Related (but different): I'm wondering how much inflation will shift tax payers into higher brackets and increase the overall income for the government from those taxes.
You probably know this already, but I thought I'd pass on a correction to what is a common misconception. If you start making more money and end up in a higher tax bracket, only the amount of income in the new tax bracket is taxed at the higher rate, not the whole income.
For example: Pretend you currently make $75,000/yr and the next tax bracket is at $80,000. And you get a nice raise to make your salary $85,000 this year. Only $5,000 of your new income (the amount "above the next tax bracket") will be charged at the higher rate.
Yes - the caveat here is that if the raise is due to inflation then your real post-tax salary can go down.
(i.e. For an absurd example - suppose inflation is 100%. Last year you made 50K, this year you make 100K, which is the same in real terms (after inflation)). However, you will pay more of that 100K in tax than you would have last year, so your real income will decrease.
This tax drag can also happen for investments. If your investment goes up 100% and inflation is also 100%, you pay tax on the inflated nominal value of your investment even though the real value has not changed. Long term capital gains taxes are one way to reduce the impact of this - but they don't eliminate it altogether.
Tax brackets are usually (but not always) inflation-indexed to avoid this effect.
> You probably know this already, but I thought I'd pass on a correction to what is a common misconception. If you start making more money and end up in a higher tax bracket, only the amount of income in the new tax bracket is taxed at the higher rate, not the whole income.
Oh, for sure. But that money that moves into those brackets will be taxed higher.
You don’t need to change brackets: the incremental money will always be taxed at a higher rate that the average you were paying and the average will go up.
