Incomes, Incentives and the Growth of Means Testing in Hungary

Abstract

In this paper a new microsimulation model for Hungary is used to simulate the full impact of the April 1996 reforms to child-related benefits. This, Family Allowance is means tested, and earnings-related maternity and child care pay are replaced with means-tested flat-rate payments. Because of increases in levels of flat-rate maternity/child care payments, the overall effect of the reforms is found to be mildly progressive compared with the 1995 system. However, the targeting of child-related payments is still found to be spread throughout the income distribution, rather than focused on low-income households. An alternative scheme, modelled on the UK means-tested benefits system, achieves a much greater level of targeting, but has the side-effect of greatly increasing the effective marginal tax rates of low-income working households with children. In view of the poverty and employment traps that such marginal taxation has caused in the UK, the paper cautions against the over-extension of means testing in the Hungarian benefits system.