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.
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.
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.
"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
