5 ms·

If inflation is 5% and you get a 5% raise, you're level in real terms, right? No, because that 5% is taxed at your higher tax rate, which is (usually) higher th

If inflation is 5% and you get a 5% raise, you're level in real terms, right? No, because that 5% is taxed at your higher tax rate, which is (usually) higher than your average tax rate. This is called bracket creep.

hungryhobo 5y ago
but you're still earning more than if you haven't gotten that 5% raise.
- deleted 5y ago
  [deleted]
- jtbayly 5y ago
  And you’ll still be surprised that even though you’re in a higher tax bracket, your standard of living actually went down.
  - fragmede 5y ago
    That's not how the progressive tax system in America works.
    - jtbayly 5y ago
      It is when inflation is high, which is exactly what we are talking about.
      - deleted 5y ago
        [deleted]
- DSMan195276 5y ago
  I think his point is that while a 5% raise and 5% inflation should be a wash, since you now pay slightly more taxes than before your pay after taxes is slightly less value than before. It's still very misleading to say "wage gains aren't good" though - the problem is not that you got a 5% raise, it's that inflation is 5% so you need a slightly-higher-than-inflation raise to keep up. If you didn't get a 5% raise you'd just be even worse off.
  - iso1631 5y ago
    Presumably the tax brackets are linked to inflation too
    - jtbayly 5y ago
      Pretty sure they're not.
      - iso1631 5y ago
        US tax brackets seem to be https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021 https://www.irs.gov/newsroom/irs-provides-tax-inflation-adju...
        jtbayly 5y ago
        That shows nothing about the amount of the adjustment. Looking up last year's and running a few calculations, it appears to have been adjusted 1%! That's not adjusting for inflation. Not sure what it's adjusting for, but not inflation.
        iso1631 5y ago
        Headline literally says IRS provides tax inflation adjustments And links to https://www.irs.gov/pub/irs-drop/rp-20-45.pdf https://www.irs.gov/pub/irs-drop/rp-20-45.pdf "This revenue procedure sets forth inflation-adjusted items for 2021 for various provisions of the Internal Revenue Code of 1986 (Code)" It's states adjusting for inflation for the tax year beginning March 2021. The document came out in October 2020 when inflation was 1.2%, I'm not sure when they adjust it and you may disagree with the measure of inflation The year before was November 2019 https://www.irs.gov/pub/irs-drop/rp-19-44.pdf https://www.irs.gov/pub/irs-drop/rp-19-44.pdf Here's the one for 2021/2 (Nov 29th 2021) https://www.irs.gov/irb/2021-48_IRB https://www.irs.gov/irb/2021-48_IRB Married Individuals Filing Joint Returns, lowest and highest bands: Thresholds for tax year 2021/2 goes from 19750 to 19900 (0.7%) at one end, and from 622050 to 628300 at the other (1%) Thresholds for tax year 2022/3 goes from 19900 to 20550 (3.27%) at one end, and from 628300 to 647850 at the other (3.11%)
deleted 5y ago
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fragmede 5y ago
Only if 5% causes you to change tax brackets. 5% of $300k is a lot more than 5% of $100k or $50k/yr, but only if you were already at the very edge of a tax bracket will 5% cause you to change bracket. Eg the 22% bracket is from $40-$86k for single filers in 2021. Only if you were making $81k or more will 5% tip you over. For everyone else earning 40-81k, that 5% doesn't cause a bracket change.
- Retric 5y ago
  No, because 100% of that 5% is taxed at the highest bracket but a percentage of your old salary is taxed at your old bracket. To simplify 100k split 50k @20%, 50k @ 40% is less than (105k split 50k @20%, 55k @40%) / 1.05 The fist is worth 50 * 0.8 + 50 * 0.6 = 70k, the second is worth (50 * 0.8 + 55 * 0.6)/ 1.05 = 69.52k.
- btown 5y ago
  To add to this, especially for non-Americans or Americans unfamiliar with the tax system, the very notion of "change tax brackets" is a misnomer. If you make $41k, you still pay 10% on your first ~$10k, 12% on the next ~$30k, and 22% only on that last $1k. So yes, you could be in a situation where you had been at the top of a bracket, and your incremental wages from the raise are taxed at the next bracket's rate. But it doesn't trigger any kind of situation where your entire salary is now charged at the higher rate. Yes, of course, a 5% raise does not compensate for 5% inflation. But that's just because taxes exist, not because you are entering a higher bracket per se. IMO, the whole pervasive narrative around tax brackets being something to fear is a fear-uncertainty-and-doubt move by those seeking to vilify the tax system. It's worked surprisingly well to those ends.
deleted 5y ago
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hungryhobo 5y ago

but you're still earning more than if you haven't gotten that 5% raise.

deleted 5y ago
[deleted]
jtbayly 5y ago
And you’ll still be surprised that even though you’re in a higher tax bracket, your standard of living actually went down.
- fragmede 5y ago
  That's not how the progressive tax system in America works.
  - jtbayly 5y ago
    It is when inflation is high, which is exactly what we are talking about.
    - deleted 5y ago
      [deleted]
DSMan195276 5y ago
I think his point is that while a 5% raise and 5% inflation should be a wash, since you now pay slightly more taxes than before your pay after taxes is slightly less value than before. It's still very misleading to say "wage gains aren't good" though - the problem is not that you got a 5% raise, it's that inflation is 5% so you need a slightly-higher-than-inflation raise to keep up. If you didn't get a 5% raise you'd just be even worse off.
- iso1631 5y ago
  Presumably the tax brackets are linked to inflation too
  - jtbayly 5y ago
    Pretty sure they're not.
    - iso1631 5y ago
      US tax brackets seem to be https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021 https://www.irs.gov/newsroom/irs-provides-tax-inflation-adju...
      - jtbayly 5y ago
        That shows nothing about the amount of the adjustment. Looking up last year's and running a few calculations, it appears to have been adjusted 1%! That's not adjusting for inflation. Not sure what it's adjusting for, but not inflation.
        iso1631 5y ago
        Headline literally says IRS provides tax inflation adjustments And links to https://www.irs.gov/pub/irs-drop/rp-20-45.pdf https://www.irs.gov/pub/irs-drop/rp-20-45.pdf "This revenue procedure sets forth inflation-adjusted items for 2021 for various provisions of the Internal Revenue Code of 1986 (Code)" It's states adjusting for inflation for the tax year beginning March 2021. The document came out in October 2020 when inflation was 1.2%, I'm not sure when they adjust it and you may disagree with the measure of inflation The year before was November 2019 https://www.irs.gov/pub/irs-drop/rp-19-44.pdf https://www.irs.gov/pub/irs-drop/rp-19-44.pdf Here's the one for 2021/2 (Nov 29th 2021) https://www.irs.gov/irb/2021-48_IRB https://www.irs.gov/irb/2021-48_IRB Married Individuals Filing Joint Returns, lowest and highest bands: Thresholds for tax year 2021/2 goes from 19750 to 19900 (0.7%) at one end, and from 622050 to 628300 at the other (1%) Thresholds for tax year 2022/3 goes from 19900 to 20550 (3.27%) at one end, and from 628300 to 647850 at the other (3.11%)

deleted 5y ago

[deleted]

fragmede 5y ago

Only if 5% causes you to change tax brackets. 5% of $300k is a lot more than 5% of $100k or $50k/yr, but only if you were already at the very edge of a tax bracket will 5% cause you to change bracket. Eg the 22% bracket is from $40-$86k for single filers in 2021. Only if you were making $81k or more will 5% tip you over. For everyone else earning 40-81k, that 5% doesn't cause a bracket change.

Retric 5y ago
No, because 100% of that 5% is taxed at the highest bracket but a percentage of your old salary is taxed at your old bracket. To simplify 100k split 50k @20%, 50k @ 40% is less than (105k split 50k @20%, 55k @40%) / 1.05 The fist is worth 50 * 0.8 + 50 * 0.6 = 70k, the second is worth (50 * 0.8 + 55 * 0.6)/ 1.05 = 69.52k.
btown 5y ago
To add to this, especially for non-Americans or Americans unfamiliar with the tax system, the very notion of "change tax brackets" is a misnomer. If you make $41k, you still pay 10% on your first ~$10k, 12% on the next ~$30k, and 22% only on that last $1k. So yes, you could be in a situation where you had been at the top of a bracket, and your incremental wages from the raise are taxed at the next bracket's rate. But it doesn't trigger any kind of situation where your entire salary is now charged at the higher rate. Yes, of course, a 5% raise does not compensate for 5% inflation. But that's just because taxes exist, not because you are entering a higher bracket per se. IMO, the whole pervasive narrative around tax brackets being something to fear is a fear-uncertainty-and-doubt move by those seeking to vilify the tax system. It's worked surprisingly well to those ends.

deleted 5y ago

[deleted]