Winners and Losers. An Assessment of the Hungarian Flat Tax Reform with Microsimulation

Abstract

In our paper, we have used a database of tax returns from 2011 to assess how the tax reform, implemented in personal income taxation between 2010 and 2013, affected the tax burden of certain social groups and what implications the reforms had on the public finances. Our research follows the principles of positive economics using a static microsimulation model. Our findings reveal that the tax reform reduced government revenues by an annual total of HUF 444 billion. 74 per cent of this amount increased the net income of childless taxpayers in the top two income deciles. Although 63 per cent of the taxpayers with three or more dependent children are winners of the tax reform, in the bottom six income deciles tax liabilities of taxpayers with three or more children have not decreased markedly. Overall, we can conclude that it was income rather than the number of children which primarily affected the tax liabilities of private persons after the implementation of the tax reform. Reducing the tax rate to 9 per cent would result in a further 44 per cent decrease of budget revenues from personal income tax, which – on the basis of the 2011 data – would mean a loss of an additional HUF 522 billion of tax revenues on an annual basis.

Keywords: personal income tax, microsimulation, budget, redistribution, flat tax

JEL Classification: H23, H24, I38, D31