Gossip mongering: the new Hungarian pastime

Yesterday I already mentioned some of the unbelievable speculations concerning the prime minister, the coalition, the SZDSZ, and early elections. At the moment nothing much is happening. The SZDSZ's National Council approved the decision to leave the coalition at the end of the month and the MSZP is planning to govern alone. That's all we know. Well, this is mighty little. The curious public must have more excitement, or at least that's what journalists (always aware of ratings) think.

The latest speculation concerns the fate of the prime minister. On Friday he said that he would resign only to allow the government to execute a more "radical" economic overhaul. His plan is to follow moderate reform policies. (That was like saying to the MSZP that they might have to continue taking a little arsenic for a while, which could make them feel ill, or they could opt for a fatal dose. It's hard to imagine that the MSZP, struggling with the moderate reforms, would decide to move to the extreme, which would undoubtedly equate to "in extremis--at the point of death.")

There was a widespread belief that Gyurcsány's fate would be decided by the MSZP caucus tonight. The media reported that "personnel questions" would be seriously discussed at this extraordinary meeting of the parliamentary faction. Surely, this would be no easy session: it might last three hours, late into the night. "We," meaning the press, might not know until tomorrow morning. I heard this on the evening news on ATV, with the anchorwoman anxiously asking her colleague on the scene whether there was any update. The first time, no; about ten minutes later the reporter sadly announced that he managed to talk to a senior MSZP leader and that "personnel questions will not be even discussed." How disappointing.

OK, if the personnel change didn't occur tonight perhaps it will tomorrow night. Stop.hu's headline reads: "The fate of Gyurcsány might be decided by Monday evening." From the article we "find out" that the successor might be János Gönczi, János Barabás, or Imre Nagy. Wow! What well known names! The first two I have never heard of, the third, Imre Nagy, I heard of but his namesake was a much more famous man than he is. I can well imagine how happily the outside world would greet Gönczi, Barabás, or Nagy as the new prime minister of Hungary. Who, who, who? And the forint would begin to fall and the Budapest Stock Exchange would get the jitters. Of course, we must keep in mind that two other people, Gordon Bajnai and Péter Kiss, had been mentioned earlier as candidates for the job. At least we know who they are.

Then come speculations concerning SZDSZ. That is no ordinary story either. According to the latest gossip, although the National Council overwhelmingly approved Kóka and his friends' decision about leaving the coalition, the Meeting of Delegates will make the so-called final decision. But these are the old delegates. At the end of June, after the SZDSZ elections, the revamped Meeting of Delegates will get together and choose a new president. And then the SZDSZ will return to the coalition. One doesn't know whether to laugh or to cry over this type of fantasizing.

What worries me is that the Hungarian public becomes befuddled, and panicked, by all these wild speculations. The Chicken Littles can envisage the complete political and economic collapse of the country. And as if the speculations weren't bad enough, we have real news: that István Gaskó, head of one of the trade unions at MÁV (Hungarian State Railways) will strike again as of midnight tonight and most likely the Budapest transit workers will join in this time. If not in government, there will probably be chaos in transportation.

Comments

[NWO]

Count me among the "chicken littles". The economy can only grow meaningfully in the medium and long term if radical fiscal reform is undertaken. To do this, it will require fundamental changes to the social saftey net, and thus to Hungarians understanding of the improtance of individual responsibility. This is obviously not happening, and is unlikely to occur unless Hungary falls into an Argentina style financial crisis. We are sitting ourselves up for two more years on treading water.

We already know that the political system and the political actors within the system have neither the vision, courage nor intelligence to address these issues head on. We also know that the political system has strucutres built in to it (i.e., referendums and the like) that exacerbate the short termism of the political class and increase the propensity for populism as a political solution.

So what is there to like about this scenario? Who actually sees any light at the end of the tunnel? Who will the country rely on to help it escape the trap of its own making? It is clear the exisiting political class can't do it. The self-styled great reformer, Gyurcsany, has told us last week he rather stay im power while carrying out watered down reforms at this point than fall on te sword out of principle. As fot he opposition, it is not even worth discussing. It is also true that the population does not understand the situation, and is not willing to sacrifice any present day comforts for far greater benefits in the future. This is a country of "no responsibility". Just look at today's strikes. Will anyone be held responsible for shutting down Budapest and large parts of the country?

That basically leaves the EU and the threat that it pulls the billions of Euro in support it is promising. The EU should pull the support. It should threaten (and be prepared to follow through) to isolate Hungary within the EU if Hungary does not follow through on radical reform. Hungary will increasingly become a burden for the EU (like Italy). If the country can't get its act together, why should taxpayers in other EU countries take on the burden?

[Eva S. Balogh]

NWO: "The self-styled great reformer, Gyurcsany, has told us last week he rather stay im power while carrying out watered down reforms at this point than fall on te sword out of principle."

Of course, one can always beat his head against the brick wall, but normally it is not a good idea. Perhaps a more "velvety" course will be more effective than going ahead and face another referendum, this time against the whole health reform bill.

[Adrian]

Nor would I underestimate the potential for a major economic and political crisis in Hungary. Though I think the events driving it would be global and economic rather than local and political.

The global economy is still in a very precarious state, banks have failed in the US, UK and Germany and it is still unclear how and when the global credit crunch will unwind. It was a international credit crisis that precipitated the economic crisis in the 1930’s, and so ultimately the ascendancy of fascism in Europe.

Hungary is vulnerable firstly because so many Hungarian firms and households have borrowed Swiss Francs and Euros. If the forint falls significantly against these currencies, these loans will default. This doesn't allow Hungary the soft option of devaluation (the pound has lost 13% against the forint in the last year).
The British and American governments have flooded the capital markets with cheap credit, and lowered interest rates as much as they dare, does the Hungarian government have either of these options?

Secondly, the tough option - deep fiscal reform - was rejected by referendum, and coalition politics have now adapted to the new policy. Now Hungary is just waiting for events to unfold.

Having been through serious recessions, Britain 1980-82 when lots of people lost their jobs, and Britain 1990-92 when lots of people lost their homes, and Russia 1996 when a country lost its dignity and is still smarting at the wound. I have to wonder what of earth the Hungarians have to complain about. They ain't seen nothing yet.

[NWO]

Believe me, "go slowly" means do nothing. I do not want to disparage what the Government has done since mid-2006. In fact, the reduction of the twin deficits (something that is not yet done)has been a great accomplishment (of course, if he had be really responsible he would have addressed this before the 2006 elections). I actually think the PM, if given his choice, would have tried some further and deeper reforms, but the fact is he has no political support within his Party for that and he stays in power by the mercy of a very small number of important MSZP officials. This is a recipe for 2 years of backsliding.

[Eva S. Balogh]

NWO: "I actually think the PM, if given his choice, would have tried some further and deeper reforms, but the fact is he has no political support within his Party"

So far, so good. But the fact is that one cannot blame the "awful" MSZP politicians only. The sad situation is that almost 3 million people killed even the water-downed reforms. It would be easy to blame the MSZP, but let's face it, it is the referendum which made it impossible to continue the reforms as originally envisaged.

[Odin's lost eye]

NWO's Comments
***** "Count me among the "chicken littles". The economy can only grow meaningfully in the medium and long term if radical fiscal reform is undertaken. To do this, it will require fundamental changes to the social saftey net, and thus to Hungarians understanding of the improtance of individual responsibility." *****

To which I would add "the reform of the tax structure and getting a grip on the black economy"

I ask myself is Gyurcsány the only one who can see this? Is Olban acting like an ostrich with his head in the sand or does he beleive that the EU will bail Hungary out for ever?
Sometimes one has to take a 'softly-softly' approach in the beginning especialy when one's supporters do not seem to be able to understand a simple balance sheet!
As to the matter of 'responsability' Until the return of democracy the last thing any Hungarian wanted was to be 'responsable' for anything. If you were you could end up having your disolved remains poured down the drains at 60 Andrassy u. This idea is still almost instinctive amongst them.

[Varangy]

A couple things:

****It is also true that the population does not understand the situation, and is not willing to sacrifice any present day comforts for far greater benefits in the future. This is a country of "no responsibility". Just look at today's strikes. Will anyone be held responsible for shutting down Budapest and large parts of the country?****

NWO is absolutely right. Everyone wants to have their cake and eat it too. There is no sense of personal responsibility and long-term economic health for future generations.

In a sense, they want to rob Peter (the future), to pay Paul (the present).

Eva, you, rightly, have pointed out what I have just outlined. But I wonder just why that might embedded in Hungarian culture?

Do you care to comment?

****"the reform of the tax structure and getting a grip on the black economy"****

@Odin's lost eye

The black economy is a symptom and direct effect of regressive and punishing Hungarian tax structure. Do not make the mistake of positing it as the cause.

What inevitably happens is that many politicians want to as you say, 'get a grip' on it be raising taxes or increasing enforcement.

But the problem is that it is like that children's toy, the harder you squeeze, the more it slips from your hand.

To diminish black market activities, the direct opposite is called for. Less taxation (and the necessary concomitant cuts in spending) will coax the black market into the sunshine. Engaging in the the black market only makes sense b/c its inherent risk (enforcing contracts, liability etc etc) is compensated by more potential profit.

[Adrian]

Varangy,

I'm braodly sympathetic to your argument that cutting tax rates (especially payroll taxes) could coax some money out of the Hungarian public. This policy was realised with devastating effect by Thatcher. But how comparable are British and Hungrian tax cultures?

Britain - since Henry VII - has a history of a gradually widening base for direct taxation - from the top down. Hungary has historically given its elite exemption from taxation. I understand that the toll on the chain bridge was the first 'tax' the Hungarian nobility were ever expected to pay. So historically in the UK its been no taxation without representation, whereas in Hungary representation has implied no taxation. This sense of entitlement would seem to pre-date the communists, and be a legacy of the Hungarian nemesség.

A significant question that I can't answer is how on earth in a socialist economy did personal and pay roll taxes get so high? Surely it would have been simpler to pay lower wages?

In "The age of turbulance" Alan Greenspan pointed out that the rule of law is only selectively applied in the polities of Eastern Europe. This chimes with many anecdotes I have heard where tax laws have been selectively pursued as a means of social and political control. In order for the threat of a tax investigation to have any teeth, you have to be confident that the alledged taxdodger has something to hide. In Hungary that confidence would be well-founded.

If this is the case, significant tax reform is only going to come the back of broad consensus among the political elite that it is time to surrender that means of control.

[Varangy]

@Adrian

I am not sure I am able to weave your different references into one coherent argument. (This is not meant as a slight, it is probably me.)

I don't think the ancient practice of nobles being largely exempt from taxation has any legacy influence on modern Hungary.

****A significant question that I can't answer is how on earth in a socialist economy did personal and pay roll taxes get so high? Surely it would have been simpler to pay lower wages?****

This does not compute for me at all. Socialist economies naturally foist all sorts of personal, social contribution taxes on their slaves, whoops, I meant on their serfs, whoops, I meant on their workers. Obviously for redistributive purposes.

Socialist economies try and ignore the obvious (lack of) economic incentives and direct effects of socialist policy. Sadly, like Viki is doing now.

****many anecdotes I have heard where tax laws have been selectively pursued as a means of social and political control
...
If this is the case, significant tax reform is only going to come the back of broad consensus among the political elite that it is time to surrender that means of control.****

I completely agree. And that is what all economies struggle with, even the bastion of the free-market, the USA looks to be headed for a massive shift to the (American) Left whomever wins the upcoming election. What that largely means is more taxes, more redistribution, more spending and less growth and opportunity.

Lowering taxes and lessening spending is, like you say, about decentralizing and giving up control. Part of that is pure self-interest on the part of politicians, part of that is that politicians, especially the hungarokrata, sincerely feel that they can decide for you, me and everyone else, what is best for you , me and everyone else.

Nonsense.

A city-state (now a SAR of China) who has done it well is Hong Kong. Tiny, few resources, extremely dense, is now in a budget surplus and they continue to cut taxes!

From http://www.mondaq.com/article.asp?articleid=58094

*****On 27 February 2008, the Hong Kong Financial Secretary presented his budget for the fiscal year 2008–09 against a background of soaring government revenues for the year ending 31 March 2008. The budget surplus is forecast to run to a record HK$115.6 billion (US$14.82 billion).
...
Investors and taxpayers will benefit from a raft of measures proposed in the budget. A summary of the major proposals are set out below.
Measures for Corporate— Company Profits Tax Reduced from 17.5% to 16.5%
...
the Financial Secretary has proposed a one-off tax reduction of 75 percent of profits tax for 2007–08, subject to a ceiling of HK$25,000 (US$3,205). The reduction will be reflected in the taxpayer’s final tax payable for 2007–08. The proposal will benefit all 100,000 companies liable to profits tax.

The Financial Secretary further proposed to waive the business registration fee of HK$2,600 (US$334) for 2008–09, to benefit all companies.

Tax losses incurred by a company can be carried forward without time limit.

...
The budget granted a 100% profits tax deduction for capital expenditure on environment-friendly machinery and equipment in the first year of purchase and shortened the depreciation period for environment- friendly installations, mainly ancillary to buildings, from 25 years to five years.

Salaries Tax—Salaries Tax Reduced from 16% to 15%

The budget will reduce the standard rate from 16% to 15% and also widen the tax bands for 2008–09.

The Financial Secretary has proposed reducing the standard rate from 16% to 15% for 2008–09.

Property tax is payable in addition to rates. Corporations carrying on business in Hong Kong can also elect to be exempted from property tax and instead be liable to profits tax.

The Financial Secretary will waive rates for 2008–09, subject to a ceiling of HK$5,000 (US$641) per quarter for each rateable tenement.
Charitable Donations

The ceiling for tax-deductible donations under profits tax, salaries tax, and tax under personal assessment will be increased from 25% to 35% of assessable profits or income for 2008–09.

The Financial Secretary has proposed to waive the hotel accommodation tax to further promote tourism and enhance the competitiveness of the hotel industry.

Last but not least, duties on wine, beer, and all other alcoholic beverages except hard spirits are waived. This is calculated to cut retail prices by possibly 20–30% and may also help Hong Kong enhance its reputation as a winetrading centre for Asia.*****

Conclusion: They fucking get it.

[Adrian]

vanrangy,

please don't swear, our host doesn't like it. I appreciate her hospitality very much, and wouldn't won't to lose it.

More about tax later

[Odin's lost eye]

Varangy please refrain from using basic Anglo-Saxon. It diminishes the argument. However I agree with you on the subject of 'CONTROL'. All over the world 'officers and other officials' deem that they know better than you. This is the nature of 'officialdom'. Once established it is almost impossable to remove it. It is like a cancer - it spreads and spawns more of its self. It makes its own rules and often flouts and ignores the laws of the land. Then only answer is to get hold of a 'Martin Ryland' type and let him cut out the dead wood.
In the matter of reforming the taxation structure, the models are already in existance. It is just a matter of importing one of the most suitable from abroad. When there is a fair and propper taxation system the 'black economy' will die back to a more normal proportion. The problem of taxation in Hungary seems to go back to before the W.W.II. Among some of the translated Hungarian authors I have read is Sandor Marai. In his books he is always complaining about the middle classes avoiding taxation.
Finaly as NWO quite rightly says
**** "It is also true that the population does not understand the situation,..." ****
Again I fear that we have history to thank for this. I have found, at a technical level, - Hungarians DO NOT LISTEN - I had flooding in my basement. The engineers proposed a 3MegaHuF solution involving pumping huge amounts of concrete through the walls. When I tried to tell them another solution I could see from their faces that they had 'switched off' and my translator started to argue with me. I know alot about water and getting rid of it. In my first career I had to deal with oceans of it (literaly). I cured the problem my self for less than 100,000 HuF. I drained the water away to somewhere else!
This 'not listening' is something Hungarians are very good at. I think it stems from 50 odd years of Communist properganda and it seems to have become ingrained in their psyche. They just do not want to know.

[Adrian]

Varangy

My post was not intended as a coherent argument, but three observations about tax that I think your position overlooks. If it helps I'll flag "new point" in future.

New point: History and taxation

"I don't think the ancient practice of nobles being largely exempt from taxation has any legacy influence on modern Hungary". Well, this is the difference between you and me. Going back to the Thatcher years; I'm curious to know your position on the poll tax - or as she called it the "community charge".

I think that her battle to introduce this reform to local taxation was lost as soon as it became "the poll tax" in the public imagination, this harked back to another piece of tax legislation last introduced in 1381.

The majority of British people decided that this tax was unfair. Folk memory of taxation goes right back to Robin Hood in English culture. I don't see why Hungarians should not have a folk-memory of a political priveledge that only started to wain in 1848.

New Point: Socialist Economy

I didn't mean economies with redistributive tax policies like the UK or Hungary, those I would call mixed economies. I meant economies where the state owns the means of production. Here the state also owns the revenue of all the businesses in the economy. In such an economy the state has the option of not charging the workers/slaves/serfs any tax at all, but of financing itself from the operating surpluses of it's businesses. If I was a socialist dictator, I would have gone for this and propagandized "look no income tax in workers' paradise". DOES ANYONE KNOW WHY THIS DIDN'T HAPPEN?

New Point: Social and Political Control

I'm not sure we really do "completely agree", here I'm not talking about the elite having control of the economy, good ol' socialist style. I am talking about the elite having control over individuals they decide are damaging their interests. For example, an acquaintance of mine claimed that while she was divorcing her husband, APEH investigated her three times. Her husband was a prominant local politician, and she felt he had used his influence to instigate the investigations so that any the disclosed financial information could be used in their financial settlement. Several similar stories have appeared in the press that APEH investiagations into politicians' affairs have been politically motivated.

New Point: Hong Kong Tax Dream

Thanks for all the statistics, but I don't think advertising the beneficial affects of one country's tax regime is sufficient reason for trying to impose it on another.

The structure of their economies is likely to differ: how many farmers are there in Hong Kong. Their existing foreign trade commitments might differ: is Hong Kong part of the EU? The population's tolerance of social inequality may be different: are Hong Kong's successful business people seen as role models or as robber barons. The policy commitments by political parties my be different: what are the economic policies of Hong Kong's opposition. The people's attitude to work, wealth and responsibilty may be different - I can make a call on this one I went to boarding school with several Hong Kong Chinese, their attitudes to all three were significantally more positive than those of most Hungarians who now surround me.

Because I see these questions as significant I am a Conservative and not a Libertarian, and had Thatcher been more conservative in her outlook she might have lasted longer and done more important work, Gyúrcsány who seems very Thatcherite in his aspirations likewise.

[Varangy]

****Going back to the Thatcher years; I'm curious to know your position on the poll tax - or as she called it the "community charge".****

I am generally against government/taxation (and spending). Big surprise, eh? That said, I don't advocate anarchy and public goods (infrastructure, military, police etc etc) must be funded. The devil, of course, is in the details. Who defines what is public good and how much should it funded?

I know very little about it -- I think she was trying to, perhaps clumsily, offset another tax that had been eliminated.

****I think that her battle to introduce this reform to local taxation was lost as soon as it became "the poll tax" in the public imagination, this harked back to another piece of tax legislation last introduced in 1381.

The majority of British people decided that this tax was unfair. Folk memory of taxation goes right back to Robin Hood in English culture. I don't see why Hungarians should not have a folk-memory of a political priveledge that only started to wain in 1848.****

I see your point about 'folk-memory', but it is not something I observe or have observed among my social circles.

****I meant economies where the state owns the means of production. Here the state also owns the revenue of all the businesses in the economy. In such an economy the state has the option of not charging the workers/slaves/serfs any tax at all, but of financing itself from the operating surpluses of it's businesses. If I was a socialist dictator, I would have gone for this and propagandized "look no income tax in workers' paradise". DOES ANYONE KNOW WHY THIS DIDN'T HAPPEN?****

I think I see what you are saying. Just pay them less i.e. take out the de facto income taxes earlier/'invisibly' and netto you come out the same.

My guess is that it is still pretty transparent as to what is going on. Why that wasn't done? I have no idea.

****I am talking about the elite having control over individuals they decide are damaging their interests. For example, an acquaintance of mine claimed that while she was divorcing her husband, APEH investigated her three times. Her husband was a prominant local politician, and she felt he had used his influence to instigate the investigations so that any the disclosed financial information could be used in their financial settlement.****

I see. I concur completely. Generally, the more government you have, the more opportunity for corruption.

To be honest, I had a tax dilemma that I cleared up with APEH because a friend of a friend knows someone there. I would have been a fool not to take advantage of that.

****Thanks for all the statistics, but I don't think advertising the beneficial affects of one country's tax regime is sufficient reason for trying to impose it on another.

The structure of their economies is likely to differ****

Sure. But basic economics, the laws of supply and demand, price theory and the effects of taxation, don't differ.

****The population's tolerance of social inequality may be different: are Hong Kong's successful business people seen as role models or as robber barons.****

The above points are completely irrelevant to inducing economic growth. Whether or not the population is resentful against the successful is silly. It might dictate tax policy, just like my choice of color, say, I like red, in a car might influence my car-buying decision, but red doesn't make the car go faster.

****The policy commitments by political parties my be different: what are the economic policies of Hong Kong's opposition.****

Sure. Again, those are largely irrelevant to my larger point, you cannot escape economics and human nature. The Commies tried and were extremely successful in impoverishing the people.

***The people's attitude to work, wealth and responsibilty may be different - I can make a call on this one I went to boarding school with several Hong Kong Chinese, their attitudes to all three were significantally more positive than those of most Hungarians who now surround me.***

I don't disagree.

Perhaps we are just talking past each other. You say that there is no one-size-fits all-tax policy.

Sure. I completely agree. That is not what I meant to illustrate with Hong Kong. I do not think that Hungary should enact an exact down to the littlest detail simulacrum of Hong Kong, but...it is undeniable, lowering taxes and lowering spending yield economic growth and create wealth.

[Viking]

I am the first one to claim that the need for public support for austerity measures are overrated, but I mean during the period when these measures are put into effect. That is why I am conceptual against referendums, like the Hungarian one his year.

That said, one still need the support of the common people to get a taxation system to work. You cannot just move the tax-% up and down and think it will have any effect on people's moral/willingness to pay the tax.

Let me take a short anecdot:
I was working in renovating one of our cellars with my FatherInLaw when we discovered that we needed some small tools. My FatherInLaw shook his head and said - "It was better in Kadar-time, then you just took what you needed from the work-place".

My FatherInLaw is close to 80 years old, never been outside Hungary, born in Western Hungary, married a girl from Eastern Hungary and built his family there in the East. He started to work when he was 7 years old and worked all his life. None of his family were never Party members and their children were never Pioneers (which was unusal in the school at that time). I regard him as honest and trust him totally.

If a person like that can make such a statement, does not this say something about the state of peoples minds regarding taxation and what is "common ours"?

Would lowering taxes just give the middleclass more to spend on luxury or would they really invest the money for "best of the country"?

[Varangy]

****You cannot just move the tax-% up and down and think it will have any effect on people's moral/willingness to pay the tax.****

Of course it does.

****Would lowering taxes just give the middleclass more to spend on luxury or would they really invest the money for "best of the country"?****

How about this? Let the middle-class (and any other class) spend their money any which they see fit.

[Adrian]

Varangy,

we seem to agree on lots of stuff in principle about tax. But:-

Counter cycle spending?

In the 1930's growth stopped in the developed economies and the economies went into a downward spiral. The reason for this was inadequate social security, as people lost their jobs, they could no longer afford to consume, and the total demand in the economy contracted, as demand contracted, more people lost their jobs and so on. The solution to this was provided by J.M.Keynes - the government should borrow to spend, thus creating deferred taxation. The stimulus package Bush is pushing through congress now is exactly this. Sometimes increasing the tax burden can increase growth.

There is a more complicated aspect to this argument involving the relationship between saving, consumption and income inequality. But I'm tired, maybe tomorrow...

Moral or Economic?

Sometimes your approach to tax reform is moral: "Let the middle-class (and any other class) spend their money any which they see fit." here 'their' seems to imply that you see tax as some sort of legalised theft, a very Hungarian view.

Sometimes your approach seems purely economic "But basic economics, the laws of supply and demand, price theory and the effects of taxation, don't differ."

What are arguing about tax reform, what is the case or what ought to be the case?

And if you don't mind me asking how long have you been living and working in Hungary? I was as frustrated as you seem to be, but it was nearly fifteen years ago.

[Viking]

Varangy,

So you actually are stating that if you lower taxes peoples willingness to pay those taxes will go up? In what relation 10% tax down = 20% more tax income for the state due to an "automatic" higher willingness?

The State never needs to argue its case? Making some propaganda to the people about why it is important to pay tax (common ours etc)?

Normally a Libertarian thinks that Tax is theft anyway, so I cannot understand your view. Because the % goes down, the Libertarians willingness to pay the tax goes hardly up.

[Adrian]

Viking, Varangy

Let's assume an economic argument about tax.

"The willingness to pay" becomes the "marginal cost of avoiding paying". If the tax is less than the cost of avoiding paying it, then people will be willing to pay. If the tax is more than the cost of avoiding paying it then people won't pay.

The impact of any tax rate reform can only be assessed through consideration of the costs of tay avoidance. The costs of avoiding paying tax are real but complex: the cost of creating seperate legal identities; cost of holding wealth/ earning income in tax efficient forms, and the risk of punishment for tax fraud.

Historically, the costs of tax avoidance in Hungary have been very low. Though Gyurcsány seems to have made tangible progress in raising them

[Viking]

Adrian,

Yes I can agree with that. The deterrence of getting caught plays a role in peoples willingness to pay tax, but I still believe there is a moral value also. Maybe because I am Swedish and some researchers claim there is a common culture thing among Swedes, Russians and Japanese - The honour of the Common.

In Sweden this is seen as the "FolkHemmet" (literally "People's Home") meaning the Good State.

Russians believe in their leaders, if it was the Tsar or Stalin - They were all called "Little Father". Now it is Putin the Russians put their total trust in.

The Japanese have a strong connection to their Emperor.

In all these 3 countries people normally have a positive view of their Leaders and the State they represent. Hence a bigger willingness to contribute with the tax, for a/the common good.

But maybe we are the exception that confirms the rule that the rest of the world does not give a hoot were the taxes go, they just do not want to pay it...

[Varangy]

****So you actually are stating that if you lower taxes peoples willingness to pay those taxes will go up? In what relation 10% tax down = 20% more tax income for the state due to an "automatic" higher willingness?****

@Viking

The concept you are instinctively coming up with is known as elasticity. That is, a ratio of the percentage change for X over percent change in Y.

In this case:

-X% marginal tax rate

over

+Y% increase in paid taxes

What that is exactly for Hungarian taxes, I don't know, it is probably somewhat inelastic i.e. between 0 and -1. (-1 would be -X%/+X%)

Now let me tell you why I think that. (Besides the obvious, the more free your markets are, generally, the smaller your black markets.)

The black economy exists, as we all know, precisely to avoid higher prices by the consumer and taxes by the supplier. However, the black economy is not without risk, cost and inherent financing limits --- these, while hard to quantify, are very much part of what Adrian terms 'costs of tax avoidance'. I perceive them to be much higher than Adrian does i.e. simply avoiding detection by the Hun. State.

It is much, much harder to enforce property rights and contracts as well as resolve disputes when you do all your business in cash/black economy.

Minor example, where I buy my suits in Bp., I always pay cash and get no receipt. We all know why.

Let's say I was told that the suits I purchased were Hugo Boss. A couple days later, someone who knows about these things informs that my new suits are nothing but cheap Chinese knock-offs that will fall apart in six months.

What can I do? I can try to take it back to my tailor/suit smuggler guy --- and if, most likely, he refuses? I

I cannot take him to court as I have no record of the transaction etc etc

That is why property rights and contracts in the black market are usually enforced by big, bald, and muscled men -- not judges.

As far as he goes, he has to smuggle in his suits. Run two sets of books -- figure out where to stuff his excess cash should he get audited or robbed etc etc --- a pain in the ass, especially should he get caught.

This is a silly example but I think we all get the point.

Currently, it makes sense for both me and my suit smuggler to go below the radar. That is the money we save/gain compensates for the risk we observe. That said, if the áfa-kulcs was to be reduced, we would most likely both be better off and more likely, to quit transacting in the black market.

I could draw similar examples of the problems/risks of transacting labor services under the table, say between a waiter and a restaurant owner.

****The solution to this was provided by J.M.Keynes - the government should borrow to spend, thus creating deferred taxation. The stimulus package Bush is pushing through congress now is exactly this. Sometimes increasing the tax burden can increase growth.****

@Adrian

I don't want to go into a protracted off-topic and get into keynesianism but this is a common myth. No country has ever taxed, spent and/or borrowed its way to growth -- otherwise the former USSR et al would be rich, not poor.

***income inequality. But I'm tired, maybe tomorrow...***

I am unconcerned with income inequality. A rising tide lifts all boats.

Then Adrian says:

****Sometimes your approach to tax reform is moral: "Let the middle-class (and any other class) spend their money any which they see fit." here 'their' seems to imply that you see tax as some sort of legalised theft, a very Hungarian view.*****

Then Viking says:

***Normally a Libertarian thinks that Tax is theft anyway, so I cannot understand your view.****

I don't see tax as theft. As I wrote above very clearly:

***I am generally against government/taxation (and spending). Big surprise, eh? That said, I don't advocate anarchy and public goods (infrastructure, military, police etc etc) !!!must be funded.!!!***

So, let's do away with that straw-man right quick. What I do know is that individuals can spend their own money better and make better decisions for themselves than the State can do either for them.

If you don't believe me, allow me to dictate your spending choices and preferences for labor and leisure for a year or so.

****Would lowering taxes just give the middleclass more to spend on luxury or would they really invest the money for "best of the country"?****

This has nothing to do with my alleged theft perception. It has everything to with taxation shouldn't based on what people will spend their money on net taxes. That is, if you think they will buy a whole lot XYZ, if you lower taxes. But you would rather they spend it on ABC. Let them spend it on ABC or XYZ or QRS. Why should you or anyone have a say?

Long comment. I am exhausted.

[Adrian]

Varangy,

so you think that Bush's fscal stimulus package is a mistake then?

If so, what would your response to declining growth in the US be?

[Viking]

So Varangy-Country is ruled by fear. Fear of getting caught. The people there are not guided by a moral compass that keep them on the straight and narrow road. No 10 Commandments etc, just fear and repression from the bad State.

In China they have public executions as Saturday entertainment in big Stadiums. I believe they still get new murderers, rapists and big embezzlers faster than what they can kill them off. So if it fear of getting caught and killed does not stop people from committing crimes, how will then fear of getting caught for tax evasion stop people from cheating with the tax, regardless of the %?

But what do I know, I am just the "village idiot" in the Varangy world.

[Varangy]

****Varangy,

so you think that Bush's fscal stimulus package is a mistake then?

If so, what would your response to declining growth in the US be?****

@Adrian

Great question. I, personally, think that Bush's giveaway is a prodigious waste of money. I was going to draw some analogies myself for you, but time would be better spent reading some more intelligent , better argued and more eloquent than me. Therefore, I direct you to

http://opinionjournal.com/columnists/rbartley/?id=95001820

The column is a couple years old -- but the economics don't change.

***In what passes for debate in Washington, the prevailing notion seems to be "putting money in people's pockets." This might be called single-entry Keynesianism, since the money the government puts in pockets arrives by immaculate conception.***

Now onto, *sigh, Viking:

***So Varangy-Country is ruled by fear. Fear of getting caught. The people there are not guided by a moral compass that keep them on the straight and narrow road. No 10 Commandments etc, just fear and repression from the bad State.***

You make no sense whatsoever. This is the third or fourth time you have either:

a) mistakenly misconstrued something I have said

b) intentionally built a laughably obvious strawman

c) have projected your own psychological problems onto me

Nowhere did I use the word 'fear'. What I simply reference is economic incentive, self-interest and risk management. You say you own several retail stores, you must respond to incentives and disincentives rationally or you would be out of business. For example, you are more likely to borrow money to expand when interest rates are low, than when high. You pay back your loans, not only out of, primarily, moral principle, but you do not want to incur late fees etc etc

You do not 'fear' (like I fear my neighbor's dogs) interest rates and loan terms -- yet you respond to them.

What about economics and incentives do you not understand????

****In China they have public executions as Saturday entertainment in big Stadiums. I believe they still get new murderers, rapists and big embezzlers faster than what they can kill them off. So if it fear of getting caught and killed does not stop people from committing crimes,****

We are going way, way off topic here. You expect me to believe that YOU actually believe that punishment of crime has NO deterrent effect whatsoever on criminal activity?

So, why even persecute and punish anyone? Let's just stop here b/c you make no sense.

****how will then fear of getting caught for tax evasion stop people from cheating with the tax, regardless of the %?****

Please re-read the very comment you are responding to again.

'Fear of getting caught for tax evasion' is one component of the costs of doing business in the black market.

I demonstrated that executing transactions in the black market has upsides/gains that outweigh the potential risk faced.

Currently, for activity carried out in the black market, the net costs of doing business in the black market are less than paying the required legal amount in taxes.

By lowering taxes some (unknown) X%, you decrease the costs of doing business legally.

The black market gains are then outweighed by the gains of doing business legally, where you have access to formal courts, contracts etc etc

Again, I have been, I feel, cogent and responsive to your comments.

Does your antipathy for me override your common sense?

[Viking]

Varangy,

I was trying to get you to see the moral side of governing a country. It is not just a spreadsheet operation. I obviously failed, but I can live with that.

I do many decisions based on simple economic rules, many of those you described. But, and here we differ, I try to put a moral dimension in some of my decisions. It is up to my discretion and my values and there is probably no consistency whatsoever.

You call it a simple judgement of the greatest benefit - white or black transaction? I call it "fear of getting caught". Same coin, 2 sides.

I will still believe that it is possible to influence the "benefit"-factor to an unknown degree by applying moral (or State propaganda as maybe a Libertarian would call it, but it is basically the same thing). For a State the moral-boosting (we are all in the same boat etc), if successful, can be cheaper in many senses than the "fear"-factor only. Lately Veres was trying to do this, he even asked the media to help him. I do not think Veres' plea will have any real effect in such a politically divided Hungary of today. Here you can really refer to Schroeder's comments earlier today.

I do not expect to get the Nobel-prize for this theory, though.

Punishment as deterrence, no not really. It would be easier if it worked, but a high moral, good working society and working treatment of mentally ill persons is normally better. For me it is the same "benefit/fear"-scenario as in the tax-case, but that can be another story.

I did not know a "village fool" had any high standard on his common sense.

[Varangy]

****I do many decisions based on simple economic rules, many of those you described. But, and here we differ, I try to put a moral dimension in some of my decisions. It is up to my discretion and my values and there is probably no consistency whatsoever.****

Moral principle does not have to be mutually exclusive with economic incentives.

I assume most people are 'good' and most people make decisions informed by their moral principles and economic incentives. They do not have to be, but can be, binary.

I cannot comment on the rest of your comment b/c it has no consistent line or argument.

****I do not expect to get the Nobel-prize for this theory, though.****

For Nobel Prize in the Name of Incoherence, I will certainly nominate you.

*****Punishment as deterrence, no not really. It would be easier if it worked, but a high moral, good working society and working treatment of mentally ill persons is normally better.*****

I agree. We should treat you better.

****I did not know a "village fool" had any high standard on his common sense.****

He doesn't.

[Adrian]

Varangy,

the economics do change, the US economy is no longer growing. By the mesure of GDP per person its already in recssion, i.e individual americans are getting poorer.

Do you wait and let them get poorer?