Minimum Wage Rise: Budget makes a Good Deal but Low Income Earners Lose on it

Minimum Wage Rise: Budget makes a Good Deal but Low Income Earners Lose on it

Under an agreement, made between the employers and employees’ organizations and the government, next year the minimum wage will be one-hundred thousand forints gross. In this government term this would mean an increase by 38%, which would make us the top players in the European Union. 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.

38% is in fact 10%

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 66,482 forints in 2014, while in 2010 the same came to 60,236 forints. 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 33 billion forints. Calculating with the net wages only 11 billion forints more will remain in the low income earners’ purse.

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.

The 38% rise of the gross wages of itself places Hungary to the third position in the raking 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.

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 to be the 11thin the order, with the increase by approx. 10%.

Examining the four Visegrad-states, the Baltic States, Romania, Bulgaria, Slovenia and Croatia, Hungary comes to take the 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 neighboring 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 so dramatic impacts; the tax burden imposed on the lowest incomes grew only by 9%.