Assessing the economic and social impact of tax and benefit reforms: A general-equilibrium microsimulation approach applied to Hungary

We present a general-equilibrium behavioural microsimulation model designed to assess long-run macroeconomic, fiscal and distributional consequences of tax and benefit reforms in a small open economy. We apply the model to reforms adopted in Hungary between 2008 and 2013, a period characterised by intense reform activity in the wake of the financial crisis. Innovations of the model include the treatment of labour supply responses of individuals, affecting both participation (extensive margin) and work intensity (intensive margin), and the incorporation of general-equilibrium effects by a parsimonious macroeconomic model. Our results suggest that Hungary's flat tax reform may have boosted output by improving work incentives of high earners (along the intensive margin), but reduced work incentives and employment levels of low earners. We find that policy measures introduced since 2008 substantially increase income inequality. Moreover, the contribution of changes after 2010 is about four times that of the changes before 2010.