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On the design of self-financed Prime d’Activité reforms

Felix J. Bierbrauer, Pierre Boyer, Emanuel Hansen, Adrien Vallette
January 2024
This note highlights that a test function can be used to identify potential inefficiencies in a given Socio-fiscal system / tax-and-transfer system. The authors apply this function to the French context of the 2019 reform of the activity allowance, using the specific example of single parents with one child to illustrate their point. They then demonstrate the possibility of designing and implementing self-financing reforms.
Reference IPP Policy Brief No. 104

Quote this publication

Bierbrauer, Felix J., Boyer, Pierre C., Hansen, Emanuel, Vallette, Adrien (2024). ‘What are the options for self-financing reforms to the activity allowance?’, IPP Policy Brief, No. 104. Institut des politiques publiques (IPP).
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Presentation

Income supplements such as the activity bonus have become a defining feature of the tax and transfer systems in OECD countries. This reform forms part of a €10 billion plan aimed at improving the purchasing power of the working poor and the middle class, introduced in response to the Gilets jaunes / yellow vests movement. This analysis highlights two key findings.

On the one hand, inefficiencies existed prior to the 2019 reform, which means that a self-financing reform was possible. On the other hand, the 2019 reform was not self-financing because adopting a self-financing model would have required focusing on a narrower income bracket than that chosen in 2019, as the reform pursued other objectives.

Key Results

  • Since the introduction of the EITC in the United States in 1975, in-work income support schemes have expanded significantly across OECD countries. In 2020, at least 16 OECD countries had implemented a programme of this kind.
  • According to the theory of optimal taxation, a socio-fiscal system / tax-and-transfer system is inefficient when there is scope for self-financing tax reforms – that is, reforms that do not harm anyone and help at least one household.
  • Applying this approach to the French socio-fiscal system / tax-and-transfer system in 2018, focusing on the case of single parents with one child, shows that certain inefficiencies were present prior to the 2019 reform: these are found around annual gross salaries of 23,000 and 28,000 euros. The 2019 reform, by correcting these inefficiencies, could have been self-financing.
  • However, this was not the case: adopting a self-financing model would have required focusing on a narrower income bracket (between approximately 22,000 and 30,000 euros of gross annual salary) than that chosen in 2019 (approximately between €6,000 and €27,500 gross annual salary), as the reform pursued other objectives.
  • The code applied here retrospectively is available as open source and can be used to analyse other similar reforms, past or future.
Last modified: July 31, 2026