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Indexing the income tax scale to inflation: implications for tax rates and redistribution

Brice Fabre, Sylvain Duchesne, Lola Josseran
January 2024
Indexing the income tax scale to inflation is the key measure in the 2024 Finance Bill as regards household taxation. This measure represents a reduction in tax of 6 billion euros compared with a scenario where the tax scales remained unchanged.
Reference IPP Policy Brief No. 103

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Indexing the income tax scale to inflation: implications for tax rates and redistribution. IPP Policy Brief No. 103. 1 January 2024. To be reviewed
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Presentation

Against the current backdrop of high inflation, the main overarching measure in the 2024 Finance Act relating to income tax (IR) is the indexation of the tax scale to inflation. This note provides a general overview of the implications of indexing to inflation – a process carried out almost every year in France – for the average household tax rate and the redistribution effect of the tax. Although such indexation reduces tax rates compared with a scenario where the tax scale remained unchanged, during periods of economic growth it has the effect of increasing tax rates and overall redistribution, whilst reducing the progressivity of the tax. To assess the effects of an indexation measure, it is important to use a counterfactual scenario with unchanged tax rates, in which the tax scale would be adjusted at the same rate as incomes.

Nevertheless, high inflation makes the issue of adjusting incomes to keep pace with inflation a very pressing one. The authors examine private-sector wages and show that, from 2021 to June 2023, wages did not keep pace with inflation across the entire distribution of wage income. If this trend were to be confirmed by data covering the whole of 2023, the indexation measure would therefore lead to a temporary reduction in tax rates.

Key Results

  • As incomes rose faster than prices over the long term, the average personal income tax rate between 1998 and 2020 would have increased by 20 per cent if the only changes made to the original tax scale had been to index it to inflation.
  • The tax rate would have risen for all hundredths of net taxable income, with the exception of those falling outside the taxable range. The proportion of non-taxable households would have been reduced, and the rise in the tax rate would have been smaller for the wealthiest 1 per cent of households.
  • Between 2021 and June 2023, the various centiles of annual earnings rose by between 6.1% and 8.7%, compared with cumulative inflation of 10.2%.
  • If this slower rise in wages relative to prices were to be confirmed by data covering the whole of 2023, the indexation measure would lead to a temporary reduction in tax rates.
Last modified: July 21, 2026