An Analysis of the Hungarian Tax Reform

The feasibility of systemic reforms may depend on their distributional consequences. The shift to a market economy can be expected to increase wage differentials and unemployment, which will have an adverse effect on income distribution. Income tax reform and the change in the system of consumer subsidies and indirect taxes may modify these market mediated impacts, and could go some way to offsetting some of these inegalitarian tendencies. Much will depend on the speed and efficacy of the alternative redistributional instruments and institutions which will be required to replace the former enterprise-based systems, on the speed with which incomes and prices adjust, and on the budgetary strains created by the debt burden and the adverse terms-of-trade shocks.