Hungary incentives of the day

Hungary passed a law in 2019 exempting women with four children from income taxes, for life. This is the first effort that at least sounds somewhat like actually trying.

Yet when considered in detail, this was a rather terrible implementation. There is a mismatch here between what women and families want and what this is pushing them towards.

Even with a large income tax break, asking women to have four children is rather ambitious. The one-time payments for the first three children are not that different from zero, the main effect only kicks in if you have four. Then there is no substantial further benefit to having five.

The benefit then comes in the form of not paying income tax rather than a direct payment. That means that to get the benefit, the mother of four has to be working.

There are exceptions, but presumably if you choose to have four children in order to get financial benefits, what you want to do with that funding is stay home with your children. That’s not allowed here. The income tax benefits don’t even seem to pass to the father or husband, so they can support a family on their own. I do get it, given how easy that would be to game, but it doesn’t seem great. It also creates a very strange and huge incentive to have stay-at-home fathers, and to encourage various forms of tax fraud, I am sad I have not yet watched any movies about this.

All the incentives here are twisted and highly inefficient. Another problem is that most of the benefits paid are going, for a while, to go to women whose children were already born under the old regime.

Then early this year they extended the policy to all mothers under 30. If you have one child by 30, you are exempt from income taxes for life.

This essentially wipes out the four-child policy, other than retroactively. The number of women who are going to have zero children before 30, then have four or more later, is very small.

The new rule seems much more interesting. Hungary’s tax rate on personal income is 15%. So this is a permanent 17% boost in take-home pay if you have your first child before 30. That seems like a very strong incentive to have your first child before 30, even if you weren’t sure if you wanted one or not. Not as strong as a similar-expected-value one-time payment or guaranteed income steam. Still warping the tax incentives in very strange ways. Still pretty great.

Long term I am very curious to see what this does to tax rates. If the majority of Hungarian women do not pay income tax, that is going to require a substantial tax hike. It also will be very interesting to see the impact on earnings, and on the gender pay gap, and on norms of child care. If a couple gets married in their 20s, and knows that the women is permanently immune from income taxes and the man is not, so the women’s pay is worth at least 17% more, what happens?

Here is more from Zvi Mowshowitz, most of it about fertility-boosting attempts in other nations.