FRED’s recent addition of data from the Internal Revenue Service is a gold mine of interesting factoids. The data cover different tax returns and drill down to particular line items. There are even time series on amounts for exemptions, deductions, and credits. The graph shows one such exemption, the personal exemption for married couples, in three versions: the nominal value as written in the tax code (blue), the real value after adjusting for inflation using the consumer price index (red), and the real value adjusting for the nominal increase in incomes using personal income per capita (green).
Move the glider to look at different time periods and you’ll notice the exemption was quite high (even in nominal terms) in the first years after the income tax was introduced, which is one factor explaining why only a minority of households were paying any tax in the first years. That eroded substantially after WWII, when the exemption was small. It has increased recently in nominal terms and keeps up with inflation but not with the increase in incomes. Indeed, it’s now trending, in real terms as deflated by income, to the lowest it has ever been. In terms of 1982-84 prices, it’s now at about $2300, compared with about $2000 at its lowest point.
How this graph was created: The exemption is among the most popular in the data release, so click on it and you have the blue line. From “Edit Graph,” use the add line feature to search for the same exemption and add to the line CPI (using the longer series) and apply formula a/b*100. Again add a line with the same exemption, add to it personal income per capita (make sure not to use the real series) and apply formula a/b*14000 (with 14000 being the factor needed to make the line roughly match the $2000 exemption in 1982-84, which is the base year for the CPI).
Suggested by Christian Zimmermann.