Country Study, Hungary

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National Bank (25%) 125,000 HUF

Taxable Interest Income 3,000
HUF

Taxes Due
600 HUF

This aspect of this tax allows for fair treatment to those who would otherwise lose their money putting it in accounts that could not stay up with the tremendous inflation that several countries in eastern Europe face due to their recent transition to a market economy (Newbery, 6).

As was true with the Value Added Taxes (VAT) the Personal Income Tax (PIT) also has exemptions. The following is a list of examples of items exempt from tax (Okno 2).
Social Security allowances
Gains of up to HUF 100,000 from the non commercial sale of moveable property
Retirement gifts of up to HUF 10,000
Compensation of defined working clothes

In addition as of January 1995 tax credits against taxes owed were offered in several areas such as social security contributions by the employee, for individuals making under 500,000 HUF, for installments on loans for dwellings, charitable contributions, and for special savings accounts.
Corporate Income Tax
The corporate tax is levied on all businesses, no matter how large or small, the same way. As of January of 1995 the corporate income tax has been reduced from 36% to 18% on undistributed profits before tax. this is called either the additional tax or the calculated tax. After this tax has been levied the profits are then distributed among the shareholders and an additional 23% is taxed to the shareholders. To illustrate this tax figure
1.3 demonstrates how the tax is calculated. fig 1.3
Calculation of Additional Tax
| |HUF |
|Income before tax |100.00 |
|Calculated at 18% |(18.00) |
|Income after tax to be |82.00 |
|distributed | |
|Amount available for distribution|66.67 |
|after payment of additional tax | |
|(82/1.23) | |
|Total Tax Paid |33.33 |
|Effective Rate of the additional |15.33% |
|tax (% of income before tax | |

Source Deloitte & Touche LLP

In addition to the corporate tax employers must also make Social Security contributions. Typically, employers must make a contribution at a rate of
44% of their gross salary. Employees are required to make a 10% contribution, however, it not unlikely to see individuals putting more than
10% away of retirement.

Another tax that employers are subject to is the Unemployment Fund
Contribution. This is to continue to support the unemployed between work.
Employers must pay 4.2% of their employees gross salary and wages to the
Unemployment Fund. Employees are required to pay 1.5% of their salary.
However, employees' contribution is tax deductible.

Training Fund Contributions is yet another tax that corporations are subject to. This tax is to provide for the cost of training employees.
This contribution is currently paid by the employer at 1.5% of the total payroll. This tax is for corporate income tax purposes.

As with other Hungarian taxes exemptions are offered to certain kinds of business. Hungary grants exemptions on a case by case basis and either dose not grant an exemption or grants a 100%, or 60% exemption. The figure below shows how companies are allowed to use their exemptions.

fig. 1.4
Percentage of Taxes due under specific exemption
| |18% subject to |23% subject to |
| |Corporations |Shareholders |
|100% Exemption |100% reduction |No Reduction |
|60% Exemption |20% reduction |No Reduction |

Businesses view this set of taxes as equitable and do not squabble over the fairness of the taxes. They seem to be more interested in how to receive tax exemptions and want reform in the exemption granting side of the tax system (Newbery, 8). This is good because of the infectious shadow economy in other former soviet countries. This means that businesses will be more willing to pay taxes that are due to the government.
So What Does this mean for Hungary?
Newbery argues that the Hungarian tax system is at least as egalitarian as any where else in the world as far as an equal distribution of taxes.
Especially since the method of redistribution is so good at keeping poverty remarkably low. While the transition still will put a gap between the
“haves and the have nots”, the government needs to keep its eye out for the most vulnerable such as the old and unskilled. Many argue that because of the rough transition people may become disillusioned with a market economy and never realize the gains that the countries leaders have fought so hard for. However with vigilance and a little bit of patience Hungary will reach its goal.
Privatization
In addition to using tax collection as a source of raising revenue, Hungary has turned to privatization to offset Hungary’s 31 billion USD national debt (Galai, 1). The sale of government controlled industries such as natural gas, oil, and electric powered utilities has earned the government over 1.4 billion USD in the past year.

Recently the Hungarian Government decided to sale shares in eight of the fourteen nationally owned electrical power and distribution companies. A
German consortium agreed to pay 180 billion HUF for the shares and controlling interest in the former government controlled utilities.

In addition to the sale of the utilities Hungary has had discussions about selling the National Bank of Budapest to investors. However analyst point out the bank will have to spend the next year fixing up the bank before they can think about selling it. Government officials would expect a heavy return if the bank were to be sold.

While some analyst applaud the actions the government has taken others wonder who is really in control in Hungary. Is the government still calling the shots or is it the foreign investor with the most money invested in a majority of Hungary's' industry. Another key step to
Hungary’s transition to a market style economy is expenditure policy.
Expenditure Policy
Along with changing revenue policy expenditure policy is a crucial role of any government and especially important policy questions for governments in transition. Hungary’s main policy stance on expenditures is to try to match in-kind efforts and expenditure policy to specifically earmarked funds.
Defense spending
As mentioned in the introduction when Hungary decided to withdraw their membership with the Warsaw Pact they decided to drastically reduce their military expenditure. Hungary’s reduction in defense spending was a key decrease in fiscal consolidation to help decrease their ever rising budget defict. The graph in Fig. 1.5 represents Hungary’s decrease in defense spending over the last ten years.

Fig. 1.5
[pic]Source: SIPRI Military Expenditure Database

Social Welfare Reform
Reforms to Hungary’s Social Welfare systems have been plentiful. Decreases in Welfare systems have mainly been reallocation of subsides on a stricter criteria basis. Hungary has made constant efforts to restructure social programs in which have proven to be ineffective. One example is the reform of the “Family Allowance System.” After a evaluation of the old program it was proven to be cost ineffective and replaced by a new “Family Support
System”. This new “Family Support System” target families in need based more on income criteria and targeted people in the greatest need. Another key social expenditure reform was that of pension and health programs.(CCET, 2)
Pension and Health Programs
Hungary experience great abuse in the areas of health and pension programs, but have taken steps in the right direction to help correct the situation.
One such of these decisions was that of increasing the number of days employers are liable for sick pay. This reform travels in the right direction because the policy had reduced the Social Insurance Fund and also created minimum incentives for abuse of the system. Much more needs to be done in the way of pension and health reform however this policy shows a step in the right direction..(CCET,2)
Expenditure Summary
The underlying tone of Hungary’s expenditure policy is that of reducing the budget deficit without creating economic turbulence. Hungary faces many obstacles in trying to reduce their budget deficit. Such obstacles are rising inflation and high rates of unemployment these problems lead to substantial social problems. Regardless, Hungary is still looking the right “social safety net” but not at the expense of its economic viability and without effecting production and output ion a negative way.
Conclusion
Hungary has come a long way since the initial transition from a centrally planed economy to a market economy in 1988. However, Hungary continues to strive to overcome the obstacles described in this paper. The transition has been difficult for the people of Hungary. People accustom to a centrally planned economy are not typically faced with subjects such as unemployment or cost budgeting. Therefore, many Hungarians have become disillusioned with the new market economy. However, most (including socialist) have insisted that economic progress continue. In order for
Hungary’s economy to continue its success it must remain to be egalitarian in both the way it collects cash through taxes and the way it redistributes resources to the people of Hungary. Hungary must be sensitive to the vulnerable such as the unemployed and the unskilled, during the sometimes unforgiving transition to a market economy.

Bibliography

1. CCET. “The Center For Co-Operation With The Economies in

Transition.” OECD-OCDE.

Http://www.oecd.org/sge/ccet/hun_fisc.htm.

2. Sipri. “Military Expenditure Database”.

2. Washington Post. “ Hungary: State Department Notes”

Washington Post.Com. http://www.washingtonpost.com/wp- s…term/worldref/statedep/hungary.htm