Mária Lakatos

Taxation in General: Hungarian Tax System

Tax reform in 1988

The regulations before 1988 treated the incomes of the population deriving from various sources and acquired under various titles in a very different manner, therefore, it could not provide for public burden sharing proportionate with the size of income. Apart from this, the rate of taxes payable by the private persons was disproportionately lower than that of companies, which made it ab ovo necessary to replace the wage-proportionate corporate taxes with a uniform income tax system.

Basically, the personal income tax system merged the income categories that were earlier differentiated under various legal titles, and also extended the scope of the tax to the - formerly tax-free - interest on savings that people held at financial institutions as well as to the interest on bonds traded on the securities market at that time; however, the fragmentation that prevailed during the period before introducing the personal income tax also remained to stay after the reform of 1988.

The personal income tax launched from 1988 had the following features [12].

First, obligatory consolidation was ordered for most income sources, and the tax liability had to be assessed according to a progressive tax scale. However, separately taxed incomes did not pertain to the 11-class progressive tax scale but to the linear tax (withholding tax) was paid, e.g. on interest, dividend incomes.

Second, private entrepreneurs were subject to a special “two-channel” taxation system. The point was that private entrepreneurs and partnerships paid 25% entrepreneurial tax on their business profit, while the amount of profit used for personal purposes was subject to personal income tax. As can be seen, the population became the main carrier of tax burdens already in this early stage [17].

7. Table. Revenues of the state budget according to main sources (in %)

Year	1987	1988	1989	1990	1991	1992	1993
Business organizations	63.2	55.5	48.2	40.6	30.9	26.3	22.9
Population	25.0	32.2	34.8	36.9	38.9	39.3	38.8
Other	11.8	13.3	17.0	30.2	32.3	34.4	38.3
Total:	100	100	100	100	100	100	100

Source: Ministry of Finance, Analyse for internal use 1994

The direct tax burdens of the population went up from 9 % (in 1988) to 17 % in the percentage of taxable incomes, while the average tax on incomes moved between 5 % and 15 %.

The indirect tax burdens on the population were not assessed in that period by referring to the fact that small capital ventures and private entrepreneurs not subject to VAT were also considered as final consumers, but the three-rate VAT increased the tax burden on the population by 10 % on average - confirmed the Ministry of Finance in its inner report in 2001 [18].

In a single year, the state budget gained a new income source at a rate that was inconceivable before, even if the state budget refunded to the companies a certain part of the grossed up wages (companies extended the wages in order to protect employees from losses). As is shown by the statistics reflecting the revenues of the first six years and the year preceding the year of introduction, the highest growth of revenues came from personal income tax (also at net present value), while the VAT increased at a rate falling behind the inflation and the amount received from corporate taxation became lower.

The primary targets (the increase of the state revenue) were met at the level of the state budget. The following general conclusions can be drawn from the figures:

the business organizations paid an amount that kept decreasing both at nominal value and at its rate compared to the revenues of the state budget (growth was only recorded with customs and import payments);
the personal income tax paid by the population showed a dynamic increase, the rate of personal income tax in the state budget revenues exceeded 10 % (from the 1990s);
within the key tax types, there was a shift towards consumption-type taxes;
the rate of state budget centralization did not decrease despite the original concepts, thus the state budget basically determined the use of more than half of the GDP and it maintained its role in redistributing the revenues.

However, the introduced tax system had certain features that needed correction almost immediately.

The use of many brackets in personal income tax triggered a superfluously detailed difference between various population groups and the upper 60 % proved to be extremely progressive.

Even at that time, tax collection and control was narrowed down only to the processing of about 4 million personal income tax declarations and to the ventures declaring the highest income.

Therefore, the reported cost statement deductions became impossible to control (this led to the special Hungarian new verb, (term) “elköltségelés”, (over-expensed) i.e. collecting cost invoices) and revenue control was also reduced to the obligatory data submission that was ordered for companies.

Thus, the introduced tax system clearly deteriorated the situation of the population, which moderated the burden on companies in absolute terms and the revenues of the state budget went up to an unprecedented extent. The size of the revenue from personal income tax induced the government to reduce the 100 % share promised to municipalities first to 50 % within a year, and this decision brought the newly shaping local municipalities and the whole municipality system into a tough position. Analyzing the situation of municipalities, Gábor Gulácsi concluded that - as a secondary impact - re-transferring personal income tax to municipalities on a territorial basis further increased the disadvantage of poor regions with little, or quickly dissolving industrial and agricultural production structure [19].

However, the personal income tax structure integrated further inequalities into the system. The public burden sharing was not proportionate with the incomes as different taxes (depending on their source) were assigned to consolidated and unconsolidated incomes.

Despite this, the personal income tax system is one of the success stories of the economic policy of the Németh government as it created a basic condition for European integration, provided the opportunity to calculate labour price according to the real market relations and, parallel with this, it restored the obligation of the citizens to share the public burden. On the other hand, it placed a significant part of the state budget incomes onto a stable base.

In this chapter we only analyse the changes in the personal income tax system from the above introduced starting point.

8. Table. Tax changes 1989-2022

Main tax elements	1988	1989-1994	1995-1998	1998-2002	2002-2010	2011-2022
Tax rates	0-60 %	0-56 %	the 0 % rate was terminated, 20-48 %, then 20-42 %	20-40 %	2002-2006: 18-38 % 2004-2010 18-36 %	16, then 15 %
Tax scale	11 brackets	6 brackets	6 brackets	3 brackets	3 brackets until 2004, then two brackets	1 bracket
Tax free limit	48,000	110,000 forints	tax credit for employees	none	minimum wage is tax free with tax credit	none
Allowance	allowance for employees, allowance for children, tax exemption for meal contribution at work. tax allowance for intellectual work	same	the former allowances were terminated	allowance for children, allowance for paying interest on mortgage credit, allowance for tuition	the former allowances were reduced between 2002 and 2006 and totally terminated from 2006	family allowance, family contribution allowance, allowance for married couples, allowance for handicapped people Cafeteria - the groups receiving allowance keep narrowing, its charges near the wage charges
Movable - immovable property	income to be combined	same	ranked as income to be taxed separately	same	same	same
Income taxed separately	20 %	0/10/20 %	20 %, tax credit for stock exchange investments (tax exemption), initially without limitation.	20 %	20 %	16, then 15 %
Employee contribution	reduced the tax base	reduced the tax base	did not reduce the tax base. The group of incomes subject to social insurance contribution was extended, also covering activities already subject to copyright protection.	it once again partially reduced the tax base. The employer contribution was reduced by 10% (from 39 to 29 %).	it once again did not reduce the tax base. Solidarity contribution above a gross annual wage of HUF 6,748,850	cannot be deducted from the tax base, its rate is 17+1.5 %;15,5+1,5;13 %
Investments	20 %	returns on state securities 0 % stock exchange gain 10 % other 20 %	the tax on returns on state securities investments is 0 %, the tax on stock exchange gains decreased to 10 %	the 20 % tax on exchange gains also covered the exchange gains on securities kept on capital accounts, thus the exemption granted to the shares of stock exchange companies was terminated. However, the rate of write-off was extended	the returns on stock exchange investments became tax free	16, then 15 % 0 % on amounts kept on long term investment accounts for 5 years

Source: Personal Income Tax Act, by own collection [11]

Taxation in General: Hungarian Tax System

Tartalomjegyzék

Kiadó: Akadémiai Kiadó

Online megjelenés éve: 2022

ISBN: 978 963 664 137 5

Taxation is a scheme for the state to provide revenue. The so collected money could then cover the public spending of the government. These are the so-called allocative and redistributive functions of the state budget. Although, taxation theory discusses the various tax types and analyses the various taxation tools very extensively, there is no absolute answer to the question, when and what type of taxation system would be optimal. Thus this introductory book on taxation deals with the three basic types of taxes - the income tax, the VAT and the corporation tax - in a very pragmatic way. There are legal texts and cases from both the international and also from the relevant Hungarian practice.

This book is recommended not only for students of economics but also for law students and practitioners beside anyone who is interested in the basic regulations of taxation.

Hivatkozás: https://mersz.hu/lakatos-taxation-in-general-hungarian-tax-system//

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