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Bracket creep

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What is “bracket creep”?
It’s safe to assume that everybody likes a pay rise. But tax authorities may be just as happy. Why? The answer is: bracket creep – a tax rise that takes you unawares.

Earn more, pay more tax

Austria has a progressive tax system. If you earn more, you pay more tax than someone who earns less. This sounds fair. But let’s take a closer look. There are six tax brackets:
 
income in € Tax rate
Less than 13,308 0 %
13.308 - 21.617 20 %
21.617 - 35.836 30 %
35.836 - 60.000 40 %
69.166 - 103.072 48 %
103.072 - 1.000.000 50 %
more than 1.000.000 55 %
Source: BMF

Calculating income tax

Example
Let’s say Anna earns € 23,000 per year. Of this gross income, € 11,000 is tax-free. Anna has to pay income tax on the remaining € 12,000, with two different tax rates applicable in this case. As a result, she actually receives a net income € 19,975 per year from her employer. The difference of € 3,025 goes to the finance ministry as income tax. This is how the amount of tax is calculated: 20 % of € 7.000 = € 1.400 32,5 % of € 5.000 = € 1.625 Total income tax = € 3.025

“Tax on inflation”

Gross wages and salaries are usually adjusted for inflation the rate at which prices increase every year. But the additional income thus earned is subject to the highest applicable tax rate in each case. In Anna’s case, this is 32,5%. So roughly one third of the pay rise gets deducted again. Because the additional earnings are always taxed at the highest applicable rate, the increase that makes it into your account is virtually always lower than the inflation rate. But prices are going up nevertheless, so your income may buy you less than before, despite the pay rise.

Income brackets remain the same: This is “bracket creep”

While prices are on the rise all around, the income brackets that define tax rates remain the same. This is not quite reasonable. If the brackets were moved up, along with inflation, just as the cost of rent, food and other goods is rising, then wages and salaries would at least remain the same in real terms. Which means that when your income is adjusted for inflation, you could afford at least as much as before.
Read more
In addition to the video, Agenda Austria has also published an article that explains bracket creep in greater detail and describes how the ministry of finance benefits from not eliminating bracket creep.

Links:

FAQ

Cold progression is a hidden tax increase: if your salary rises due to inflation, you slide into a higher tax bracket – even though you can’t afford more in real terms.
A progressive tax rate applies in Austria: the more you earn, the higher the tax rate. If you receive a salary increase, the additional income is often taxed at a higher rate.
This means that higher incomes are taxed more heavily. There are several tax brackets – from 0% to 55% – depending on the level of income.
Because the tax thresholds are not automatically adjusted for inflation. As a result, the tax burden increases even though your real income remains the same or even decreases.
You get less net than you expect from the salary increase – and often can’t afford more despite the higher gross amount.

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