One of the most controversial economic issues in Hungary is back in the public attention: the uniform income tax rate, or, by its other name, the flat tax. According to the plans of the national conservative government of Prime Minister Viktor Orbán, the tax rate would soon be reduced from its current 16% to below 10%, which would be an absolute novelty in Europe.
Orbán first communicated the viewpoint of his government during his visit to Japan in November when he said it is possible that the flat rate might become a one-digit number. Mihály Varga, Minister of National Economy, confirmed his words a little later. Now Zoltán Pankucsi, the state representative responsible for tax issues in the Ministry of Economy, has confirmed there will be further reduction, but at the earliest in three years.
Until then, the utmost priority of the government is to keep state debt below 3% of gross domestic product (GDP), or face an EU excessive deficit procedure. Meanwhile, a promise to reduce the flat tax, or even keep it where it is, does no harm to Fidesz as spring’s parliamentary elections approach.
The left opposition cannot stop wailing when it comes to the flat tax. The party of former prime minister Gordon Bajnai (2009-2010) even started collecting signatures to stop the flat tax via a referendum. In the eyes of Bajnai’s Together 2014-Dialogue for Hungary coalition, the tax is something like the “original sin of Fidesz”. Their reasoning: it is bad for the majority of Hungarians, destroying ten thousand workplaces and forcing many young people to leave the country.
The president of the opposition Socialist Party (MSZP), Attila Mesterházy, also has a negative attitude, telling Parliament that it is bad for the country from an economic and from a social point of view. Mesterházy supports the introduction of a just and progressive tax system, where the rich have to bear more burdens.
A study prepared with the collaboration of an analyst of pro-government market research institute Századvég late last year was oil on the fire for the Socialists. The authors of the study concluded that the introduction of the flat tax rate in 2011 is losing the state HUF 444 billion each year. They calculated that this sum is primarily enriching those childless Hungarians who already belong to the highest income group.
The authors said the 16% uniform rate significantly increased the tax burden for low earners (for example, in the case of people earning the minimum wage the yearly tax burden increased from HUF 58,000 to HUF 126,000). The ratio of the payments of the highest earners within the whole tax income had been reduced from 61% to 42%. Their conclusion: those who earn more are the absolute winners.
Gábor Orbán, the State Secretary responsible for tax issues at the Ministry of National Economy, has a different opinion, stating that the top 20% of taxpayers pay 60% of the total tax income. However, this is not the point, he said. The introduction of the uniform rate was primarily because both tax rates applied in the previous progressive taxing system (18% and 36%) were so high that they prompted widespread tax evasion.
Orbán said: ”In order to come closer to this goal it was necessary to introduce a lifelike, suitable and simple taxing system.” In addition, the flat tax was the most important driver of sustainable economic growth in the country.
Zoltán Cséfalvay, another State Secretary at the ministry, said it is not the aim of the uniform tax rate system to even out social differences. The point is that “everyone should pay their taxes”.
The most positive example of the flat tax rate is our northern neighbour Slovakia. When it introduced a 19% flat tax rate from 1 January 2004 both for private people and companies, the country gained a reputation as a paradise for entrepreneurs that connected with its entry to the EU that year, sparking an investment boom. In January last year the social democratic government of Robert Fico introduced a higher tax rate of 25% for top earners.
In the EU a flat tax rate system can be found in Bulgaria (10%), Estonia (21%), Latvia (23%), Lithuania (15%), Romania (16%) and Czech Republic (15%).