A bill to exempt the minimum wage from personal income tax in order to reduce the tax burden on low wages was submitted to the Hungarian Parliament on 20 September 2021. The proposal aims to amend the Personal Income Tax Act. According to the preamble of the bill, the exemption is necessary, since the income of minimum wage earners is increasingly falling behind average earnings and the total tax burden on wages is one of the highest in Europe.
This will be achieved by creating a system of proportional and fair tax credits. According to the explanatory memorandum of the bill, the reintroduction of the tax credit system would make it possible to achieve full income tax exemption of the minimum wage. For earnings above the minimum wage, tax would be set at a progressively decreasing rate, up to the median wage in 2020 (HUF 321,000). According to the calculations, this would result in a net increase of more than HUF 25,000 in the minimum wage without discounts, while the guaranteed minimum wage would rise by around HUF 17,000 net.
In order to ensure that the minimum wage will be exempt from tax this year, the proposal would enter into force on 1 November by introducing the tax credit scheme.
Critics fear that the bill, if enacted, would also boost the black economy, since employers, in order to avoid paying taxes, would employ workers at the minimum wage and workers would receive their wages above this in other ’unofficial’ ways. As they highlight, this would result in a huge loss of tax revenue for the state and would also have a negative impact on workers, as they would be entitled to less pension than they would have been entitled to on the basis of their previous actual income. However, its supporters believe that it would be a huge help to people earning no more than the minimum wage.
By Eszter Kamocsay-Berta, Managing Partner, KCG Partners Law Firm