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The effect of income tax and rising inflation on fixed salary employees

The effect of income tax and rising inflation on fixed salary employees

By Josef Kefas Sheehama.

Prices have climbed so high it will take some time for them to come back down to earth. In other words, the uncomfortable inflation numbers of 2022 will likely stay with us well into the year 2023.

Technically speaking, when there is inflation, you have to spend more money to buy the same goods. Most everything in our lives will be impacted by inflation such as food, shelter, household items, clothing, transportation, health care, recreation, alcohol and more. If prices rise faster than salaries do, we may need to adjust to a different lifestyle than we were used to.

Those on a fixed income will be negatively impacted the most. Salaries play a vital role in motivating employees to exhibit and implement their unobservable skills in performing different tasks or jobs. Taxes are charges levied on the residents of a country by the government and are used for the general welfare of the public. A decrease in income tax leads to an increase in disposable income; but on the other hand it decreases government expenditures and vice versa. Tax revenue is an important component of government revenue but it also has a significant impact on the salary of employees and net salaries of workers. The extent to which taxes affect the pay or salaries of employees depends on the types and nature of taxes and its rates.

Inflation hurts poor people more than the richer as more of their income is spent on food items. If the income follows the higher earnings base, the employee tax will be high and if the employee’s earning falls in the lower income base, then he will pay lower income tax.

In many instances the employer cannot reduce the salaries of employees because of rise in tax rates. I will use practical examples to simplify and to enable the man in the street to understand this. Inflation won’t affect the amount you owe on your mortgage but it could impact the interest you pay. It’ll all depend on whether you have a fixed or a variable rate mortgage. If you have a fixed-rate mortgage, then you’re fine for now, until you need to renew. If you have a variable rate mortgage, however, you may find interest rates starting to rise sooner rather than later. The Bank of Namibia has already started to increase the benchmark rate and has signalled it plans to continue to increase it.

Furthermore, the income of a fixed salary person falls with the rise in prices of goods and services. Real income raises the standard of living, not the nominal income. Inflation affects the real salaries, which have a direct impact on income distribution and the level of poverty. Therefore, it seems possible that the fall in real salaries during high inflation is an equilibrium phenomenon, which means that real salaries adjust to the inflation with time.

Nevertheless, when inflation is rising, your salary probably won’t. Food prices are up, rent prices are up, and oil prices are so high. Yet it’s unlikely that salaries will rise correspondingly. Now it’s clear we’re going to have another year of inflation, and probably several more. However, these rates aren’t based on cost of living they’re based on existing demand. Employers have reason to be cautious before committing to inflation-based increases. Once they do this, employees will expect them to sustain the same salaries. Employers would rather not be in a situation where they can’t sustain an inflation salary.

Namibian consumers can beat the current high inflation rate by understanding their individual inflation baskets and taking control of the unique expenses that are driving up their cost of living.

An individual inflation basket represents the core goods and services that an individual usually spends their money on, compared to the official inflation basket, which represents the goods and services that the average Namibian spends their money on. So, everyone’s individual inflation basket is different, and the composition of your basket is driven by how you spend your money.

Consumers must understand where the increases are in their own inflation baskets to try and soften the impact inflation has on their standard of living. In Namibia, the poor and vulnerable are hit harder by inflation than consumers in the middle-income group. The lower income group’s inflation basket tends to be heavily skewed to transport, food and education, and any significant price rise in those elements has a much bigger impact on poor households. Similarly, there is a big difference between the inflation baskets of the middle and upper income groups. The goods in their inflation baskets include food, medical costs, rent and some transport.

Namibians must be mindful that there is a difference between good and bad debt. Bad debt typically comprises overspending on goods, services and experiences that are not a necessity for living. Conversely, a home loan that builds personal and generational wealth represents good debt. If you are going to borrow money, do so prudently. Consider which needs the debt or loan is going to address and if the objective you are borrowing for is going to serve you in future.

In conclusion, know the impact of income tax and inflation on your income. It is not enough that your gross income is high, what’s important is that your personal income is high enough to fulfil your needs and improve your living standard. Compare your increment with the inflation and income tax rates. Otherwise, you would not be able to know whether your increment added something to your life or was just enough to offset rising inflation.


About The Author

Guest Contributor

A Guest Contributor is any of a number of experts who contribute articles and columns under their own respective names. They are regarded as authorities in their disciplines, and their work is usually published with limited editing only. They may also contribute to other publications. - Ed.

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