How the stealth income tax increases make you worse off

I thought a couple of examples of how the stealth increases in income due to inflation make families worse off would be helpful.

Let’s assume inflation is 2% a year and to make it simple (won’t compound) is 6% over a three year term.

If you are on a wage of around $50,000 then you pay tax of $8,020 and have a net income of $41,980.

If your wages rise by 6% to compensate for inflation then your income is $53,000, your tax increases to $8,920 and you net income to $44,080.

What is the resulting change for each:

  • Gross income up 6% (0% in real terms)
  • Tax up 11.2% (4.0% in real terms)
  • Net income up 5% (down 0.9% in real terms)

So over one term, you end up 1% worse off and paying 5% more tax in real terms.

And what about the change over three terms?

If your wages rise by 18% to compensate for inflation then your income is $59,000, your tax increases to $10,720 and you net income to $48,280.

What is the resulting change for each:

  • Gross income up 18% (0% in real terms)
  • Tax up 33.7% (13.3% in real terms)
  • Net income up 15% (down 2.5% in real terms)

So over three terms term, you end up 2.5% worse off and paying 13% more tax in real terms.

This also means the higher inflation is, the more extra tax you end up paying, and the worse off you are in real terms.



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