Flat Tax Spurs Growth, Tisza Party Proposes Progressive Overhaul

Hungary introduced a flat-rate personal income tax in 2011, marking a significant simplification of the tax system and reducing the overall tax burden on labor. The move encouraged higher workforce participation and contributed to a 20% increase in employment between 2010 and 2024. Today, Hungary ranks among the top EU countries for employment rate.

The flat tax system also helped curb tax evasion and grey-market employment, while improving the competitiveness of the Hungarian economy. Compared to the previous progressive (multi-bracket) tax system, the flat tax created stronger labor market incentives, contributing to dynamic GDP growth. In contrast, the earlier system discouraged labor expansion and increased the risk of emigration—particularly among higher-income earners.

Under Hungary’s flat-rate system, all personal income is taxed at the same percentage, regardless of income level or source. This replaced the earlier progressive model, where higher incomes were subject to higher tax rates.

The reform came into effect on January 1, 2011, initially setting the rate at 16%, later reduced to 15% in 2016. Targeted tax exemptions and discounts were also introduced for specific groups, such as:

Employees under the age of 25,
Mothers raising four or more children (with planned extension to mothers of three and two children starting in October),
Newlyweds,
Mothers under 30,
And families eligible for family tax credits.

The main goal was to encourage workforce participation by lowering the tax burden on income, especially for high earners. The marginal tax wedge—the tax burden on each additional unit of income—dropped across almost all income groups. This, in turn, reduced incentives for undeclared work or tax avoidance.

Combined with other pro-labor policies like the public works program and Job Protection Action Plan, the flat tax helped more individuals move from inactivity to employment. As data supports from Hungary’s Central Statistical Office (KSH), between 2010 and 2024:

The number of employed persons aged 15–74 increased by over 800,000, or 20%.
The employment rate in this group rose from 51% to 65.1%.
Among 15–64-year-olds, the rate increased from 57% to 75.1%.

As employment and wages rose, household disposable income grew, boosting consumption and supporting economic expansion.

Hungary’s employment rate now exceeds the EU average and outperforms many regional peers. This reflects a broader strategy of promoting a work-based society, targeting groups traditionally underrepresented in the labor market, such as women, students, and older workers.

In parallel, Hungary shifted its tax focus toward consumption and transaction-based taxes (e.g. VAT, excise duties), which are considered less distortionary than taxes on labor and capital. By lowering taxes on work and business activity—including a 15% personal income tax (PIT) and a 9% corporate income tax (CIT)—the government stimulated both employment and investment.

Lower labor costs improved company profitability and encouraged foreign investment, particularly in labor-intensive industries. In 2024, Hungary’s average hourly labor cost stood at EUR 14.1, well below the EU average of EUR 33.5, making it one of the most competitive in Central and Eastern Europe.

Initial estimates by the Hungarian Central Bank (MNB) indicated that the flat tax reform reduced PIT revenues by HUF 433 billion (EUR 1, 107 million) upon implementation. However, by 2017, this shortfall had nearly disappeared due to higher employment, consumption, and resulting tax revenues (VAT, excise duties, etc.).

Between 2010 and 2017, these measures were estimated to have:

Boosted GDP growth by 6 percentage points,
Increased household disposable income by 8%.

Before 2010, Hungary had a multi-bracket tax system with high marginal tax rates, especially around the average wage level and above. This discouraged additional work and encouraged underreporting of income. In the early 2000s, top marginal income tax rates reached 44–48%, with 5–6 tax brackets.

In 2009, Hungary had the second-highest average tax burden per capita in the EU, with 53% of gross labor costs going to the state (compared to the EU average of just over 40%). This heavy tax burden deterred both labor supply and job creation. As a result, Hungary’s employment rate in 2009 was the fourth-lowest in the EU.

High marginal rates on higher earners also increased the risk of emigration, particularly among skilled professionals. A 2020 study (Kleven et al.) found that personal income and wealth taxes significantly influence the mobility of top earners—the top 1–5% are especially responsive to changes in tax policy, unlike average earners.

A leaked internal memo suggests that Hungary’s Tisza Party (main opposition) is considering a shift from the current flat personal income tax (PIT) system to a progressive, three-tier structure, introducing tax brackets of 15%, 22%, and 33%.

The document suggests, incomes under HUF 5 million (approximately EUR 13,000) would remain taxed at 15%, while those earning between HUF 5 million and 15 million annually would fall into a 22% bracket. The top rate of 33% would apply to incomes exceeding HUF 15 million (roughly EUR 39,000), affecting even many professionals such as doctors.

The document argues that Hungary’s economy has reached the limits of its current fiscal model and calls for a broader overhaul of the tax system in 2026, with a focus on reassessing household tax benefits. While the memo’s authenticity has been reportedly confirmed by several sources familiar with the party’s economic plans, Tisza Party leader Péter Magyar has publicly denied any intention to raise taxes, dismissing the leak as a forgery and reiterating the party’s commitment to tax cuts.

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