OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Work Incentives and Recent Reforms of the Tax and Benefit System in Hungary

Reducing the extent of inactivity and promoting labour supply is essential to foster labour market outcomes in Hungary in the medium term. Notwithstanding specific factors linked to education, the pension system or family and disability policies, financial disincentives play an important role in this regard. This paper describes the impact of recent reforms of the tax and benefit system in Hungary on some indicators of financial incentives to enter the labour market derived from OECD tax and benefit models. While personal income taxes were cut and the system of tax allowances for families became more generous other welfare benefits were reduced or phased out, which causes significant changes in the incentives for workers, inactive or unemployed people. Between 2010 and 2012, the average tax wedge dropped for high-income earners and/or families with two children, but increased mainly for individuals without children and income below the 80th percentile, which was partly mitigated by the implementation of compensation schemes. However, there is still a large gap in the average tax wedge with the OECD average and regional peers, notably driven by high social security contributions. The implicit tax on returning to work from unemployment remains relatively high and increased below the average wage for most family types. However, it was cut above that level. The absolute level of the implicit tax on returning to work from inactivity is significantly lower notably following across-the-board cuts for lone parents and one-earner married couples with two children, somewhat offset by increases below the average wage for families without children.


Keywords: benefit system, Hungary, implicit tax, labour supply, replacement rate, tax wedge, effective tax rate
JEL: J38: Labor and Demographic Economics / Wages, Compensation, and Labor Costs / Wages, Compensation, and Labor Costs: Public Policy; H23: Public Economics / Taxation, Subsidies, and Revenue / Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies; H24: Public Economics / Taxation, Subsidies, and Revenue / Personal Income and Other Nonbusiness Taxes and Subsidies; J65: Labor and Demographic Economics / Mobility, Unemployment, Vacancies, and Immigrant Workers / Unemployment Insurance; Severance Pay; Plant Closings; J22: Labor and Demographic Economics / Demand and Supply of Labor / Time Allocation and Labor Supply; D63: Microeconomics / Welfare Economics / Equity, Justice, Inequality, and Other Normative Criteria and Measurement
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error