Assessing the redistributive effects of income taxation in Hungary

We estimate that in Hungary, the bottom decile of taxpayers pay roughly 6-8 percentage points more tax on their income than those in the top decile.  This can be attributed to three main factors: the higher savings capacity of the wealthier, the high VAT rate and the flatness of the income tax.

There is nothing unusual in the fact that VAT is regressive (i.e. the richer pay less VAT relative to their income than the poorer): this is the case in most countries and the main reason behind is that the richer consume less (and save more) relative to their income. However, this effect is relatively strong in Hungary, where the VAT rate is high: compared to 21% on average in the EU, 20% in most of our neighbours it is 27% in Hungary. The Hungarian case is also special in that there is no element in the VAT system that would substantially offset the regressivity of consumption taxes.

Taxpayers without children are taxed at the same rate irrespective of their income, so that the state deducts the same proportion from the salaries of those earning very much and those earning very little. For taxpayers with children, the amount of income tax paid depends on the number of children and income, but this has little impact on the distribution of the overall tax burden. One reason for this is that only 23 percent of all taxpayers claim family tax credits, and the net value of all such credits is just under 2 percent of total consolidated income. Another reason is that the family tax credits favour higher income earners: in 2020, almost half of these credits went to the top third of taxpayers (even though since 2014 lower income earners can deduct the credit from their social security contributions). In HUF terms, the amount of the credit increases with income: taxpayers in the bottom decile claiming the family allowance receive an average of HUF 7,000 per month, while those in the top decile receive almost HUF 40,000.

The above lessons come from a detailed analysis of the redistributive effects of the Hungarian tax system using individual-level administrative databases that have not been available to researchers so far. Other results are presented in the non-technical summary (in English) and the details of the calculations are provided in the research report (in Hungarian).

BI was commissioned to carry out this research by the Polgár Foundation for Equal Opportunities.