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Quantifying the impact of a personal income tax reform on tax revenues, growth and inequality in Hungary
This paper analyses the impact of introducing progressivity into the Hungarian personal income tax (PIT) system on tax revenues, growth and inequality. This reform would strengthen labour market participation by reducing the labour tax wedge for low-income earners and improve the responsiveness of tax revenues to economic growth. Using a framework combining static effects and behavioural responses along both the extensive margin (employment effects) and the intensive margin (substitution and income effects), and accounting for tax buoyancy, the analysis shows that the reform becomes revenue-enhancing once these dynamic effects are considered. Aligning capital income taxation more closely with labour taxation further strengthens tax revenues. The comprehensive reform would raise the tax-to-GDP ratio by 0.4-0.8pp by 2040, depending on the specific reform scenario and assumed parameters. By stimulating employment among low- and middle-income workers and despite moderate disincentives for higher-income earners, the reform would boost potential GDP in all scenarios. The reform would also significantly reduce income inequality and strengthen redistribution.
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