Mária Lakatos

Taxation in General: Hungarian Tax System

The impact of the Bokros package on the tax system

The change in a taxation policy is not determined primarily by the increase or the moderation of the tax brackets, by the change of the tax rate or even by the restructured allowances. The changes can be classified by the rule of law, the legal environment called by James Buchanan as the tax constitution, how the tax constitution guarantees the former allowances either in a more moderate form or even by granting them to other groups, or - on the contrary - what acquired rights are withdrawn or granted [20]. From this viewpoint, basic importance was carried by the programme hallmarked with the name of Lajos Bokros that the government launched on 12 March 1995. The economic policy goal of narrowing the demand, reducing state expenditure and increasing revenues was planned to be achieved by modifying the tax act, which otherwise played a subordinate role in the changes.

Although the Constitutional Court decided to repeal a significant part of the Bokros package, no change was made to the modification of the tax laws, except for accident contribution payment, as there the constitutional rights allegedly were not affected [21]. The Hungarian constitution specifies tax payment as a contribution to the public burden and a unilateral obligation of the citizens without any counter-service, and the spirit of this provision was not violated by the Bokros package. The austerity measures were in force for two years then the government regarded it as a success. They thought to have managed to reduce the deficit of the balance of payments quickly and at a high rate also in an international comparison. This, in itself, restored the confidence of the international money markets and it was possible to finance the deficit that remained to stay and was soon reproduced in an unchanged form. Some reshuffle could be observed in the second half of the 4-year political cycle, primarily in the modification of the allowances, tax credits and tax brackets, but basically this did not change the nature of the tax system.

Analyzing the listed changes, it is evident that primarily pensioners, employees and families with children got into a worse situation. If we do not look at the issue from a social political aspect but from the viewpoint of almost 400,000 private entrepreneurs and almost one million businesses in total, we can spot the following differences between the two types of tax system:

The deductibility of the social insurance contribution was cancelled, which raised the costs both for private businesses and partnerships.

The termination of the 0 rate income class, which excluded private entrepreneurs and the owner-managers of partnerships (internal members of limited partnerships - managing directors) from the circle of exemption as tax credits since these were only granted to the employee status. This means that this group was not given exemption even if they earned the minimum wage.

The former HUF 100,000 tax base reducing allowance for activities subject to copyright changed for a tax allowance of HUF 50,000, which definitely reduced the real value of the allowance, depending on the income limit. Narrowing the scope of activities subject to copyright and making these incomes subject to contribution payment was disadvantageous for about 170,000 taxpayers.

Clearly the tax policy favoured the accumulation of wealth by taxing the returns on deposits and state securities investments with 0 rate. It served well the general interest in increasing investments in addition to reducing the stock exchange gains to 10 % in 1995 and 1996.

As a result of the actions of the Bokros package, a personal income tax system was created - basically differing from the tax reform in 1988 - that focused on efficiency instead of the previously preferred aspects of equity and fairness. Efficiency was also promoted through the increasing rate of control. This tax system was much more able to increase tax revenues from inflationary tax forints without any further change as its introduction was accompanied with a 12 % price increase (higher than expected), which automatically increased payments not only at a nominal but also at a real value, while frozing the tax allowances. (Namely because the tax-reducing items did not follow the progression, and the impact is totally different if a certain % of the part taxed with the marginal tax rate is deducted from the annual income without any limitation above - which grows together with the inflation - compared to deducting from the payable tax a maximum amount that is limited from above.)

As a result, a different personal income tax system was set up, which practically ignored the social aspects, leaving the enforcement of the principles of equity and fairness to social policy. It was strongly differentiated according to the sources of incomes and expressly preferred capital incomes while it connected income tax with social insurance deductions also over and above the wages. This feature was further strengthened not only by the above mentioned extension of the contribution base but also by the rule which made it compulsory to pay full social insurance contribution for all other legal relationships of employment below 36 hours a week, i.e. some part-time entrepreneurs paid twice. This means that the obligation to pay taxes and contributions were closely related to each other.

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//

BibTeX EndNote Mendeley Zotero