Hungary's quite successful transformation form Soviet-styled command and controlled economy into largely free market economy has been a great leap forward. One of the key components of advocating liberal economic agenda has also been quite reasonable tax policy with low personal and corporate taxation as well. In fact, Hungary is having second lowest corporate tax rate (16%) in EU, after Ireland (12%). However, the situation is rapidly changing and the country is heading in the wrong way to meet the criteria to enter the EMU. Hungarian Government has decided to get in touch with EU-styled tax harmonization. The proposed plan excludes the possibility of cutting corporate and personal tax rate in the next five years. This clearly misguided economic policy will not improve conditions to attract more foreign direct investment and the flow of skilled workers as well. There is little hope for Hungary to attract more offshore companies. In order to cut the deficit, Hungarian lawmakers imposed higher VAT and higher taxes on business profits. Such a backward economics will have unimaginable consequences. The middle tier of VAT has therefore been increased from 15% to 20% while the plan has also introduced 4% solidarity tax on business profits and personal incomes exceeding HUF 6 million (US$ 27,500). Hungarian officials say that government is considering a shift to more consumption-based taxes instead of taxing incomes. But the thing is not over yet. The agenda included the introduction of 20% tax rate on earned interest and foreign exchange gains as well. The main objective of the Hungarian government is to ensure macroeconomic stability which is now below the Maastricht criteria. Budget deficit equals 8% of GDP and public debt (58,9%) is one of the highest in the EU. But increasing taxes on dividends, business profits, corporate and personal income will not efficiently result in the fulfillment of Maastricht targets. The effective step forward would be to ignore the EU and continually reduce tax rates on both personal and corporate income as well. As companies would be willing to engage in market behavior, wages would go up and as the result of lower tax rates, tax revenues would go up. The government should continually reduce public consumption and budget deficit by paying off the public debt. The currency has lost 9% this year, the third-worst performance by a European currency behind the Icelandic krona and the Turkish lira. As the result of a little bit higher inflation, the interest rate went up for a little bit as well. Next, Hungarian Central Bank should announce the policy of inflation targeting and stop increasing the quantity of money more than the annual output growth (GDP growth) lifts-up. If enacted, the best way for Hungary to meet Maastricht criteria is to cut its spending habits a little bit and to start paying-off the public debt very quickly. The continuation of lowering tax rates would result in more tax revenue, not less. High labor taxes caused Hungary to lose investment opportunities. The state’s role in controlling prices is still very strong demonstrated by the government’s price limitation on privately owned firms. Red-tape regulation is still one of the most paramount concerns. Business licenses are hardly obtainable. Retail businesses still counter a web of burdensome government regulation that makes it difficult to open-up the store. However, there is still a lot to in Hungary to finally reach the macroeconomic stability. But raising various taxes is certainly not the soundest way to pursue fine and reliable macroeconomic situation of the country.
Suggested Reading:
Hungary to refrain from tax cuts through 2011, Budapest Business Journal
Hungary’s businesses and consumers braced for tax hikes, Tax News
Hungary caves in to EU pressure, The Market Center Blog
Hungary's foolish tax increase, The Market Center Blog
No comments:
Post a Comment