I am trying to figure out how to compute the equivalent salary in a country
B given a salary in a country
A by taking into account purchasing power parity and tax rates in both countries. The computation I arrived at is the following, but I am not 100% confident that it is correct to do it this way:
s_A be the current salary in country
A, with a tax rate of
e be the exchange rate from
B. Let the purchasing power factor between
p (1 of
A's currency in
A buys you
g goods, while 1 of
A's currency after basic exchange rate conversion buys you
Given these numbers:
- Determine net pay
n_Aafter tax in country
n_A = s_A - (s_A * t_A).
- Determine corresponding amount of money
m_Bin currency of country
Bthrough simple exchange rate.
m_B = n_A * e
- Determine amount of money
m_B'in currency of country
Bthat has the same purchasing power in
m_B' = m_B + m_B * p
- Find amount
s_Bof salary in currency of
m_B'after applying the correct tax according to the laws in
Example. Say we have a salary of 100,000 EUR per annum in Germany, and we want to know the corresponding relative salary in Norway. I follow the algorithm from above:
- 100,000 EUR salary in GER after tax = 57,000 EUR due to 43% tax rate
- 57,000 EUR = 581,400 NOK base exchange rate
- 57,000 EUR in GER purchasing power = 581,400 NOK + (581,400 NOK * 24%) = 720,100 NOK in NO purchasing power since a Euro only has 76% of its purchasing power in Norway.
- 720,100 NOK requires 1,050,000 NOK salary due to 33.4% tax rate
Hence, the equivalent relative salary for a 100,000 EUR salary in Germany would be a salary of 1,050,000 NOK in Norway.
Is this calculation valid?