Assessment of income distribution and a hypothetical flat tax reform in Hungary
AbstractThe paper presents evidence on the effects of taxes and benefits on household incomes in Hungary referring to the 2006 system and a hypothetical flat tax reform. For this, a microsimulation model is used, which is based on a matched sample of an income and a consumption survey and administrative tax records. The Hungarian budget receives more revenues from VAT than from PIT. This has major implications on equity, as while PIT is progressive, VAT is regressive, imposing a higher tax burden on low-income households. We highlight the importance of tax allowances. The absolute amount of total tax allowances tends to increase with income, and the share of allowances within total incomes is around 5-7% in all income groups, except the top fifth, where it declines. Targeting is thus inadequate, and it is especially so in case of child support. Family tax allowance reaches the bottom decile only to a limited extent. This is in sharp contrast with the universal child benefit, which is well targeted to the poorest. The second part explores the likely impact of the introduction of a flat tax, where VAT and PIT rates are set at 20%, and a tax free bracket for low incomes is kept. We show that a budget neutral solution would have a largely regressive effect, where 70% of the population would lose, with a minority on the top of the distribution gaining.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 7304.
Date of creation: 15 Jul 2007
Date of revision:
Tax-benefit microsimulation; redistribution; flat tax reform; Hungary;
Other versions of this item:
- Dï¿½ra Benedek & Orsolya Lelkes, 2008. "Assessment Of Income Distribution And A Hypothetical Flat Tax Reform In Hungary," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 173-186.
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- I38 - Health, Education, and Welfare - - Welfare and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
- C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General
This paper has been announced in the following NEP Reports:
- NEP-ACC-2008-03-01 (Accounting & Auditing)
- NEP-ALL-2008-03-01 (All new papers)
- NEP-CMP-2008-03-01 (Computational Economics)
- NEP-LTV-2008-03-01 (Unemployment, Inequality & Poverty)
- NEP-PBE-2008-03-01 (Public Economics)
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