taxpayers. Table 1-2 below shows the changes made by the Act in the distribution of the tax burden in 1987 and 1988; this table reflects the effect of major provisions affecting individuals, including the rate reductions, increases in the standard deduction and personal exemption, and changes in itemized deductions.

Table I-2 shows the percentage changes in tax liabilities between prior law and the Act for each of nine income classes. In the aggregate, the Act reduces tax liability of individuals by 2.2 percent in 1987 and by 6.1 percent in 1988.

Table I-2.-Percentage Change in 1987 and 1988 in Income Tax Liability Under the Tax Reform Act of 1986

NOTE.-These figures do not take account of certain provisions affecting individuals. Thus, the total tax reductions are somewhat different from what is indicated in this table.

Table 1-3 shows average income tax liability and tax rate by income class for 1988, the first year in which the changes in the tax rates and standard deduction are fully effective. By virtue of restructuring the tax schedules and broadening the tax base for individuals, and reducing corporate tax preferences, the Act produces substantial reductions in individual income tax liabilities.

Table I-3.-Average Income Tax Liability and Tax Rates in 1988 Under Prior Law and Under the Tax Reform Act of 1986

NOTE.-These figures do not take account of certain provisions affecting individuals. Thus, the total tax reductions are somewhat different from what is indicated in this table.

The income tax liability of individual taxpayers will decline an average of $194 in 1988, from an average $3,176 under prior law to an average $2,982 under the Act, as shown in Table I-3.

Simplification of tax returns

The Congress believed that the tax rate schedules in prior law were too lengthy and complicated. The Act provides a two-rate tax structure (15 and 28 percent), beginning in 1988. Under the Act, more than 80 percent of individuals either will be in the 15-percent bracket or will have no Federal income tax liability.

The prior-law tax rate structure is modified by the Act to make the individual income tax fairer and simpler and to reduce disincentives to economic efficiency and growth. Simplicity in the rate structure is achieved by using only two taxable income brackets. The four filing statuses are retained because they are the fewest classifications that can be implemented to provide fairly and equitably for the diverse characteristics of the taxpaying population.

The two-bracket tax structure replaces the prior-law ZBA with a standard deduction. Under the new structure, individuals determine taxable income by subtracting from adjusted gross income either the standard deduction or the total amount of allowable itemized deductions. Unlike the ZBA, the standard deduction enables the taxpayer to know directly how much income is subject to tax and to understand more clearly that taxable income is the base for determining tax liability.

Further, the difference between the standard deduction for an unmarried head of household and that for a married couple is narrowed by the Act in recognition that the costs of maintaining a household for an unmarried individual and a dependent more

closely resemble the situation of a married couple than that of a single individual without a dependent.

The increases in the standard deduction and modifications to specific deduction provisions simplify the tax system by substantially reducing the number of itemizers. As a result of these changes, about 11 million itemizers will shift to using the standard deduction, a reduction of approximately 30 percent in the number of itemizers relative to prior law.

Marriage penalty

Under the Act, the adjustments of the standard deduction and the rate schedule make it possible to minimize the marriage penalty while repealing the two-earner deduction. As a result, single individuals who marry will retain more of the share of the standard deductions for two single individuals than under prior law.

Table I-4 presents a comparison of the marriage penalty in 1988 as it would be under prior law and as changed under the 1986 Act.

Table I-4.-Marriage Tax Penalty in 1988 for Two-Earner Couple Under Prior Law and Tax Reform Act of 1986

NOTE.-The marriage bonus or penalty is the difference between the tax liability of a married couple and the sum of the tax liabilities of the two spouses had each been taxed as a single person. Marriage bonuses are negative in the table; marriage penalties are positive. It is assumed that all income is earned, that taxpayers have no dependents, that deductible expenses were 16.7 percent of income under prior law and 14 percent of income under the Act, and that deductible expenses are allocated between spouses in proportion to income. The computations in the table reflect the standard deduction, personal exemption, rate bracket, and prior-law deduction for two-earner married couples.

Elderly and blind taxpayers

The tax burden on elderly or blind taxpayers is eased by the Act apart from the effect of rate reductions. The prior-law income tax credit for certain elderly or disabled individuals is retained.

As discussed above, the Act increases the standard deduction amounts and personal exemptions for all taxpayers. Thus, in 1989, the $2,000 personal exemption amount for each individual under the Act will be almost equal to the two personal exemption amounts allowed under prior law ($2,160 for 1986) for an elderly or blind individual. Also, the higher standard deduction amounts under the Act go into effect one year earlier (in 1987) for elderly or blind individuals than for all other taxpayers (in 1988). These increased amounts are further augmented under the Act by an additional standard deduction amount of $600 for an elderly or blind individual ($1,200, if both) who is married (or who is a surviving spouse), or of $750 for an unmarried elderly or blind individual ($1,500, if both). The higher personal exemptions and standard deduction, plus the additional standard deduction amount, offset the loss of the additional personal exemption under prior law.

1. Tax rate schedules

Explanation of Provisions

The rate structure under the Act consists of two brackets and tax rates-15 and 28 percent-for individuals in each of the four filing status classifications. Reflecting the replacement of the ZBA by the standard deduction, the 15-percent bracket begins at taxable income of zero. (Under the Act, taxable income equals AGI minus personal exemptions and minus either the standard deduction or the total of allowable itemized deductions.) Effective for taxable years beginning on or after January 1, 1988, the rate structure is as follows.

For married individuals filing separate returns, the 28-percent bracket begins at $14,875, i.e., one-half the taxable income amount for joint returns. The bracket amounts for surviving spouses are the same as those for married individuals filing joint returns.

Beginning in 1989, the taxable income amounts at which the 28percent rate starts will be adjusted for inflation (as described below). By December 15 of each year, beginning in 1988, the Treasury Department is to prescribe tables reflecting the bracket amounts applicable for the following year as adjusted for inflation.

Rate adjustment

Beginning in 1988, the benefit of the 15-percent bracket is phased out for taxpayers having taxable income exceeding specified levels. The income tax liability of such taxpayers is increased by five percent of their taxable income within specified ranges, until the tax benefit of the 15-percent tax rate has been recaptured.

The rate adjustment occurs between $71,900 and $149,250 of taxable income for married individuals filing jointly and surviving spouses; between $61,650 and $123,790 of taxable income for heads of household; between $43,150 and $89,560 of taxable income for single individuals; and between $35,950 and $113,300 of taxable income for married individuals filing separately. These dollar amounts will be adjusted for inflation beginning in 1989.

The maximum amount of the rate adjustment generally equals 13 percent of the maximum amount of taxable income within the 15-percent bracket applicable to the taxpayer (for a married individual filing separately, in order to preclude an incentive for separate filing, it is the 15-percent bracket applicable for married taxpayers filing jointly). Thus, if the maximum rate adjustment applies, the 28-percent rate in effect applies to all of the taxpayer's taxable income, rather than only to the amount of taxable income above the bracket breakpoint.

Transitional rate structure for 1987

For taxable years beginning in 1987, rate schedules with five brackets are provided, as shown in the table below. Neither the rate adjustment (described above) nor the personal exemption phaseout (described below) applies to taxable years beginning in 1987.

For married individuals filing separate returns, the taxable income bracket amounts for 1987 begin at one-half the amounts for joint returns. The bracket amounts for surviving spouses are the same as those for married individuals filing joint returns.

2. Standard deduction

Increased deduction.-The Act repeals the zero bracket amount (ZBA) and substitutes a standard deduction of the following amounts, effective beginning in 1988.