Tax reform is typically a
decisive question in political debates. In Hungary there are two factors which
are making the spring-summer period of drafting the autumn tax laws more tense
than usual. Firstly, there is growing pressure on political players to launch
tax reform in order to stop the competitiveness of the Hungarian economy from
deteriorating even further. The second point is that progress is being hindered
by the current political situation.
Hungary uncompetitive
The majority of economic
and political players now agree that reform of the tax system is a matter of
urgency. Whereas in most Eastern European countries there is a trend of
steadily reducing tax burdens, here corporate and payroll taxes have risen as a
result of the austerity programme. From an economic perspective the main
driving force behind the tax reform is that Hungary is falling behind other countries
in the region in terms of competitiveness and attracting capital investments.
The longer Hungary waits before implementing comprehensive tax reform, the more
the country will be at a disadvantage compared to its regional rivals. It is
widely understood that the tax reform has three main purposes: it must meet the
challenges of international tax competition, reduce tax evasion, and result in
fairer distribution of tax burdens. Finally, there is agreement that the tax
reform will only be successful if it is genuinely comprehensive. In other
words, it has to involve restructuring the tax system, improving
administration, making tax audits more stringent and removing factors which
encourage tax evasion.
The debate on tax reforms
begins where the political positions part from each other. In this respect the
difference between being in government and in opposition is more important than
differing ideologies and views on economic policy. This is best illustrated by
the behaviour of the Alliance of Free Democrats (SZDSZ). Since announcing its
split from the coalition, the liberal party has been demanding tax cuts
increasingly forcefully in the course of the current tax debate in preparation
for the autumn amendments to the tax legislation. Since holding talks with
Finnish, Estonian and Romanian liberal political leaders in the middle of
April, János Kóka, the SZDSZ chairman and former economy minister has been
arguing emphatically for a flat-rate tax system. The last time the SZDSZ spoke
with such vigour about the need for such a system was during its 2006 election
campaign.
Fidesz courts responsibility
The difference between
the responsibility of being in government and in opposition is also illustrated
by Fidesz’s approach. The largest opposition party, which for years has held
out the promise of radically reducing taxes and contributions, in recent months
has clearly been trying to appear more capable of governing and to improve how
the party is viewed by economic decision-makers whilst still retaining the key
messages of its earlier policies.
As the smallest
opposition party the Hungarian Democratic Forum (MDF) has likewise been trying
to strengthen its position in the tax debate. The MDF released its own
proposals named the National Programme for Freedom of Taxation, which calls for
a tax amnesty, an 18 per cent flat-rate personal income tax, and reinstatement
of three VAT rates. The MDF achieved a minor success at the five-party talks
which it initiated because all the parliamentary parties agreed on the partial
abolition of inheritance tax which the party had been demanding for years.
Lonely at the top
Whereas the opposition
parties can put forward their sweeping tax reform proposals, the MSZP, which
has the responsibility of governing, is in a tight corner. Comprehensive tax
reform can only be launched in a stable budgetary situation, because it will
involve additional expenses at the beginning and the increase in revenue will
only be gradual. As a result Prime Minister Ferenc Gyurcsány has stressed that in
the current situation the government can only take small steps.
This, however, puts him
at a clear disadvantage from both an economic and political point of view,
because continuous change to the tax legislation would increase uncertainty.
Gyurcsány also has a difficult legacy: he lost his credibility in terms of tax
reform when the 2006 five-year tax reduction plan was withdrawn after the
MSZP’s election victory.
The government can only
regain a modicum of credibility in this area if it can show at least some
results in transforming the tax system. However, a step-by-step tax reform over
two years can only be successful if it takes place according to a smooth
schedule which enjoys the stable backing of the parliamentary majority. That
would mean the political players putting aside their short-term political
interests. There is very little chance of this in the current, highly unstable
political situation: there is a minority government which means daily
bargaining in parliament, the European Parliament elections will take place in
a year’s time, and all the parties are keen to show that they have an
independent tax programme.
This also makes it
unlikely that the SZDSZ-MDF-Fidesz majority which shares the idea of a
flat-rate tax will topple the minority MSZP government by voting for a joint
tax programme. This scenario is only possible if the SZDSZ, now an opposition
party whose level of support is currently below that needed to pass the
parliamentary threshold, decides in the autumn that it is worth risking early
elections.
