Could Higher Taxes on Top Earners Help Hungary Create Jobs and Strengthen Growth?

An OECD study finds that replacing Hungary’s flat 15% income tax with a moderately progressive system could increase employment by 1.4%, raise long-term GDP by about 1%, and boost tax revenues by 0.4–0.8 percentage points of GDP by 2040 while reducing inequality. The report argues that lower taxes for low-income workers, combined with higher taxation of top incomes and capital income, would strengthen fiscal sustainability, improve labour market participation, and create a more inclusive growth model for Hungary.

A new OECD study suggests that Hungary could achieve a rare policy combination: higher economic growth, stronger public finances, and lower income inequality through a reform of its personal income tax system. Conducted by the OECD Economics Department with contributions from tax, labour and economic policy experts, the analysis comes at a crucial time as Hungary faces slowing growth, rising public debt nearing 75% of GDP, and growing fiscal pressures from an ageing population.

The report argues that Hungary's flat 15% personal income tax system, introduced between 2010 and 2013, has helped simplify taxation but now limits the country's ability to raise revenues, encourage labour market participation among low-income workers, and reduce inequality. According to the OECD, the current system leaves Hungary with one of the least progressive tax structures in the OECD and one of the lowest top income tax rates among developed economies.

Low-Income Workers Carry a Heavy Tax Burden

One of the study's most significant findings is that low-income workers in Hungary face a relatively high tax burden compared with both OECD and regional peers. Workers earning around 50% of the average wage face a labour tax wedge that is approximately 14 percentage points higher than the OECD average and about 6 percentage points above neighbouring countries.

The flat-tax structure means that low-income and high-income earners often face similar effective tax burdens. Hungary is the only OECD country where workers earning five times the average wage face nearly the same tax wedge as those at the bottom of the income distribution. The OECD argues that this discourages labour market participation among low-skilled workers and reduces incentives to move into better-paying jobs.

To address this, the report proposes a more progressive tax structure. Under the preferred scenario, incomes below the 20th percentile would be taxed at 9%, middle-income earners at 16%, and only the top 10% of earners at 22%. Even after the reform, Hungary would still maintain one of the lowest top marginal income tax rates in the OECD. Around 90% of taxpayers would benefit from lower average tax rates under this model.

Growth and Revenue Gains Could Arrive Together

A key message for policymakers is that the proposed reform is not only about fairness but also about economic efficiency. OECD simulations suggest that reducing taxes on lower-income workers would increase employment by about 1.4%, mainly by encouraging more people to enter the labour market.

Higher employment would translate into stronger economic activity and increased tax revenues. The report estimates that Hungary's potential GDP could rise by around 1% in the long term as a result of stronger labour force participation. Unlike traditional tax cuts aimed at high-income earners, the OECD finds that tax reductions targeted at low-income workers generate larger employment effects because these groups are more responsive to financial incentives.

The fiscal impact is equally noteworthy. While the reform is designed to be revenue-neutral initially, the study finds that once behavioural responses are considered, government revenues would actually increase. Depending on the scenario, the tax-to-GDP ratio could rise by between 0.4 and 0.8 percentage points by 2040.

Another major advantage comes from improved tax buoyancy—the ability of tax revenues to grow alongside the economy. Under the current flat-tax system, revenues rise roughly in line with income growth. Under a progressive system, tax revenues increase faster than incomes as earnings move into higher tax brackets. The OECD estimates this effect alone could add around 0.2 percentage points of GDP in revenues by 2040 and about 0.6 percentage points by 2070.

Capital Tax Reform Could Strengthen Fiscal Sustainability

The report also highlights a growing imbalance between the taxation of labour and capital income. Capital income in Hungary is taxed at a lower effective rate than labour income, creating incentives for tax avoidance and income shifting.

To reduce these distortions, the OECD recommends increasing capital income tax rates from 15% to between 22% and 25%. Even after accounting for behavioural changes by investors and business owners, the measure could generate an additional 0.2–0.3 percentage points of GDP in revenues.

For governments facing rising pension and healthcare costs, these findings are particularly relevant. The OECD warns that population ageing could reduce personal income tax and social security revenues by 0.7 percentage points of GDP by 2040 and by 1.4 percentage points by 2070. Strengthening tax revenues today could therefore help finance future social spending without placing excessive pressure on public debt.

What It Means for Development Partners and Businesses

The implications extend beyond Hungary. For international development institutions such as the World Bank, IMF, European Commission and regional development banks, the study provides evidence that progressive tax reforms can support both growth and inclusion. The OECD's analytical framework combines employment effects, taxpayer behaviour, revenue impacts and growth outcomes, offering a useful model for other countries seeking to strengthen domestic resource mobilisation.

For private-sector stakeholders, the findings present both opportunities and risks. On the positive side, higher employment and stronger labour force participation could help ease labour shortages, expand consumer demand and support long-term economic growth. Increased disposable income among low- and middle-income households could boost spending in retail, housing, financial services and consumer goods sectors.

However, businesses and investors may face higher taxes on top incomes and capital earnings. While this could slightly reduce after-tax returns for some investors, the OECD concludes that the broader gains from stronger growth, higher employment and greater fiscal stability are likely to outweigh these costs.

The report ultimately challenges the long-standing belief that progressive taxation harms economic performance. Instead, it concludes that a carefully designed tax system can simultaneously improve growth, increase government revenues and reduce inequality. For policymakers confronting demographic pressures, widening income gaps and fiscal constraints, Hungary's proposed tax reform offers a potential roadmap for achieving more inclusive and sustainable economic development.