<%> Inflation and break-even pay rises

RMGC11

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With inflation approaching 4% - for someone that is paid at the higher marginal rate of income tax to break even after inflation (i.e.: not be paid less than the previous year), their annual pay rise should be double the inflation rate (8%). That would result in a net pay increase of (a bit less than) 4% - which would cover the inflation rate.

Is that correct or not? If so - I imagine a lot of people will see their salaries drop in inflation-adjusted terms.
 
That's not quite correct. If tax credits, bands, USC bands all increase in line with inflation, then an inflation adjusted salary increase leaves you exactly as well off in after tax purchasing power.

If there's any lesser indexation of bands and credits, then, because ALL your pay increase suffers the marginal rate of tax and trimmings, you would indeed need an pay increase ahead of inflation to keep up. But not double, something in between. You can do the exact calculations to figure out exactly what that would be. It'll be different at differing income levels.
 
Indeed, I've confirmed the above with the following example:

Let's assume only one tax band of 50% exists (and there are no other taxes outside that), that kicks in at 40k and assume a yearly salary of 100k.

Year 1 net income: 40k untaxed + 60k * 50% => 70k net income
[...] 5% inflation occurs, 5% tax band indexation - to tax kicks in at 42k and a 5% pay increase to 105k [...]
Year 2 net income: 40*1.05 = 42k untaxed + 63k * 50% = 31.5k => 73.5K (the value of year 1 money with 5% inflation is exactly 73.5k).


Historically, do tax bands and credits always get indexed for inflation?
 
Given my massive income I'd have to see a pay increase of about 7.8% to break even. :D ;)
 
Historically, do tax bands and credits always get indexed for inflation?
No. It's a discretionary policy

There is also the inflation as expected on Budget day and the inflation outturn.

Inflation is volatile in Ireland and there have been big divergences in the past.
 
Inflation is not (so far) as a bad as it looks. Prices dropped a lot in 2020 as energy costs collapsed, and the last few months is a rebound from that.

All items HICP for Ireland in September is only 2.5% above where it was in September 2019, so an annual rate of just over 1% over the last two years.

Average hourly earnings on the other hand are still up 10% in the last 2 years!

Yes, Covid has done a few strange things to how these numbers are calculated. But in average terms workers are much better off in real terms than before Covid.
 
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@NoRegretsCoyote - interesting perspective.

To the original question - if tax bands aren't indexed - that means a pay raise needs to be above inflation rate just to "stand still".
It would be great if someone would develop a simple calculator website to use - that takes into account inflation and tax bands indexing - to calculate what inflation and tax-band adjusted "same pay" from year to the other would look like.


At what % rate of inflation would you start to get worried? :)
 
It would be great if someone would develop a simple calculator website to use - that takes into account inflation and tax bands indexing - to calculate what inflation and tax-band adjusted "same pay" from year to the other would look like.
Ex ante or ex post? Inflation often over- and under-shoots Budget-day expectations. You have to look at these things over a number of years.

"Fiscal drag" - when you have inflation but don't index bands and credits - can be a handy way of rising taxes when you don't want to seem like you're doing so
 
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