What is the relevance of tax brackets? Earning more nominally while standard of living going down is the same as earning less in real terms.

“Moving up” in a tax bracket never means earning less in nominal or in real terms. It just means you get less in your pocket of the extra you earned, not of the total you earned.

I feel like all the stupid comedy shows, especially in the 80s and 90s, making those episodes about getting a raise and earning less money, did a lot of damage to people's understanding of how taxes ACTUALLY work, and continues to ripple to this day, leading to comments like the one you are replying to.

While there's nothing to fear from taxes, there is the completely separate issue of the benefits cliff [0]. When you just barely make enough to no longer qualify for SNAP or childcare and you lose 100% of those benefits instead of it phasing out based on your pay. This benefit is often worth more than a normal raise, so while you you don't take home less in your paycheck, you do have fewer resources overall. Phasing out benefits instead of making them all or nothing is a simple way to address this.

0 - theguardian.com/money/2014/jul/20/benefits-cliff-minimum-wage-increase-backfire-poverty

Other benefits is certainly a valid point, from food stamps to scholarships to all kinds of things. And when people talk about those I totally sympathize because my family dealt with those issues of "too much for those scholarships but not enough to be able to afford over a certain tier of school." And when people talk about those things I agree entirely.

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.

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.

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.

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.

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

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.

It’s too far to say that “”wage gains aren’t good”, but he makes a good point about wage increase, inflation, and tax brackets I hadn’t thought of before

I think it's a bit overblown personally, the percentage of tax you pay is not going to increase a notable amount even with 5% inflation and a 5% raise. The brackets also get adjusted every year, to account for his point.

Presumably the tax brackets are linked to inflation too

Pretty sure they're not.

US tax brackets seem to be

https://www.irs.gov/newsroom/irs-provides-tax-inflation-adju...

1% inflation seems about right for the 2020->2021 tax year. Most indicators are lagging so if inflation started taking off during 2021 it wouldn't show up right away.

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.

Headline literally says

IRS provides tax inflation adjustments

And links to 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

Here's the one for 2021/2 (Nov 29th 2021)

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%)

And you’ll still be surprised that even though you’re in a higher tax bracket, your standard of living actually went down.

That's not how the progressive tax system in America works.

It is when inflation is high, which is exactly what we are talking about.

Because they haven’t adjusted the amounts for the tax brackets with inflation. So it’s a double whammy. Your money is worth less, even though you got more of it. And now Uncle Sam is taking more of it.

I cannot figure out why the US writes laws in terms of nominal value while maintaining an inflationary currency. The majority of lawmakers agree that a law should be x with respect to the current value of USD, why don't they also agree it should be x+inflation for a future value of USD? Maybe with a circuit breaker for hyperinflation. They don't have to rely on third party inflation numbers, because the Fed is a government agency.

Do some lawmakers only support a law because it will have a lower (min. wage) or higher (tax) real monetary significance in the future?

Probably, even if it is only accidentally. The Congressional Budget Office produces long-term estimates on things, and I'm guessing they aren't ignoring inflation. So, for example, a proposed law has $X ramification, according to the CBO, over the course of 10 years where X is an acceptable amount. If you were to adjust to make the law account for inflation, X would change, potentially into something not acceptable.

I think two of the biggest falsehoods many people seem to believe about finances is that one, you don't want to move up in tax brackets because then you will suddenly be making less money. And two, that somehow businesses and business owners can just "write off" expenses so that those expenses don't actually cost them any money.

There are a few edge cases where these can be technically true but they are rare and limited in scope and magnitude.

I think you are misreading the comment at the root of this whole thread. They aren't saying "if you go up a tax bracket, ALL of your income goes down because you pay more taxes!" but instead saying "you might make more money but despite that, you will not be able to buy more things." I don't think tax brackets have anything to do with this besides being tied to how much you make.

>you might make more money but despite that, you will not be able to buy more things.

I'm not sure how else to read that. If you make more money, you can buy more things. Even if you go up a tax bracket. If you make twice as much money and that moves you up a tax bracket, you won't be able to buy twice as many things, but you can still by more things than you could when you made half as much. Maybe 1.8 times more things.

That’s not how taxes work

https://www.investopedia.com/ask/answers/071114/can-moving-h...

I think they mean if you are 1% away from a new tax bracket and get a 5% raise, 4% of that is at the higher tax bracket. So while you still make more money you make less than you would have if the entire 5% were in the lower bracket.

As others have already noted, that's not how tax brackets work. The real problem might be government programs like Medicaid - it's hard to tell if eligibility requirements are inflation-indexed, and since it seems to be determined at the state level, I'm almost certain it won't be in every state. So it's possible that increased wages, while it still increases post-tax income, actually reduces net disposable income after taking Medicaid, CHIP, etc. into account.

Tax laws are confusing, alot of people think that since they made more they are in a new tax bracket and every dollar they made is subject to the new higher tax bracket rate. This is incorrect, every dollar made at and above that high tax bracket is subject to that higher tax rate, every dollar made below is subject to the previous tax bracket.(and this is after 401k and other tax writeoffs).

Clarity here, this is how it is, where you live I presume.

Other places do have more horrid, retroactive taxation.

But that said, tax rates are typically based upon cutoffs. So the more you make, the more tax you pay.

So this means that if you get a raise to meet inflation, you could see your raise more heavily taxed, if it is above the next tax bracket.

Eventually, with enough inflation, and no changes to tax regs, you could see the very poor, taxed like the well to do, a few years before.

There are also some tax benefits, which have income cutoffs, and also programs which have income cutoffs.

With inflation at historic lows for 25 years, there is little institutional knowledge about how fast >10% inflation can erase buying power, and at the same time big raises mean nothing..

totally sorry, yes you are right, I forgot to mention I live in the US and that is how tax laws here are set up. And as a caveat I am assuming all income is salary.

Being highly paid in salary you are subject to very high taxation where someone who receives most of their income in stock and sells after holding for a year would have dramatically less taxes on the same amount of money received. Its why these CEO's making $1 a year(and having stock grants in the 100's of millions) are a slap in the face to the working engineer who incurs substantially higher taxes as a percentage than the CEO making 100x his salary.