Analysis of changes in the tax and transfer system with a behavioural microsimulation model

In this study, using a new microsimulation model, we estimate the long-term fiscal and labour market effects of the changes to the tax and transfer system which were passed into law in 2010 and which are currently planned. According to our results, if all of the currently planned measures are fully implemented, the level of GDP will be increased by over 5% over the long run, while employment will increase by about 1.5% (approx. 60,000 individuals). The estimated increase in employment is due exclusively to planned cuts in transfers. While changes to personal income tax may improve the incentives of high-income earners and thus have a stimulating effect on the economy, their effect on employment is negative due to the phasing out of the wage tax credit. These projections may change significantly if market perception of Hungary’s economic risk deteriorates. In such a case, an increase in the required return on capital may completely offset the stimulating effect of tax and transfer changes. The measures analysed also produce a substantial distributional effect. Changes to welfare benefits, as well as tax modifications, impose a burden primarily on low income households, while households with higher income generally benefit from the changes. Overall, income concentration rises from a level similar to that of Denmark or Austria to the level of Germany or Estonia, approximating the EU average.