As the rise of inequality in transition economies has increased, so the redesign of the tax-benefit system has become one of the key issues facing policy-makers. In Discussion Paper No. 1117, Sarah Jarvis and Stephen Pudney examine the scope for redistributive government policies based on progressive income taxation and direct income transfers in the case of Hungary. The paper first surveys recent developments in the economic circumstances of the household sector and changes in the Hungarian tax-benefit system. Second, it examines the changing redistributive role of the personal income tax system. Lastly, it considers the redistributive potential for various types of income transfer, using optimal targeting techniques. The analysis is based on data from the 1991 Hungarian Household Budget Survey.

The authors find evidence to suggest that policy-makers should consider implementing transfers away from households with children towards households with pensioners and unemployed workers. On distributional grounds, there is little support in their results for the pro-natalist system of family benefits that currently exists. There is also no support for the reforms of the pension and unemployment insurance systems proposed on efficiency grounds, which would entail a reduction in the level or duration of pension and unemployment insurance benefits. An extensive sensitivity analysis suggests that these findings are quite robust.

Redistributive Policy in a Transition Economy: The Case of Hungary
Sarah Jarvis and Stephen Pudney

Discussion Paper No. 1117, January 1995 (IM)