What impact does a freeze on the income tax scale have?
Taxation
Purchase power
Author
The freezing of the income tax scale1 was recently mentioned as a potential avenue for reducing the deficit in a context of public finances that are more degraded than expected. Usually, the income tax scale is indexed to inflation or to changes in household income observed the previous year. This indexation aims to prevent the increase in income from leading to a more than proportional increase in taxpayers’ taxes. In fact, in recent years, the income tax scale has most often been indexed not to the evolution of income but to that of prices. This indexation of income tax thresholds to inflation resulted in an increase in the apparent income tax rate in a context where it grew more quickly than prices.
1 Understood here as the stability of marginal tax rates and the non-indexation of entry thresholds in the different tax brackets.
2 Since 2017, very dynamic financial income is no longer subject to income tax. They are mostly taxed under the single flat-rate levy (PFU). See: Madec P., “Attention: one PFU can hide another », OFCE Blog, September 2018
In 2024, we anticipate that income subject to income tax2 should increase by 4.1% for a consumer price index increasing by 2.2%. Therefore, indexing the income tax scale to inflation should result in an increase in tax revenue of around 2.6 billion euros. Using the Ines micro-simulation model, developed jointly by Insee, Drees and Cnaf, and the latest version of which simulates the socio-fiscal legislation of 2022, we simulate different scenarios of freezing, total or partial, of the income tax scale.