The proposed payroll tax reductions and their possible implications

Mihály Varga said on Monday he was weighing a possible reduction in payroll taxes so that the current employment problems in Hungary could be solved, online financial journal portfolio.hu reports.

Reacting to the proposal, the national business association VOSZ said that as Hungarian entrepreneurs constantly had to face labour shortage, they would support the lowering of payroll taxes.

Péter Virovácz, macroeconomic analyst of ING Bank, had already raised the possibility of payroll reduction but, at the same time, warned that a notable reduction in payroll burdens might be difficult to implement. He emphasised that in case the budgetary resources were decreased, the education, pension, and health-care systems might have to be compromised.

According to Virovácz, a 1 % reduction of the social contributions would lead to HUF 54 billion (EUR 172.4 million) deficit to the budget, meaning that if the social contributions were reduced from 27 % to 20 %, some HUF 415 billion (EUR 1324.75 million) would be missing.

Although the exact amount of the possible tax cut is yet to be determined, portfolio.hu has listed some of its possible implications.

First, here are the contributions that are currently deduced from the wages in Hungary.

The distribution of social security contributions payable by the employee: pension contribution (10 %), in-kind health insurance contribution (4 %), in cash health insurance contribution (3 %), labour market contribution (1.5 %).

The distribution of social security contributions payable by the employer: social security contribution (27 %), vocational training levy (1.5 %).

In order to illustrate how these contributions affect the amount of wage workers eventually receive, the financial journal has come up with a simplified example. The site writes that the average gross wage is currently HUF 257 700 (EUR 823) in Hungary, from which the employees receive HUF 171 000 (EUR 545) as their net wage; however, this costs the employers no less than HUF 331 145 (EUR 1 057). In other words, the employees receive only 51.8 % of the entire labour cost, while 48.2 % of it is collected by the government in the form of different taxes and contributions.

If payroll burdens on net wages in the international context are taken into account, Hungary is ranked fourth among other EU countries, the journal claims.

But would it all make a real difference?

An important question is how the employers and employees would react to the planned changes. In practice, the payroll tax reductions would mean that the Hungarian government forgoes some of its revenues in favour of its employed citizens. However, the effects of the possible measures are not so unequivocal, as employers would have more options to choose from. They could either increase their own revenues, employ more workers for the same wages as they did before the payroll tax reductions, or raise the wages of their employees.

According to the financial journal, however, if there was a real labour shortage in Hungary, such payroll tax reductions would not make any difference at all because there would be no available labour force to fill open vacancies with.

But the website adds that there are some 640 00 currently unemployed people in Hungary, and that the reason that there is labour shortage despite such a high number of unemployed people is manifold.

• Some of the unemployed have a low level of willingness to work, which cannot be increased by raising wages.
• Public work programmes discourage people to enter the private sector, as the wages they earn are not much lower than the minimum wage.
• It is difficult for Hungarian employees to compete with wages that can be earner in Western countries ¬- the phenomenon that has become well known as “brain drain”.
• The labour market demand and supply exist in different ways across Hungary, while the workers’ mobility is scant.

The payroll tax reductions would most probably solve only the first two cases. Nevertheless, it remains unclear as to what extent would a possible wage rise increase the willingness to work of those groups.

All in all, it is of paramount importance to give answers to these questions, since hundreds of millions of forints are at stake.

edited by Gábor Hajnal

Source: http://www.portfolio.hu/