Not only hurts tax
revenues, but lowers quality of work
The typical Hungarian
likes to eat heavy, fatty food, is virtually dependent on a set of wheels and
shamelessly evades taxes. In Hungary cheating the tax authority almost counts
as a national sport.
There are several reasons
for this phenomenon: high taxes, the unfair distribution of the tax burden and
the complicated tax system. In addition there are still destructive anti-state
reflexes at work in Hungarian society which stem from the communist era. According to a new study by two employees of
the National Bank of Hungary (MNB), Gábor P. Kiss and Judit Krekó, Hungary has
a grey economy worth roughly 12% of GDP. In its latest study, the financial
consulting institute Oriens puts the scale of illegal employment at 20-21%.
Other analysts speak of a grey economy of up to 30%.
The big two
In Hungary concealment of
consumption and the non-payment of social security contributions are
particularly conspicuous forms of tax evasion. Both phenomena are around eight
percentage points above the EU average. According to the MNB study, in 2007 the
Hungarian state lost revenue of around 6.7% of GDP due to tax dodging. In 2006
this figure was 7.9% of GDP. This value is higher than the entire Hungarian
budget deficit of 5.5% of GDP (from the previous year). The treasury suffered
the greatest loss of revenue after earned income, where the level of evading
tax and contributions payments was 4.2% of GDP.
The smaller, the sneakier
Tax dodging is
particularly widespread among those Hungarian companies with fewer than five
employees. Around 90% of income tax – equivalent to 20% of GDP – is paid by
private companies with more than five employees, and by employees in the public
sector. The contribution of Hungarian small enterprises which have fewer than
five employees is minimal.
Hurts in other ways
The Oriens report points
out that Hungary’s rampant tax evasion has also made itself felt on the
macroeconomic level. In the construction industry, for example, due to tax
evasion very few large companies have formed which have their own employees and
offer quality, instead of which the industry is dominated by sub-contractors.
According to Oriens it speaks volumes that in Hungary the average number of
employees in a construction firm is three, whereas in neighbouring Slovakia the
figure is 19.
Yes to tax cuts – but how?
The minority Socialist
government (MSZP) is under increasing pressure from all sides to reduce taxes
in order to curb tax evasion. So far they have taken a wait-and-see attitude,
and are currently still debating different solutions.
Defence Minister Imre
Szekeres, for example, would like to regroup the tax burden within the existing
tax system, by massively raising excise tax in order to reduce other taxes.
The minister in charge of
the Prime Minister’s Office, Péter Kiss, would like to significantly reduce the
tax burden on work in order to boost employment. The introduction of a flat tax
has been repeatedly rejected by the MSZP.
The Socialists’ former
coalition partner, the Alliance of Free Democrats (SZDSZ), has called for a 20%
flat tax to be brought in following the implementation of an “intelligent, well
thought-out tax reform”.
conservative opposition party Fidesz has also been speaking of tax cuts for
some time. György Matolcsy, former economy minister under the Fidesz government
of Viktor Orbán (1998-2002) and today director of the Growth Research
Institute, explained at a forum that if Fidesz comes into power it would
undertake tax and contributions cuts to the tune of roughly HUF 1 trillion (EUR
4.10 billion). According to Matolcsy such a move would enable around a million
new workplaces to be created in five to ten years.
The smaller conservative
opposition party, the Hungarian Democratic Forum (MDF) proposed the
introduction of a flat tax set at 18% at the start of April. The MDF is also
recommending that there be three VAT brackets of 5%, 12% and 25%.