Mária Lakatos

Taxation in General: Hungarian Tax System

Income tax versus sales tax

With these questions we have reached the first steps of drafting the taxation constitution. Once we have determined that we set up a taxation system based on the principles of equity and fairness, then the further principles of the taxation of the biggest group of income owners, i.e. the natural persons, must be set down.

As a general rule, the basic principles are accepted and a taxation complying with the ability to pay is used to implement the principles of equity and fairness.

Thereafter, however, a choice must be made between income taxes (as direct taxes) and taxes linked to turnover or consumption taking into consideration which fulfills the requirement of fairness (or equity). The principle of equity must or should be met both horizontally and vertically. When applying the ability to pay principle the horizontal plane represents fulfilment of the criterion of the equal tax burden bearing of people with identical incomes, while the vertical plane shows the different tax burden bearing of people with different incomes. Obviously, this example considerably narrows the circle of other standpoints that can be taken into account and considers them existing or presumes the comprehensive nature of the tax basis of assessment, namely, it takes the basis of taxes into consideration based on income and consumption explored or shown in the returns in the broader possible circles (no tax avoidance) and also the tax administration, accounting, controlling, revision and collection costs which should not be too high compared to the revenues.

The following example was elaborated by Musgrave and Musgrave [2] and shows in a very simple way that equity and fairness means different taxation depending on whether it is applied to people of identical incomes or people of identical consumption abilities.

At the beginning one taxation period (which, usually, is a fiscal year) is taken into account. Tax clients spend the income earned thereby either on consumption or save it, they have, as we see, no other option.

We have three tax clients of whom two have identical incomes during the studied period. Tax client “A” spends all what he earns, “B”, on the other hand, makes only savings. Income tax rate is 10 per cent, as the budget needs 28 revenue units.

1. Table. Comparison of the income and the consumption taxes during a period

Income owners	Income	Consumption	Savings	Income tax	Consumption tax
A	100	100	–	10	15.6
B	100	–	100	10	–
C	80	80	–	8	12.4

Source: [2]

If instead, we consider consumption as the basis of assessment not the income earned and we want to realize the same amount of tax revenues, then the consumption tax must be 15.6 per cent, so that we could withdraw 15.6 out of 100 and 12.4 out of 80 units. If we asked the three income owners which taxation type they would prefer, “A” and “C” would obviously prefer paying income tax as then they would have a significantly lower amount of tax burdens and “B” would insist on consumption tax, as in that case, he would not have to pay taxes at all. Lets’ examine the realization of the standpoints of horizontal and vertical equitability.

The principle of horizontal and vertical equity materializes, yet the incomes of “A” and “B” are identical and they pay identical taxes, taxes which are different from the tax burden of “C” who earns less and, therefore, he pays proportionally and equitably less.

Their consumption patterns also differ, which makes enforcement of the principles of equity and fairness difficult if we want to collect the resources necessary for financing the state budget based on consumption.

As in this case the tax burdens of “A” increases considerably, while “B”, who has the same income pays no tax at all, while “C”, whose income is the less of all, pays less than “A” since his consumption is lower, but higher than “B's”, who has a much bigger consumption potential than he.

None of the criteria of equitability shall materialize when comparing the situations of “A” and “B”, who, though their consumption potentials are the same, are not treated equally by the tax system, so one of them pays tax and the other does not.

This means that, as a rule, the tax system of every developed economy includes the above principles and the actual taxation system tries to comply.

Definition

Horizontal equity: People of the same situations, i.e., living under identical circumstances, having identical incomes or properties are treated identically by the tax system.

Vertical equity: People of different pecuniary positions, having different assets are treated differently by the tax system, meaning that individuals of different incomes are subject to different tax rates.

Naturally, from the point of view of the budget, there is also another distribution system. Theoretically, there is a linear relation between the trends of the GDP and the tax revenues, i.e. the change of the GDP compared to the previous year and the tax revenues. According to this, tax revenues increase when the GDP grows and the tax revenues of the central budget can suffer a decrease under otherwise unchanged conditions when the GDP decreases [8]. The smooth operation of the state spending requires, therefore the levying of such types of taxes which do not depend on the performance of the obligors in the given year. Accordingly, we can create groups of taxes depending on income (the personal income tax, corporate tax and turnover taxes belong here) and that of taxes independent of income, the so-called autonomous taxes [3], such as the wealth tax and the property tax.

As it can be seen, we have used several grouping criteria. In the final analysis, usually three main pillars of the taxation system of the developed world are distinguished: personal income tax, corporate tax, and the turnover (sales) tax and these guarantee a significant part of the state revenues.

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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