 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. 99-514 ). The Omnibus Budget Reconciliation Act of 1990 (OBRA90; P.L. 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. Eight years later, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16 ) added a new 10% statutory rate. Several other provisions of the act modified the tax brackets and limitations on personal exemptions and deductions for higher-income taxpayers. 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 ). 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. Tax Reform Act of 1986

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%. Under TRA86, capital gains was treated as ordinary income and taxed at regular rates that peaked at 33%. Omnibus Budget Reconciliation Act of 1993

OBRA93 made several changes in the individual marginal income tax rate structure. 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. 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. JGTRRA also lowered the tax rates for long-term capital gains and dividends. American Taxpayer Relief Act of 2012

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%. P.L. 115-97

Individual marginal income tax rates did not change after ATRA until the enactment of P.L. 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. Effects of Inflation on Income Tax Liabilities

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. 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 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). But some key elements of the tax remain unadjusted for inflation. Under current law, the amount of the credit itself and the phaseout thresholds for higher-income taxpayers are not adjusted for inflation. 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. Consequently, starting in 2018, tax elements that are adjusted for inflation are indexed to a preliminary estimate that could be significantly revised.
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.