The seminar will be held in the Visitor Centre at 3 pm.
Benczúr Péter
(MNB-CEU)
Abstract
Many Central and Eastern European countries are adopting flat tax schemes in order to boost their economies and tax revenues. Though there are signs that some countries do manage to improve on both fronts, it is in general hard to distinguish the behavioral response to tax changes from the effect of increased tax enforcement. This paper addresses this gap by estimating the elasticity of taxable income in Hungary, one of the outliers in terms of not having a flat tax scheme. We analyze taxpayer behavior after the 2005 change in the personal income tax schedule using a Tax and Financial Control Office two years panel dataset between 2004 and 2005 with roughly 215,000 taxpayers. Our results suggest a relatively small but highly significant tax price elasticity of about 0.06 for the population earning above the minimum wage (around 70% of all taxpayers). This number increases to around 0.3 when we focus on the upper 20% of the income distribution, with some income groups exhibiting even higher elasticities (0.45). We first demonstrate that such an elasticity substantially modifies the response of government revenues to the 2004-2005 tax changes, and then quantify the impact of a flat income tax scheme. Our calculations indicate that though there is room for a parallel improvement of budget revenues (of around 2.4%) and after-tax income (around 1.4%), such a reform involves important adverse changes in income inequality, and its burden falls mostly on lower-middle income taxpayers.
JEL codes: H24, H31
Keywords: elasticity of taxable income, tax reform, behavioral response, revenue estimation, flat tax