Will Hungary’s Tax Breaks for Mothers Boost Birth Rates?
Some potential impacts of Hungary’s Pro-Natal Policies for fertility and family dynamics
Hungary just announced that starting January 1, 2026 mothers with one child will be exempt from paying income tax until they turn 30. Mothers with two or more children will be exempt from income tax for life. In a decade or so, this will make a great event study but for now we can only make predictions about what effect this will have on the Hungarian Birth rate.
Before I get into my predictions for Hungary after this tax change, there are two things worth noting:
Hungary’s pro-family policies are generous right now: The changes in the tax code are another step by Prime Minister Viktar Orban to boost the birth rate. Hungary’s pro-family policies include baby grants that are worth roughly five years’ minimum wage, tax and housing incentives for families who choose to have three or more children, and parental leave allowances. These policies are restrictive on who receives them – parental benefits are restricted to only heterosexual, married women aged under 40 who earn above the minimum wage. Families must also be able to pay into these programs prior to using them.
Hungary has one of the best tax codes in the OECD: Hungary is ranked 7th on the Tax Foundation's International Tax Competitiveness Index. Their high ranking is due to low personal and corporate taxes that make the tax code easy to comply with, promote economic development, and raise sufficient revenue for the government.
I highlight these because I believe that they will palliate some of the positive effects to fertility that would be expected from the tax changes – I explain why below.
Unsustained Boosts in Fertility
While Hungary has had marginal increases in the birth rate following their pro-natal policies, these haven’t been sustained. The birth rate did rise after pro-natal interventions were implemented, but birth rates quickly fell again and are rapidly approaching their pre-intervention rate.
This spike in birth rates isn’t families changing their hearts and minds about having children because of baby bonds and housing assistance. Instead, the spike is likely caused by families who would have otherwise had children deciding to have the first or higher-order birth sooner to take advantage of generous pro-natal policies. The sharp decline in more recent years indicates that Hungary’s pro-natal policies have captured as much of that demographic as they can and the birth rate is returning to equilibrium.
It is likely that the same will be true for this income tax exemption. There will be a spike in births as families attempt to take advantage of the new income tax exemption, but birth rates will eventually return to equilibrium.
Quick Note on Tax Elasticity
Tax elasticity in Hungary is relatively low: the estimated overall elasticity of taxable income is 0.06 for most taxpayers earning above the minimum wage (which would be all earners eligible for this tax break). This low tax elasticity means that the behavioral effects of tax policy will be limited.
However, tax elasticity isn’t the same across income groups. High earners in Hungary have a much higher tax elasticity (0.2), meaning that their behavior is much more influenced by changes in the tax code. Unfortunately this means that those capturing the benefits may be the wealthiest Hungarians who likely would have had children and been able to afford children absent government intervention.
Dramatic Rise in Number of 2nd Order Births
My assumption is that the fertility increase that will happen in Hungary will be from families having their second child. The second child is less costly on all dimensions – any social concerns about having children have already occurred with the first birth, many of the large “capital investments” (think crib, car seats, etc.) have already been paid for, etc.
With such a generous exemption, families with higher tax elasticity may be willing to have a second child since they have already made costly investments into raising their first child. I wouldn’t be surprised if there is very little effect on first-births, but a massive effect on second-births.
Younger Parents and More, Younger Marriages
In order to capture the most benefit from the income tax elimination, we may see the marriage age and age at first birth in Hungary fall. According to the most recent data, the mean marriage age in Hungary is 30.2 and the mean age at first birth is 28.7. With Orban’s plan, a woman having her first birth at 28 would only give her two years without an income tax – equaling about HUF 2,964,977.30 or $8160 USD for a woman making the average salary in Hungary. Having a first birth earlier means that the amount of tax savings grows exponentially.
It’s unclear if these tax benefits will be limited to married couples. It’s a fair assumption, as I noted above most of Orban’s policies are limited to married couples. If the exemption is limited to only married couples, there will likely be more couples getting married and more couples getting married young.
Rise in Stay-at-Home Dads
One potentially unexpected outcome from the tax exemption is that the gender balance of who stays home may flip. Hungary does not have “married filing jointly” like the U.S. – all taxes are filed individually. The biggest tax payoff would be for the mother to continue working and advance in her career, especially for those with more than 2 children, while letting dad stay at home.
Hungary has a very low employment rate for mothers of young children – 16% of mothers with children under three in Hungary are employed outside the home. Comparatively, 94% of men with children under three work outside the home. While labor force participation for mothers does rise as children get older, I wouldn’t be surprised to see participation rates rising for all age groups after this policy. The question is what will win – paid leave or no income tax?
I’m excited to read the swath of papers that come out in a decade about Hungary’s pro-natal policies. But if the next administration comes in and removes these pro-natal policies, we may get some dif-in-dif papers sooner! Regardless, Hungary is an important place to watch for economists and family policy analysts alike.
Time Users
What I’m Reading: Who Cooked Adam Smith’s Dinner: A Story of Women and Economics by Katrine Marçal. Once I’ve finished it, I plan on writing a full piece on it because it warrants a substantive response
Something I found interesting: The Institute for Family Studies published an awesome study on zoning and fertility. It’s a must-read for anyone interested in the birth rate decline
What I’m Listening To: I’m changing this to watching this week because my husband and I just finished Adolescence on Netflix (we binged it all in one sitting). It is a haunting mini-series and an important call to action for parents about what kids may be doing and consuming online
What I’m Making: I’ve been on an overnight oats kick recently and I batch made a few flavors this weekend. I sort of followed this recipe to make a base, but mostly just made it up and added the flavors I wanted