Soon-to-be
minority government says now is not the time for an overhaul
Small
conservative opposition party the Hungarian Democratic Forum (MDF) last week
moved forward in its desire to bring in a flat tax system and recommended an
amnesty on tax cheats to help ease in a strictly enforced new low-tax model.
advocated a simplified flat-tax system as a means to combat the black economy
and boost Hungary’s competitiveness. The liberal SZDSZ party – set to leave the
governing coalition at the end of the month – and main centre-right opposition
bloc Fidesz-KDNP have both supported a flat tax model in the past.
In what it dubs
its National Tax Freedom Programme (NAP), the MDF calls for the introduction of
a flat rate of income tax fixed at 18%. Such a move would bring Hungary in line
with its regional competitors such as Slovakia, the Czech Republic and Romania.
Low earners would be protected, says the MDF, because the tax would only be
payable on that portion of monthly income over HUF 60,000 (EUR 238). Currently,
personal income tax in Hungary has two bands of 18% and 36%.
In addition, the
MDF is calling for a reduction of 7% in overall contributions for pension and
social services as well as the abolition of death duties. The party also
envisages a three-tier VAT system, with food being moved from the current
maximum 20% band to a middle band of 12%. All of this would be accompanied by a
rigorous tightening of tax inspections, says the MDF.
At a press
conference last Tuesday, the leader of the minority conservative party Ibolya
Dávid outlined her vision of a complete restructuring of Hungary’s tax system.
She believes that her party’s proposed model would boost economic growth by 2%
and drastically reduce tax evasion. Current estimates put the size of Hungary’s
black economy at between 18% and 40% of GDP.
Off the hook
Under the
amnesty, citizens would be able to voluntarily declare income generated in
Hungary but kept hidden or moved abroad between October this year and 20
February next year. They would then be required to pay a one-off rate of 10%
and begin again with a clean sheet. The MDF says it modelled its proposal on a
scheme applied in Ireland in 1988, which brought in USD 750 million from
170,000 people, although only about USD 50 million was expected.
The minority
opposition party – which has only 11 seats out of 386 in parliament – reckons
such an amnesty would bring in at least HUF 75 billion (EUR 297 million) in
Hungary. From January 2010, the current tax system would be replaced with a
simplified, lower tax model backed up by far stricter tax inspections and
rigorous rules regarding declarations of wealth. In addition to the usual legal
sanctions, the party is even calling for tax cheats to be stripped of their
voting rights.
Too complicated
The current tax
system – with some 53 different individuals taxes and compulsory contributions
– is over complicated, says the MDF. The party’s press release screams its
message in bold print: “The current tax system sends out just one message:
everyone cheats! The current tax system has only one result: everyone cheats if
they want to survive!”
Dávid concluded
her speech by saying: “The most important goal for the nation is the equitable
distribution of the financial burden, the strengthening of the middle class,
and ensuring that people are raised out of poverty.”
Government unimpressed
In parliament
last Monday, Finance Minister János Veres said that the government is open to
the idea of a tax amnesty for fraudsters. However, in response to questions
from Károly Herényi of the MDF, he rejected point blank the idea of introducing
a flat tax, which he said would favour the rich over the poor. He also
dismissed calls for the abolition of death duties, although he allowed that
exceptions might be possible in the case of property passing to very close
relatives.
PM Ferenc
Gyurcsány said that the current social and political climate precludes the
introduction of major tax reform – a situation he blamed on strong public
opposition to reform fomented by the opposition. By Wednesday, the government’s
position was clear. The Finance Ministry slammed the tax proposals, saying the
mooted measures would slash annual budget revenue by HUF 1.37 trillion (EUR
5.39 billion).
The MDF held cross-party
talks on Thursday to discuss its ideas. Dávid announced afterwards that there
was unanimous agreement on the need to lower taxes in the next few years. Apart
from general support for a reduction in inheritance tax, however, there was
little talk of definite measures. The head of the governing MSZP’s working
group on finance, Lajos Szabó, said “restructuring the tax system will only be
possible when does not jeopardise budgetary balance, if it whitens the economy,
and does not worsen the situation of people living through difficult
conditions.”
Neighbouring
Slovakia, Romania, Serbia and Ukraine have already introduced similar models,
which advocates say vastly simplify accounting and make tax evasion more
difficult. EU newcomer Bulgaria made a clear bid for foreign investment in
January when it cut personal income and corporate tax to a flat rate of just
10%.
