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Mária Lakatos

Taxation in General: Hungarian Tax System

Income, tax and the freedom to choose

The changes of the taxation system during the last few decades, nonetheless, proved some fundamental correlations between the attitudes of the state and the individuals producing the revenue. The recent results of optimal taxation proved, that a taxation policy relying on consensus shall be the one that can be the effective but, in the majority of the cases, the theory explored general correlations only that, as a rule, rely on practical experiences, which cannot be generalized because of the peculiarities of the different states [1].
In a given economy, there are three big groups producing revenues: the citizens fall into the first group which include, in the broader sense, also foreign individuals who are beneficiaries of income originating from the given country, enterprises and companies into the second and the state itself into the third. All kinds of deductions and re-groupings (re-allotments) take place in between the three of them.
If we give a schematic picture of the hypothetical operation of a hypothetical economy (see Figure 1 below) with these in mind, it is relatively easy to define, which are the points at which intervention is possible. Intervention shall, evidently, mean deduction from the income, of which taxes are one form only. The other form is composed of fees and contributions of various types which, theoretically directly cover the costs of the one or the other public service. The two systems are regulated separately: the various tax types are regulated by the various tax laws, while the fees to cover public services are defined by the act on social security contributions, and the acts regulating pensions. Social security expenses that shall be discussed by the next chapter include predominantly the contributions that are to cover pensions, unemployment benefits and healthcare. (We shall discuss all the three during the course.) Richard A. Musgrave and Peggy Musgrave have presented the various possibilities for imposing taxes or contributions as follows [2]:
 
1. Figure. Tax and fees collection points
Sources: [2] [3]
 
As it can be seen, households are shown at the first place. It is not accidental, for they can pay simultaneously income taxes, pension and healthcare contributions.
The households, thus spend their income on taxes and contributions, and consumption and make savings.
 
Definition
Tax: a unilateral payment obligation ordered by the state, which can be collected even by force (enforcing measures). Tax is a deduction for which no consideration whatsoever is due.
 
Accordingly, consumption and the associated turnover (or sales) tax (VAT) come only after spending for the taxes have been made. VAT is payable upon the purchase of the various assets, as this tax is incorporated into the purchase price. When the households buy special products, such as spirits, tobacco or petrol derivatives, excise tax can also be imposed on them, arguing that consumption can be limited thereby. If, in addition to consumption a household makes savings, too, then the turnover and excise taxes can be avoided. However another tax shall come: the one imposed on capital assets, which means that tax shall be levied on the capital yield, if the savings are used to finance any investment. (Money yields return only if invested!) The investment implemented shall trigger production, sales and sales returns resulting in profits. The profits of the enterprises can be taxed. This type of the income taxes is called corporate tax. Dividends are paid out of the profits.
 
Definition
Contribution: the price for a public service as determined by the state. Contributions “behave” as taxes from the point of view of levying, payment, recording, accounting for, execution and collection.
 
Nowadays the taxation system of the developed countries follows this scheme, and according to OECD the following tax groups are distinguished [4]:
  • income and profit taxes,
  • contributions to the social security scheme,
  • wealth tax,
  • VAT imposed on the turnover of domestic products, assets and services,
  • taxes charged on international trade and transactions (custom duties),
  • green taxes.
 
The centralization of income, or their redistribution, enable taxes to amend the positions of the income owners. According to the initial presumption, in the optimal case they achieve this by reducing the inequalities of the initial/original income. It cannot be, however guaranteed [5], that either the tax rates or the benefits, subsidies, and tax benefits given to various income sub-groups (e.g., the tax-free minimum wages of the poorest) could decrease the inherent inequalities.
The levying of taxes has, however, also another impact namely, that the taxes imposed influence the behaviour of taxpayers and divert labour supply. Higher tax rates shall result in a lower labour supply, as sooner or later the taxpayers would, if they can afford, choose free time, and the national income, and, thus the total distributable revenues shall be less. Otherwise, the impact of taxes on labour supply is dual [5a]: on the one hand, they reduce the possible consumption of the individual, yet he or she is compelled to surrender consumption to the extent of the amounts paid for taxes, on the other hand, works more for less, i.e., obtains for the same time invested less value. Sooner or later the income owner thus seeks for substitutes, and this, depending on the preferences of the individual and his or her valuation of the free time he/she has, shall lead (strictly theoretically) to not working more after a certain load level, which on the social level results in a loss.
This short discussion highlights that the elaboration of a kind of tax constitution [6] is required. It means that the basic taxation principles should be declared, so the right to choose from among the applicabe tax types secured and within this, when going into detail the terms of tax subjects, tax objects precisely defined and the granting of benefits circumspectly assessed.
 
Definition
Tax constitution: The tax constitution sets down the basic principles of taxation, the procedural and substantive rules within which the further statutes lay down the specific requirements, that is why it is called tax constitution.
 
The two major principles of taxation are reasonableness and fairness. This dual expectation means that all taxpayers shall contribute to the costs of the government by their reasonable shares [2]. How to determine, though what is a reasonable share, is problematic even on the theoretical level, yet, to be reasonable we should know (set) the benchmark. What should be reasonable? The subsistence level? The social subsistence level or the tax level (tax rate) approved for a given period in a specific group of the society?
To resolve the issue we resorted to two principles that are used even nowadays when levying taxes: the benefit principle and the ability to pay principle. The first principle system dates back to Adam Smith, according to whom in a fair taxation system, the contributions (taxes) payable by the individual taxpayers must be in line with the value which they consume from the public services as individuals.
 
Definition
Benefit principle: The taxation principle, according to which the tax burdens shall be distributed among the members of the society in a way that they should pay a tax pro rata of the share they take from the public assets and governmental services financed of taxes.
 
According to those who prefer the ability to pay taxation principle, taxpayers must contribute to the public burdens to the extent they are able to.
Ability to pay principle: Tax burdens must be distributed among the members of the society based on their abilities to pay, taking into consideration the equal sacrifice principle, which can be achieved by the help of progressively increasing tax rates and not by ones proportional to the income.The expectations towards the taxation systems are fundamentally determined in the last few decades by the optimal taxation theory. Its most prominent supporter is the former senior economist of the World Bank Joseph E. Stiglitz [7], who defines the criteria of the optimal taxation system as: a simple, neutral and fair system that intervenes in the operation of the economy the least possible way, comparably cheap to control evoking the protest of the least taxpayers.
Taxation in General: Hungarian Tax System

Tartalomjegyzék

Kiadó: Akadémiai Kiadó

Online megjelenés éve: 2022

ISBN: 978 963 664 137 5

AdózásELTE GTK jegyzetekIdegen nyelvű

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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