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Earnings gap widens due to flat rate income tax

The government’s revision of personal income taxes means that the difference between what is earned at the top and the bottom of the corporate ladder has grown even further. The BBJ conducted a quick survey of leading companies to determine whether they think the development a problem, and if they are planning to do anything about it.

The introduction of a new, flat personal income tax rate of 16% plus a benefit scheme favoring people and families with children is calculated to reduce the real value of lower-earners by 3–5%.

According to a study prepared by academic János István Tóth, childless employees earning HUF 290,000 gross will definitely suffer this real value loss even if their employers were to implement the 4–6% salary hikes agreed upon at the National Interest Reconciliation Council (OÉT).

However, a HUF 220,000 salary would require a raise of roughly 13% in order to preserve its 2010 purchasing power. Tóth noted that not even the economic crisis brought real wage decreases of such proportions. According to estimates, some 1.5 million Hungarians could have seen their earnings revised downwards because of the measure, if they have no children and earn less than HUF 360,000 a month.

When the reality of what was announced as a better and fairer system became obvious, Prime Minister Orbán told Parliament that the government would hold companies to raising salaries and will not accept the system resulting in a reduction of real wages. At the same time, several companies have openly stated they would not compensate the resultant drop in earnings.

One of them is energy company GDF Suez, whose chairman-CEO is Patrick Eeckelers. Asked whether this has raised tensions between higher and lower earners at the firm, he said that it is not a big problem, since everyone is happy to have a job at all. GDF Suez has recently laid off 5% of its workforce in response to regulated energy prices and a special tax on the energy sector, and will also suspend all developments.

The same applies for pharma company Sanofi-Aventis, which will likewise not be compensating workers. Although staffing company Recruitment International is not affected since it is a smaller business with higher earners, its general manager John Smith said that the government should not expect the private sector to make up the gap caused by state regulation.

Listed drug maker Richter reported experiencing no notable increase in tensions following the tax revisions.

Market-leading lender OTP Bank, on the other hand, noted that the changes and the revised thresholds have an adverse affect on a significant percentage of its employees. Accordingly, the bank is responding by introducing a differentiated salary increase system and basic wage modifications for its lower-earning employees, the company’s communications department said. The bank has also long operated a complex incentive system to motivate employees.

Retailer Tesco and property developer Futureal declined to discuss salary-related questions.

This article appeared in the BBJ's HR special edition on April 8, 2011.