Mid-term Effects of the Flat Rate Personal Income Tax in Hungary

Bartha, Zoltán (2014): Mid-term Effects of the Flat Rate Personal Income Tax in Hungary. Published in: Humanities and Social Sciences , Vol. 19, No. 3/2014 (2014): pp. 25-42.

Abstract

The objective of the paper is to examine whether the advantages and disadvantages mentioned in the literature of the flat rate income tax could be observed in Hungary. Personal income tax data provided by the Hungarian National Tax and Customs Administration was used to check the arguments. It was found that the flat tax indeed favours richer taxpayers, and because of the family tax credits, it heavily favours families with children. Tax revenues declined as tax rates were cut, while the GDP growth rate was close to stagnant. Both of these developments go against the expectations of the flat tax supporters, although it has to be mentioned that the changes were made in the midst of a European- and world-wide depression, which could have distorted the pure effects of the new tax code. Although in many countries the flat rate tax was a positive signal for investors boosting foreign direct investments, the Hungarian government introduced extra taxes on some of the transnational companies in order to balance the budget (and compensate for the lost personal income tax revenues), which meant that there was a decline in the mood of the investors. There is some indication that some illegal activities are shifted to the legal domain: the ratio of those tax reporters who earned an annual income of HUF 2 million or higher has gone from 62.5% to 66.6% in the period of 2010-12.

• Item Type: MPRA Paper
• Language: English
• Keywords: flat rate income tax, Hungary, tax statistics, income distribution
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E64 - Incomes Policy ; Price Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies

References

Basham, P. – Mitchell, D., Lessons from Abroad — Flat Tax in Practice, in: Clemens, J. (ed.): The Impact and Cost of Taxation in Canada: the case for flat tax reform, The Fraser Institute, 2008, pp. 103-143.

Bozsik, S., Main Changes in European Tax Policies between 2007 and 2011, Theory Methodology Practice, 9/2, 2013, pp. 29-34.

Brook, A-M. – Leibfritz, W., Slovakia’s Introduction of the Flat Tax as Part of Wider Economic Reforms, OECD Working Papers nr. 448, 2005.

Erdős, T., Egykulcsos jövedelemadó és gazdasági növekedés, Közgazdasági Szemle, LIX. February, 2012, pp. 109-138.

Government Regulation nr. 299/2011 (December 22) on the expected rate of wage increase, 2011. http://jogszabalykereso.mhk.hu/cgi_bin/njt_doc.cgi?docid=143213.580592

Hall, R. E. – Rabushka, A, The Flat Tax, Stanford: Hoover Institute, 1985.

Hettich, W. – Winer, S. L., Democratic Choice and Taxation: A Theoretical and Empirical Analysis, Cambridge University Press, 2005

Kuznets, S., Economic Growth and Income Inequality, The American Economic Review, 45/1., March, 1955, pp. 1-28.

Mirrlees, J. A., An Exploration in the Theory of Optimal Income Taxation, in Arrow, K. J. and Intrilligator, M. D. (eds.), Handbook of Mathematical Economics, 1986.

Papp, Zs., Adóemelés Magyarországon - így fizet többet a lakosság. Napi Gzadaság, 28.01.2014.

Piketty, T., Capital in the Twenty-First Century, Harvard University Press, 2014.

Romer, C. D. - Romer, D. H., The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, American Economic Review, 100/3, 2010, pp. 763-801.

Slonimczyk, F., The effect of taxation on informal employment: evidence from the Russian flat tax reform, in: Lehmann, H. – Tatsiramos, K. (eds.) Informal Employment in Emerging and Transition Economies (Research in Labor Economics, Volume 34), Emerald Group Publishing Limited, 2012, pp.55-99.

Wanniski, J., The Way the World Works, Fourth Edition, Regnery Publishing Inc, 1998.

Winer, S. L. – Hettich, W., What Is Missed If We Leave Out Collective Choice in the Analysis of Taxation, National Tax Journal 52/2, 1998, pp. 373–89.