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Taxation. Inflation-indexed taxes: who will be the winners… and the losers?

Taxation.  Inflation-indexed taxes: who will be the winners… and the losers?
Written by madishthestylebar

The Minister of Economy and Finance Bruno Le Maire firmly confirmed, this Wednesday on BFM-TV and RMC, that the French will not pay more taxes because of inflation:

It is out of the question that employees pay more income tax or fall into the income tax scale because of inflation

Bruno Le Maire, Wednesday

The simple application of the rule

“We are going to index the income tax scale to inflation to avoid [que] people (…) switch to income tax or an additional slice ”due to a salary increase, insisted Bruno Le Maire.

A firm decision in appearance which is not really one: the indexation of the scale on inflation is the rule. And this since 1969, with the exception of 2012 and 2013, years marked by low inflation.

Thus, no French whose employer would have increased the salary to counter inflation will pay more taxes simply because of this revaluation, according to the Minister of the Economy.

Winners…

With inflation above 5% over twelve months, de-indexation could have been costly for taxpayers: a single person without children earning €26,065 in 2021 will have to pay €1,325 in income tax in 2022. Without indexation but with an increase in salary of 5%, he would receive €27,368 in 2022 and pay €1,512 in taxes in 2023, according to the Bercy simulator. Either a salary that covers inflation, but a “loss” of 187 euros on the tax side, all the higher as this taxpayer would reach the third marginal tax bracket…

It is worse at the bottom of the scale of taxable wages: without indexation, a worker earning €18,000 in 2021 and €18,900 (+5%) in 2022 would see his tax soar by 80%, from €164 to €294. In these two cases, indexation helps maintain purchasing power.

And those who are not increased, or not enough? Those will be able – a little – to console themselves with a lower tax: the tax to be paid for the same income of 18,225 € in 2021 and in 2022 will drop from 880 to 823 € (-7%). Not enough to offset inflation, but at least no double jeopardy. Same thing for those who would see their income fall: their tax will fall more sharply with indexation than without.

Finally, the lucky ones who will benefit from a salary increase higher than inflation will be doubly winners, with increased purchasing power and a more limited tax increase than in the event of deindexation. In 2022, they are not so rare, especially in sectors that are struggling to recruit (industry, hotels and restaurants, transport, health, etc.).

… and only one (big) loser

A win-win plan? Almost: in all cases, indexation to inflation will allow wage-earners and taxpayers to cushion, at worst, the effects of inflation, and at best to offset them. This is all the more important since many rights and social benefits are calculated according to the reference tax income.

All on condition that the State plays the game and applies, as it seems to promise, the real rate of inflation to the future income tax scale 2022.

The State, precisely, will be the big loser of the system: with the worst level of inflation for 40 years, the administration must both spend more to correct the effects and prepare to earn less on the fiscal level. The financial stakes, after two years of a pandemic that costs public money to say the least, are enormous. But there is no question, assures Bruno Le Maire, of going back on his desire to lower taxes: in the middle of the legislative campaign, he took the opportunity to recall that since 2017, taxes have fallen by 52 billion euros (26 for households , as much for companies). But “at the same time”, public spending exploded…

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