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

Earning subsidies or in-work benefit programs have become a defining feature of OECD countries' tax and transfer programs. The authors show that a test function can be used to identify potential inefficiencies in a given socio-fiscal system. These inefficiencies can be addressed by reforms using earning subsidies This approach also makes it possible to assess whether a given reform is self-financing. The authors apply this function in the French context of the 2019 reform of the prime d'activité, using the specific example of single people with one child as an illustration. The reform is part of a €10 billion plan to improve the purchasing power of the working poor and middle class, introduced in response to the Yellow Vests movement. This application shows two results. On the one hand, inefficiencies existed before the 2019 reform, which means that a self-financed reform was possible. On the other hand, the 2019 reform was not, because relying on a self-financing model would have required focusing on a narrower range of revenues than the one chosen in 2019, as the reform pursued other objectives. The methodology introduced in this note could be applied to other situations, making it possible to assess whether there are still inefficiencies in the current socio-fiscal system. This is the work currently underway in Germany, with a report to be presented to the Ministry of Labor at the end of 2023 as part of coalition agreements to reform benefits for low-income households.