I am seeking a double check as to whether or not I am understanding the following correctly.
- Let's assume that CPI-U is 2%
- Let's assume that the total tax I pay on my next dollar is 35%
Thanks,
B4xt3r
That sounds approximately correct. Most people I know have seen inflation-adjusted wages decrease considerably for the past decade or so.B4Xt3r wrote: ↑Sun Sep 02, 2018 10:40 amHi All,
I am seeking a double check as to whether or not I am understanding the following correctly.
If my pay is to not take a real cut, then I need to receive a nominal raise of 2%/0.65 = 3.07%?
- Let's assume that CPI-U is 2%
- Let's assume that the total tax I pay on my next dollar is 35%
Thanks,
B4xt3r
OK, thanks, I don't doubt it - I was surprised when I realized the above line of reasoning.
Quality of life is more difficult to determine. As measured by real wages, yes most people I know have to spend a higher percentage of income on relatively non-discretionary expenditures - medical expenses, sales and property taxes, etc. - vs. a decade ago. The quality and utility of some items we spend money for may have increased, others may have decreased.
Maybe an example would help. I think you're saying the structure of tax rates and deductions means you need a greater increase in wages to keep pace with inflation, but roughly it seems like the OP has the right idea.NightFall wrote: ↑Sun Sep 02, 2018 11:24 amI disagree. If your marginal rate is X and your effective rate is Y, then you you need (1-Y) x 2% / (1-X) to maintain the same spending power. Your formula assumes that your effective rate is 0. In reality, things get even more complicated with the different deductions and such if they're not indexed to inflation, but this is at least a first order approximation.
I also retitled the thread.If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:
- US or world economic, political, tax, health care and climate policies
- conspiracy theories of any type
- discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.
Is this true? (I'm just trying to reason it out with you.)NightFall wrote: ↑Sun Sep 02, 2018 11:24 amI disagree. If your marginal rate is X and your effective rate is Y, then you you need (1-Y) x 2% / (1-X) to maintain the same spending power. Your formula assumes that your effective rate is 0. In reality, things get even more complicated with the different deductions and such if they're not indexed to inflation, but this is at least a first order approximation.
How can it be sustainable when people are forced to spend an ever increasing amount of there income on basic necessities? If that is true, won't everyone be force to spend all there money on basic (food/shelter/clothing, etc.)tibbitts wrote: ↑Sun Sep 02, 2018 11:25 amAs measured by real wages, yes most people I know have to spend a higher percentage of income on relatively non-discretionary expenditures - medical expenses, sales and property taxes, etc. - vs. a decade ago.
...
I don't see why the current situation wouldn't be sustainable indefinitely.
Is the example I provided above sound?tibbitts wrote: ↑Sun Sep 02, 2018 11:40 amMaybe an example would help. I think you're saying the structure of tax rates and deductions means you need a greater increase in wages to keep pace with inflation, but roughly it seems like the OP has the right idea.NightFall wrote: ↑Sun Sep 02, 2018 11:24 amI disagree. If your marginal rate is X and your effective rate is Y, then you you need (1-Y) x 2% / (1-X) to maintain the same spending power. Your formula assumes that your effective rate is 0. In reality, things get even more complicated with the different deductions and such if they're not indexed to inflation, but this is at least a first order approximation.
Ok, I think that I stand corrected. Thank you. My mistake was not accounting for the fact that I live off post-tax dollars, and therefore my effective tax rate should be accounted for somewhere.NightFall wrote: ↑Sun Sep 02, 2018 12:38 pmExample, say your salary is $100,000. You take home $80,000 but your marginal rate is 35%. If inflation is 2%, you need $80,000 = $81,600 to maintain your same standard of living. You will need an absolute raise of $1,600/.65 = $2461. That is a raise of 2.46%, which is precisely the amount that I specified.
This is not quite right. Because most of the tax code is indexed for inflation, next year, even in the absence of any raise, the OP's take-home pay will go up. The Federal income tax owed will be lower due to higher standard deduction and more of the income being taxed in the inflated lower brackets.NightFall wrote: ↑Sun Sep 02, 2018 12:38 pmExample, say your salary is $100,000. You take home $80,000 but your marginal rate is 35%. If inflation is 2%, you need $80,000 = $81,600 to maintain your same standard of living. You will need an absolute raise of $1,600/.65 = $2461. That is a raise of 2.46%, which is precisely the amount that I specified.
Bold is mine. That is an interesting point, because if your effective rate equal to your marginal rate, then this effect goes away.
Not everyone is not receiving any pay increases, and even for many of those who earn less in real terms every year, it may take a while before they spend all their money on "necessities." Also, the idea of necessities has evolved over time - generally some things that used to not be considered luxuries tend to become essentials over time. There's no rule that says the opposite can't occur.B4Xt3r wrote: ↑Sun Sep 02, 2018 11:54 amHow can it be sustainable when people are forced to spend an ever increasing amount of there income on basic necessities? If that is true, won't everyone be force to spend all there money on basic (food/shelter/clothing, etc.)tibbitts wrote: ↑Sun Sep 02, 2018 11:25 amAs measured by real wages, yes most people I know have to spend a higher percentage of income on relatively non-discretionary expenditures - medical expenses, sales and property taxes, etc. - vs. a decade ago.
...
I don't see why the current situation wouldn't be sustainable indefinitely.
Yeah. If that is true, I believe that you are getting a real (not nominal) pay cut. Sorry!HJY700 wrote: ↑Sun Sep 02, 2018 5:02 pmThis thread is incredibly helpful and also totally nuts!
The latest CPI-U annual increase for the San Francisco region is 3.9%, according to BLS. Using my own (but probably not atypical) effective and marginal rates, I would need a 4.5% increase just to keep up with cost of living. The standard pay raise at my megacorp is not that high.
I guess the future we are discussing isn't sustainable, but I don't see this subdiscussion as actionable so perhaps we should avoid delving further.tibbitts wrote: ↑Sun Sep 02, 2018 5:24 pmNot everyone is not receiving any pay increases, and even for many of those who earn less in real terms every year, it may take a while before they spend all their money on "necessities." Also, the idea of necessities has evolved over time - generally some things that used to not be considered luxuries tend to become essentials over time. There's no rule that says the opposite can't occur.B4Xt3r wrote: ↑Sun Sep 02, 2018 11:54 amHow can it be sustainable when people are forced to spend an ever increasing amount of there income on basic necessities? If that is true, won't everyone be force to spend all there money on basic (food/shelter/clothing, etc.)tibbitts wrote: ↑Sun Sep 02, 2018 11:25 amAs measured by real wages, yes most people I know have to spend a higher percentage of income on relatively non-discretionary expenditures - medical expenses, sales and property taxes, etc. - vs. a decade ago.
...
I don't see why the current situation wouldn't be sustainable indefinitely.
Think of it as tax buckets: the first $20,800 you spend is tax free (standard deductions + exemptions for MFJ). The next $9,325 you spend was taxed at 10%, and so on... You get the idea. So the more you spend, the more expensive it gets. So, you might want to use effective tax rate rather than marginal tax rate in your calculation.B4Xt3r wrote: ↑Sun Sep 02, 2018 10:40 amHi All,
I am seeking a double check as to whether or not I am understanding the following correctly.
If my pay is to not take a real cut, then I need to receive a nominal raise of 2%/0.65 = 3.07%?
- Let's assume that CPI-U is 2%
- Let's assume that the total tax I pay on my next dollar is 35%
Thanks,
B4xt3r
That's a good point. As long as the brackets and deductions are all indexed to the same numbers, it's a wash.Svensk Anga wrote: ↑Sun Sep 02, 2018 3:25 pmThis is not quite right. Because most of the tax code is indexed for inflation, next year, even in the absence of any raise, the OP's take-home pay will go up. The Federal income tax owed will be lower due to higher standard deduction and more of the income being taxed in the inflated lower brackets.NightFall wrote: ↑Sun Sep 02, 2018 12:38 pmExample, say your salary is $100,000. You take home $80,000 but your marginal rate is 35%. If inflation is 2%, you need $80,000 = $81,600 to maintain your same standard of living. You will need an absolute raise of $1,600/.65 = $2461. That is a raise of 2.46%, which is precisely the amount that I specified.
No, because tax brackets are indexed to inflation. If you get a 2% raise and the tax brackets increase by 2%, you will have a 2% increase in your tax and a 2% increase in your take-home pay, so you will keep your purchasing power.B4Xt3r wrote: ↑Sun Sep 02, 2018 10:40 amHi All,
I am seeking a double check as to whether or not I am understanding the following correctly.
If my pay is to not take a real cut, then I need to receive a nominal raise of 2%/0.65 = 3.07%?
- Let's assume that CPI-U is 2%
- Let's assume that the total tax I pay on my next dollar is 35%
I'll make up some numbers to make the math easier.
OK. I think I understand the math that you did now. Doesn't this directly contradict the conclusion made above that the raise depends on the both the marginal and effective tax rates? If so, our mistake was assuming that the marginal and effective tax rates were independent of inflation, which is not true since the brackets themselves are indexed to inflation.grabiner wrote: ↑Mon Sep 03, 2018 6:20 pmI'll make up some numbers to make the math easier.
Suppose that the standard deduction is $20,000, and you then pay 10% tax on taxable income up to $10,000, and 15% tax on the amount from $10,000 to $70,000, and 25% tax on the amount over $70,000. If your income is $100,000, your taxable income is $80,000, and you will pay 10% tax on $10,000, and 15% tax on $60,000, and 25% tax on the last $10,000, for a total tax bill of $12,500. Your after-tax income is $87,500.
The next year, inflation is 5%, and you get a raise to $105,000. The new standard deduction is $21,000, and the 10% tax bracket applies to taxable income up to $10,500, and the 15% tax bracket applies to taxable income between $10,500 and $73,500, and the 25% tax bracket applies to the amount over $73,500. Your taxable income is $84,000, and you pay 10% tax on $10,500, and 15% tax on $63,000, and 25% tax on the last $10,500. You pay 5% more tax in each bracket, so your total tax bill increases by 5% to $13,125. Your after-tax income is $91,875, which is 5% higher than the previous year.
Yes, that was the mistake.B4Xt3r wrote: ↑Tue Sep 04, 2018 6:42 amOK. I think I understand the math that you did now. Doesn't this directly contradict the conclusion made above that the raise depends on the both the marginal and effective tax rates? If so, our mistake was assuming that the marginal and effective tax rates were independent of inflation, which is not true since the brackets themselves are indexed to inflation.grabiner wrote: ↑Mon Sep 03, 2018 6:20 pmI'll make up some numbers to make the math easier.
Suppose that the standard deduction is $20,000, and you then pay 10% tax on taxable income up to $10,000, and 15% tax on the amount from $10,000 to $70,000, and 25% tax on the amount over $70,000. If your income is $100,000, your taxable income is $80,000, and you will pay 10% tax on $10,000, and 15% tax on $60,000, and 25% tax on the last $10,000, for a total tax bill of $12,500. Your after-tax income is $87,500.
The next year, inflation is 5%, and you get a raise to $105,000. The new standard deduction is $21,000, and the 10% tax bracket applies to taxable income up to $10,500, and the 15% tax bracket applies to taxable income between $10,500 and $73,500, and the 25% tax bracket applies to the amount over $73,500. Your taxable income is $84,000, and you pay 10% tax on $10,500, and 15% tax on $63,000, and 25% tax on the last $10,500. You pay 5% more tax in each bracket, so your total tax bill increases by 5% to $13,125. Your after-tax income is $91,875, which is 5% higher than the previous year.