In 2025, approximately 400,000 households will be newly subject to income tax, while around 18 million will face increased tax burdens due to the failure to pass a budget that included inflation adjustments for tax brackets. Budget Minister Laurent Saint-Martin warned that without passing the budget, automatic indexing will be frozen, leading to more taxpayers and higher taxes for many. A special law may be considered to address these issues if the budget is not ratified by year-end.
Impact of the 2025 Budget Proposal on Income Tax
In 2025, an estimated 400,000 additional households will find themselves subject to income tax, while around 18 million households will see an increase in their tax burden. This situation arises from the failure to pass the proposed budget for 2025, which included crucial adjustments aimed at indexing the income tax brackets to inflation.
The administration of Michel Barnier faced a setback on Wednesday evening due to a motion of censure that was supported by left-wing deputies and members of the National Rally. This development ushers in a period fraught with both political and financial uncertainty.
During interviews on France 2 and TF1, Barnier addressed the consequences of not passing the 2025 budget, stating, “If the budget proposal is rejected, nearly 18 million French citizens will experience an increase in their income tax, while others will be taxed for the first time due to the absence of necessary re-indexation in the finance law.” He warned that this outcome appears unavoidable.
Additionally, Budget Minister Laurent Saint-Martin indicated that around 380,000 more households would automatically enter the income tax system if the budget proposal were to fail.
The Ministry of Finance is relying on a report from the French Observatory of Economic Conjunctures (OFCE), which details the effects of freezing the income tax scale that was released earlier this month.
Key Provisions of the Budget Proposal
The proposed 2025 finance bill (PLF) aimed to adjust the six income tax brackets by 2% in order to shield taxpayers from the detrimental effects of inflation.
The government noted, “The indexing of the income tax scale to inflation, excluding tobacco, preserves a consistent level of taxation in real terms.” The indexing could be based on the previous year’s household income trends or, as has been the case in recent years, directly tied to inflation, according to the OFCE.
“Typically, the tax scale undergoes annual indexing,” explained Pierre Madec, an economist with the OFCE and author of the study. “Without an approved budget, automatic indexing is suspended, leaving us with the previous year’s thresholds, effectively freezing the scale.”
Will More Households Be Taxed?
Yes, the total freeze of the tax scale in 2025 could result in 380,000 new households becoming taxable when they otherwise would have been exempt had indexing been applied.
In this scenario, the threshold for the second tax bracket, where households start paying taxes at a rate of 11%, remains unchanged from 2024.
According to Pierre Madec, these additional taxpayers are individuals who were on the cusp of the first bracket, which allows for no tax payments, and are now crossing into a taxable status.
Will Everyone Experience Tax Increases?
Not everyone, but many will. The OFCE estimates that approximately 17.6 million households could see their income tax rise if the scale remains frozen in 2025. This figure encompasses the 380,000 new taxable households.
Madec elaborated, “For households experiencing income growth, they may either enter the tax system, face higher taxes within the same bracket, or be pushed into a higher tax bracket. A thawing of the scale could mitigate these increases.” The OFCE predicts that taxable incomes will grow by 4.1% in 2024.
It’s important to note that even with an indexed income tax scale, certain households would still enter the tax system or see their taxes increase if their income growth outpaces inflation, as incomes are anticipated to rise more significantly than inflation in 2024.
What Would a Special Law Entail?
Should the budget texts not be ratified by December 31, lawmakers will need to consider a “special law” to maintain the government’s operations.
According to the Budget Ministry, any adjustment of the income tax scale under a special law poses a “risk of unconstitutionality,” given that such laws typically cannot introduce new tax provisions beyond what was established in the previous finance law. However, this could lead to constitutional discussions.
Eric Coquerel, president of the National Assembly’s Finance Committee, stated in an interview with Les Echos that modifying the income tax scale is entirely feasible within the framework of a potential special law.