The Hungarian prime minister's encounter with the tax cut

Usually Viktor Orbán chooses his words very carefully. Most of his promises and accusations are phrased in such a way that they are ambiguous double talk. Before the elections he was very careful about refraining from any specifics, items that later the electorate might demand be fulfilled. If in this election campaign of 2010 there was anything that was specifically promised it was an immediate and drastic tax cut. There was even talk about a tax cut as early as July 1. Of course, tax experts pointed out that to work out an entirely new system of taxation is not an easy matter, and it cannot be introduced within a month or so.

Time went by and tax cuts remained a popular speech and interview topic, but they didn't seem to be either immediate or drastic. One government member said one thing and another its opposite. Eventually critics of the government came to the conclusion that either the new government has no economic policy whatsoever or there are huge differences of opinion within the government.

Only a few days ago the undersecretary in charge of taxation indicated that the introduction of the flat tax will have to be postponed until 2013. A day later his boss, György Matolcsy, announced that his undersecretary was wrong: a flat tax will be introduced as of January 1, 2011. However, he added, this flat tax will be combined with "family taxation." As far as I can figure out, that means that there will be features in the new tax law akin to a joint return in the U.S. and deductions linked to the number of claimed dependents. However, a flat tax is flat because there are no deductions and, as some people pointed out, the Hungarian system would be unique indeed. A flat tax plus deductions! It will be interesting if it ever materializes. If you asked me today whether it will be introduced on January 1, I would say no.

And now enters the most important person in any political or economic discussion: Viktor Orbán, the prime minister. A day after Matolcsy's promise that Hungary would switch over to a flat tax system as of the first of the year, he gave an interview to a local internet paper called kemma.hu serving the county of Komárom-Esztergom. To show how cleverly Orbán can answer a question I will translate most of the exchange. The reporter asked: "Will there be a flat tax from January on?" Answer: "We will have a new system of taxation." (Note that he doesn't say that it will include the idea of a flat tax.) Then a few lines later: "I made a clear promise at the time of the campaign that Hungary will have a simple, work- and family-friendly tax system. I also said that there will be tax cuts. Business taxes were already cut from 19% to 10% and that is a radical reduction. In addition, we scrapped ten different categories of small business taxes.... Naturally there are experts who suggest that these changes should not be introduced all at once but in two or three different stages, but of course the final decision is that of the parliament. The government can only suggest. I suggest that the changeover to the new system be done at once and as soon as possible."

Note that Orbán not once uttered the phrase "flat tax." Also he said nothing about January 1st. He simply said that the new system--whatever that may be--will be introduced as soon as possible. But since the introduction of lower taxes is on everybody's mind, it became obvious that Orbán's interview on a local internet website would not satisfy the curious public. He agreed to give a television interview last night on "Az Este." The interview was in essence a shorter version of his earlier talk in Komárom-Esztergom. Again, without uttering the phrase "flat tax" he said the following: "I think I can convince the members of the cabinet and I think we have enough strength to convince at least 50% of the members of parliament" to vote for an immediate tax reduction in one stage. "One can bet that there will be such a tax system as of January."

My first reaction was: "That's really very funny." Viktor Orbán is hoping to convince the members of his cabinet of anything? Or he is hoping to receive the confidence of at least 50% of the parliamentary members?  As far as we can ascertain the cabinet does what he tells them to and very often he speaks of government decisions as his own. (Several times he was caught saying "I decided" this or that.) Fifty percent of the members of parliament? But they have a comfortable two-thirds majority and Fidesz and KDNP members vote like robots. There is no question that if the government comes up with a new flat tax plus deductions there will not be one Fidesz-KDNP member who will vote against it.

So then what? Can we speculate that this time it's different? Is it possible that in the final analysis the members of the government will not heed his suggestion? Is it possible that they will convince him that, given the state of the budget, there is no way to introduce such a low level of taxation? It's possible. In this case Viktor Orbán will be able to tell his people: "You see, I tried, but tax experts are convinced that the introduction of a flat tax must be postponed."

I can of course be wrong. Perhaps the cabinet and the number crunchers will be convinced by Orbán that such a drastic step can be taken, but I somehow doubt it. As it is, staying under the 3.8% deficit target seems to be in jeopardy. Experts are convinced that the deficit right now is about 4.4%. Less money has been received than estimated and, although the government claims that it is very careful with expenses, I believe that there must have been an increase in expenditures. In the television interview Orbán also talked about the deficit. According to him by September 30th they will know whether the government, given the present situation, can keep the 3.8% deficit or not. If not, they will "have to take some steps but whatever these steps are they will not affect adversely the pocketbooks of the people. There will no be no austerity measures."

According to Péter Róna, the immediate introduction of the flat tax would be ruinous for the budget. My feeling is that there might be some changes in the tax system as of January 1 but they will not be the ones Orbán was originally talking about.

Comments

[Paul Haynes]

I am utterly baffled by the Hungarian tax system and the changes proposed (or not). I have asked about this on here before, but remain confused.

Exactly what is it that OV was proposing in the run-up to the election? I know it was a 16% 'flat tax' (or similar), but I don't know what this means.

For instance, I assume the Hungarian system allows you to earn a certain amount before you pay any tax (as here in the UK) - does this remain under the 'flat tax'? I also assume that all other allowances are abolished. Is this so?

16% seems awfuly low to me. I haven't checked the figures, but I think the mininimum tax here in the UK is about twice that (including NI, which is just tax by a different name). How does OV hope to balance the books by cutting the government's income so drastically? Does he really think the tax avoiders will have a fundamental change of heart just because they are avoiding less tax?!

And, while I'm at it, I'm told that pensions aren't taxed in Hungary, but does this just apply to the State pension or to all pensions?

[Pásztor Szilárd]

No, OV was has not promised a 16% flat tax in the run-up to the election. He promised a significant tax cut, without details.
A 16% flat tax can surely be called a significant tax cut!

"For instance, I assume the Hungarian system allows you to earn a certain amount before you pay any tax"

In Hungary, minimal wages are tax-free but IMO this should be abolished because people primarily use it for tax evasion. Practically noone is really earning a minimal wage, but many people are administered at a minimal wage and receive the additional money directly into the pocket.

16% is very low yes, but you must take into account Hungary's surroundings. In our region, most tax rates are somewhat below 20%. If we want to have competitive advantage, it is a good idea to go below that. The main point is to lower the amount of tax paid by taxed people while widening the number of taxed people by a large extent. This means a lot of whitening of the "grey" and "black" economy.

Such a low tax is surely putting a heavy burden on the government budget but in a half year or so, more tax income is expected due to a lot of people moving in to taxed jobs from the jobs which today evade tax, plus lots of new job opportunities should be created.
This is the plan, at least, and this has worked in Slovakia.

And in Hungary there are currently no other pensions than State pensions because private pensions are not allowed to be paid yet, the system is too young for that. This is why there is an incorrect accounting of the pension system of Hungary in the EU, which OV, together with 8 more countries, is trying to change.

[Mark]

Pásztor Szilárd: "This is the plan, at least, and this has worked in Slovakia."

No, it hasn't. Actually I would read the following study - it shows based on evidence from the surrounding countries that flat taxes actually have delivered none of the benefits their supporters have claimed anywhere:

http://www.imf.org/external/pubs/ft/wp/2006/wp06218.pdf

But there and then again I wouldn't expect people who think that Hungary's Holocaust only happened when Szálasi was in power, and not before, to know very much about facts, or evidence

[Passing Stranger]

Don't let Szilard fool you into saying that there never was a flat tax on the books, and that there now is only a significant reduction at stake. In his 29 point plan of 8 June Orban very clearly promised a flat tax.

However, in onse sense Szilard may be right. The Fidesz election programme was famous for its lack of details, and the government still is vague about its plans. We keep hearing about mysterious deductions, which obviously would not make this a flat tax.
If you'd want to give Orban the benefit of the doubt, you could say that Fidesz gvt is merely communicating its tax plans very
badly.

But why would you give Orban the benefit of the doubt? We are meant to take on faith that these tax plans might work. While that is enough for Szilard, most of use would like to know on what data these wildly optimistic assesments of a succesful flat tax system are based.

As Gabor has calculated several times on this forum, a flat tax in Hungary would amount to a tax break for the rich. Those under 73000 FTS would suddenly be taxed 16%, and the sudden dissapearance of deductions would make this in reality a tax hike for anybody making up to 240.000or so FTs per month.

[wolfi]

I really can't imagine this flat rate tax without any allowances. Taxing people who earn minumum wage or maybe a bit more at 16 % would take out around 10 000 HUF from their already meager (or should I say measly ?) wages - this is ridiculous!

Especially if rich people would get this 16 % tax break.

How would he expect to win the next elections with this ?

In another country (like Greece) this surely would lead to riots ...

[Paul Haynes]

Private pensions aren't allowed? Is this right?

So, if I work for a company like (say) Teva, who would normally, I assume, offer their staff a pension as part of their salary package, they are not allowed by law to offer that in Hungary?

This seems a bit strange to me.

And what about foreigners? What if my income is from a private pension and I decide to live in Hungary - do I pay no tax?

[Paul Haynes]

"In Hungary, minimal wages are tax-free"

Sorry, but I am still confused. Do you mean 'minimum' wage?

If so, does this mean that if your income is below the minimum wage (assuming there is one) that you don't pay tax, but if you earn more than the minimum wage you pay tax on everything you earn?

Or does everybody have the same tax free allowance - i.e. no one pays tax on the first part of their income, no matter how much they earn?

If this isn't clear, perhaps my assumptions/questions will make more sense if I outline the tax system I'm used to.

In the UK, you are not taxed at all on the first £6,475 of your annual income (£9,490 if you are over 65).

Above £6,475 you pay tax at 20%, until your income exceeds £37,400, when the tax goes up to 40%, and then 50% from £150,000 (a new higher tax band, introduced this year).

Each tax rate only applies to the income in that tax band, though, so your first £6,475 isn't taxed at all, the next £30,925 is taxed at 20%, the next £112,600 is taxed at 40%, and then anything above that is taxed at 50%.

There are a host of other allowances, plus several different ways of paying tax back (even if you don't pay tax!), and then there's another tax called National Insurance, which (I think) amounts to another 9%, but which only applies up to a certain income. And, on top of all that, we pay a local tax (Counil Tax), based on the value of our houses. But, in essence, the system is as described above.

I hope this helps (because it's taken me quite a bit of 'research' to check all this!). Is the Hungarian system similar to this? If not, in what ways does it differ?

Incidently, one of the peculiarities of the UK system is that the tax-free limit is not the same as the leagal minimum wage (currently £5.93 an hour, or roughly £10,800 a year). Which leads to the bizarre situation that people on the absolute lowest wage you can legally pay, still have to pay tax!

[Pásztor Szilárd]

@Passing Stranger: I am right in every aspect, you didn't read carefully. I said OV never promised a flat tax before the elections because that was the question. The specific promises for flat tax came after they won the elections.

Check your facts and check what you are replying to.

[Pásztor Szilárd]

@Mark: you either know nothing about Hungary's WWII history or you lie.
Jews were relatively safe in Hungary until the German occupation in 1944. This is the exact reason why Hitler put Horthy out of power and put Szálasi into position.
Because Horthy was defending the Jews but you probably know it. Deporting of Jews from Hungary begun only late in the war.

Readers: check this link: http://www.ushmm.org/research/center/symposia/symposium/1999-11-09/

Mark: don't lie more.

[Pásztor Szilárd]

@Paul: yes there is a minimum amount of monthly salary in Hungary, below what no job contract can be valid for a full-time job. While this salary is not completely tax-free on paper, tax allowance gives you the deducted tax completely back.
AFAIK as your salary goes up from the minimum, tax allowance returns less and less money for you. Above a certain level (dunno the amount now), you are not entitled to have this type of tax allowance (called adójóváírás), this differs from the tax allowance from raising kids and the like.
This system is enormously complicated so the focus must be on simplifying it. May the tax be of one flat rate or not, it's not that important for me, but make it simpler and less burdening.

[Pásztor Szilárd]

Most readers here yammering about how the new tax system will hit those with low wages (not knowing the details doesn't hold these clever readers back from already knowing the effects), must be putting an incredible effort into systematically ignoring what Orbán says at every possible opportunity:
NO WAGE CAN BE WORTH LESS AFTER THE TAX CUT THAN BEFORE.

Interpretation for dummies: there will be other factors in the system (for example raising the minimum wage) that make this sure.

[Pásztor Szilárd]

@Mark: sorry about my latest post, I checked the dates of Jew deportations. They had begun before Szálasi was put into power but Horthy prevented these deportations as long as he could.
So basically things remain the same. It was clearly done on German pressure and the average Hungarian was not helping the Nazis (of course).

[Peter]

Szilard:

Eight members of my immediate family were deported, seven before Szalasi came to power! One came back. My gradparents and parents did not.
I escaped from the Budapest ghetto the evening before it was sealed and survived.
How date you to call Mark a lier!
I am calling you a lier and anti-semite!
H

[Eva S. Balogh]

Szilard: "@Mark: you either know nothing about Hungary's WWII history or you lie."

For Pete's sake, come to your senses. Mark is a well known British historian specializing in Hungary. Wake up!

[Eva S. Balogh]

Szilard: "They had begun before Szálasi was put into power but Horthy prevented these deportations as long as he could."

No, he didn't. He did it only when he got the message that if he doesn't do anything he will be in trouble after the war. Then he stopped the deportations. But if he could stop them in July, he could have stopped them before. He didn't.

[Eva S. Balogh]

Szilard: "systematically ignoring what Orbán says at every possible opportunity: NO WAGE CAN BE WORTH LESS AFTER THE TAX CUT THAN BEFORE."

Well, if Orbán says so, it must be so! The problem is that it cannot be done unless you raise the minimum wage substantially. And if he would do that as he did in 2000 or 2001 then a lot of people would lose their jobs as they did then. Surely, that is problematic when he promised 1 million new jobs in 10 years which is, by the way, is highly problematic by itself.

Perhaps it would help if you would think a bit instead of blindly believing Orbán.

[Paul Haynes]

"Perhaps it would help if you would think a bit instead of blindly believing Orbán."

That's a bit radical, Eva!

[Eva S. Balogh]

Paul Haynes: "That's a bit radical, Eva!"

What is radical about this? Szilard says (capital letters) that Orbán says such and such and we are not listening to him. And what he says is so simple: nobody is going to lose. But there is no such thing without making some adjustment and the only adjustment that is possible under these circumstances is to raise the minimum wage. The result of such move is quite obvious.

[Paul Haynes]

Sorry, Eva, I was trying to be funny.

The idea of a Fidesz supporter thinking about something instead of just blindly believing OV just struck me a darkly humorous.

But, as so often, I forgot that sarcasm is a dangerous thing to attempt on the internet. My apologies.

[Eva S. Balogh]

I'm sorry, I think I was a bit dense.

[Pásztor Szilárd]

@Peter: I couldn't care less about what you call me.
I'm bored of people who divide the whole world into Jews and anti-Semites and are extremely quick to put anyone who they dislike into the latter category.
Whatever demons you are battling, I won't be a participant in the fight. I live my life outside of it.

@Eva: if it were Gyurcsány who said such a thing as Orbán, you could be right as everything Gyurcsány said practically coincided with the truth only by chance.
But Orbán's so hardly emphasized endeavours were never proven untrue so far.
What you base your thoughts about coming evens on is nothing more than your own stereotypical thinking, supported by no existent facts.

Who said the minimum wage won't be raised, with compensating the firms for it?
@Paul: who said anything of the sort?
What are you contending with?

[Pásztor Szilárd]

@Eva: "For Pete's sake, come to your senses. Mark is a well known British historian specializing in Hungary. Wake up!"

Look at my post at September 30, 2010 at 05:58 PM to Mark.
Anyway, it doesn't make much difference. The basic allegation that Jews were deported from Hungary only on very hard German pressure still holds true.
And no anti-Semite accusation of Hungarians in general will be tolerated. People claiming such offensive nonsense will be quickly and correctly regarded as retarded and then ignored.

[Pásztor Szilárd]

@Paul: I'm answering to your questions exhaustively and on good terms and it's always mocking what you give in return.
I'll soon quit trying to communicate with you if you don't change your attitude. I'm not interested in giving detailed information to undeserving persons.

[Pásztor Szilárd]

Readers may be interested in this newly found skeleton (but as we know, no skeletons exist, the socialists themselves said it...):
http://www.portfolio.hu/en/cikkek.tdp?k=2&i=20961

Hungary posts 4.4% of GDP budget deficit in 2009 - stats

[Mark]

Pásztor Szilárd: "The basic allegation that Jews were deported from Hungary only on very hard German pressure still holds true."

It is actually considerably more complicated than this. Yes, the deportations would not have happened without the German occupation. But, if there was "hard pressure" exerted at all it was done so by a tiny number of SS specialists holed up for most of the period in a Budapest hotel led by Adolf Eichmann.

I suggest you read either Randolph Brahams two volume history of the Holocaust in Hungary or Gotz Aly and Christian Gerlachs. Both are available in Hungarian. Brahams was sat in the Kozponti Antikvarium this morning.