In 1946, when a pound of bread cost about 10 cents, the Internal Revenue Code allowed every person to treat $500 of income as applied to necessities and exempt from income tax. In 1981, when inflation has increased the general price level for all consumer products more than four times the post-World War II level, this income tax allowance for necessities has only doubled, to $1,000 per person. In effect, inflation has cut the tax allowance for necessities by half.

Better known as the personal exemption, the deduction for basic household needs applies to every taxpayer and every dependent. Its function is fundamental in a tax system based on ability to pay. By excluding basic household needs from the tax base, the personal exemption limits the reach of the tax to discretionary income. In operation, the personal exemption provides a bracket below the tax rates stated in the tables, taxing at a zero rate an amount related to family size.

As might be expected, most of the personal exemptions claimed do not benefit wealthy people. In 1976, 91.9 percent of all the personal exemptions claimed appeared on returns reporting less than $30,000 in adjusted gross income.

Not surprisingly the personal exemption no longer hits the mark in sparing necessaries from the income tax. The Labor Department's urban budget for a four-person family for autumn 1979 gives as its "low" budget an average annual expense figure of $12,585. By comparison, a family of four deducts $4,000 in personal exemptions. It can claim another $3,400 deduction for the zero bracket amount, the old standard deduction, but only giving up an equivalent amount in itemized deductions such as medical expenses and state taxes. The total of $7,400 is about 60 percent of the "low" 1979 budget for necessaries.

Current proposals for tax reduction virtually ignore the personal exemption.

The administration's proposals for across-the-board tax rate reduction do not include any adjustment in the personal exemption. Yet an important justification for those cuts lies in the effects of inflation.

Assuming an income earner can obtain the same real income by increasing dollar income just enough to adjust for inflation, the graduated tax rates will push the income up into higher brackets and increase the proportion of a household's income taxed by the federal government. To prevent an inflation-caused tax increase, the brackets need to be adjusted. As we have seen, the argument applies with equal force to the personal exemption. In fact, the present $1,000 level is exactly the same dollar amount for the personal exemption as prevailed from 1932 to 1939.

The personal exemption allocates deductions roughly on a per capita basis. An increase in the personal exemption provides a more even-handed tax reduction than bracket adjustments. For a family of four earning $25,000 in wage income, the administration's proposal would cut taxes by $153 in 1981. If, instead, all the revenue cost went to enlarge the personal exemption, the net benefit to this family rises to $279.

Some purists have criticized the personal exemption as not going far enough because a deduction gives net benefits to high-bracket taxpayers that are greater than those for lower-bracket taxpayers. But, to paraphrase Lincoln, the Lord must have loved lower-bracket taxpayers, for he made so many of them. tThe personal exemption affects everyone who pays taxes: perhaps for this reason it has no special-interest constituency. To get taxes off the backs of the people, rather than just off the backs of the well-to-do, an increase in the personal exemption is both sound and compassionate.