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Minimum wage rise: budget makes a good deal but low-income earners lose

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Under an agreement between the employers’ and employees’ organisations and the government, this year the minimum wage will be HUF 100,000 gross. In this government term it means an increase by 38%, which would make us the top players in the European Union. The left-leaning Policy Agenda examined in fact how much the low-income earners will get from that amount and in respect of the net minimal wages what position we take compared to other countries in Europe.

Under an agreement between the employers’ and employees’ organisations and the government, this year the minimum wage will be HUF 100,000 gross. In this government term it means an increase by 38%, which would make us the top players in the European Union

 

 

 

The low-income

Introduction of the flat-rate income tax scheme and the abolition of tax relief granted to low-income earners have had the greatest impact on the level of minimal wages. Consequently the tax burden on low income has grown significantly while the net amount thereof did not really vary.
Therefore, the net sum of the minimal wage is expected to be HUF 66,482 in 2014, while in 2010 the same came to HUF 60,236. That is, the gross minimum wage increased by 38% in vain, if actually it means only 10% for the employee.
 
The budget makes a good deal on the taxes imposed on minimum wages, since, calculating with merely 150 thousand minimum wage earners, without the family tax allowance, and compared to 2010, next year the budget revenues from taxes will grow by HUF 33 billion. Calculating with the net wages only HUF 11 billion more will remain in the low-income earners’ purses.
 
 

What is our position in Europe?

 
Policy Agenda examined what position we take in respect of the minimum wages in the European Union. The level of the minimal wage is defined by the state only in 21 countries out of the 28. Not in each of them has the rate of minimal wage been defined for 2014 yet. In some countries, the changes are not introduced at the beginning of the year (e.g. the United Kingdom), or the negotiations are still in progress. For that reason, only the figures already available have been considered for this comparison.
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The 38% rise of the gross wages of itself places Hungary third in the ranking of growth. Considering also the figures for 2014 the wages of the low-income earners rose even in a higher rate only in Romania and Bulgaria between 2010 and 2014. This order is anticipated not to change even when the figures for every member state are on hand.
 
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Perhaps, the changes of the net minimal wage are more expressive. According to these figures we are not the least among the leaders. Among the 21 member states with centrally defined minimum wages we come in 11th, with the increase by about 10%.
 
Examining the four Visegrad states, the Baltic States, Romania, Bulgaria, Slovenia and Croatia, Hungary takes 9th position. That is, compared to our rivals, the wage rise among those earning low income was only moderate.
 
 

Effects of the flat-rate income tax scheme

 
The distorting effect of the flat-rate income tax scheme is clearly reflected by the tax burden on the low-income earners. In the case of a progressive taxation system there must be a remarkable difference between the taxes levied on the average income and 50% of the average wage. In two member states, in Bulgaria and Hungary, there is no any difference at all, in terms of taxation, between the incomes.
 
Even in countries applying the flat-rate income tax scheme, there is some sort of differentiation between the wages as for the contributions payable. The taxes levied on low incomes are the highest in Hungary (34.5%), after Denmark, while in the neighbouring countries the same ranges between 14.5% and 29%.
 
This situation has evolved so that, in 2010, the rate of taxes levied on minimal wages was only 18% in Hungary, and four years later it has reached 34.5%, with an increase by 16.5%. In Bulgaria, the shift to the flat-rate income taxation has not entailed such dramatic impacts; the tax burden imposed on the lowest incomes grew only by 9%.
 
 
 
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