European Financial and Accounting Journal 2011, 6(2):8-27 | DOI: 10.18267/j.efaj.31

Fiscal Consolidation and the New Flat Rate Individual Income Tax in Hungary

Mihály Higye
Mihály Higye - Associate Professor, Head of Department of Public Policy and Management; Corvinus University of Budapest, Fivám tér 8, 1093 Budapest, Hungary; <mihaly.hogye@uni-corvinus.hu>.

In the last two years the Hungarian people have witnessed several new measures in government's fiscal policy. To respond to global crisis that hit Hungary hard, the Bajnai government enacted a series of economic reforms and spending cuts in 2009. The Orban government elected in 2010 launched economic programs designed to promote growth by reducing administrative burdens on businesses and lowering the tax burdens on small businesses. The plan also includes strict control of budgetary expenditures, and a "crises-tax" on different sectors which would remain in effect for minimum 2 years. One of the most popular plans seems to be the launch of a "flat-rate" individual tax replacing the existing progressive tax aiming to increase supply of labor and so tax base, to improve tax compliance and the reduce cost of taxation. The paper analyses the recent changes from theoretical and practical views focusing on expected effects of the new flat rate individual income tax system. At first glance it seems to be that this new fiscal measure has just basically anti-consolidation effects on government budgetary position loosing significant revenues from income taxes. From international lessons it is expected that that there will be no Laffer-type behavioral responses generating revenue increases from the tax cut elements of the reform. The impact of the flat tax on work incentives might be expected only in short run. The flat rate reduces the flexibility of government to use tax rates as one of the "strong" weapons in budgetary policy when it becomes unavoidable. In many developed countries a wide range of tax expenditure is still applied in a more or less progressive personal income tax system. In a system where tax expenditures are widely used tax compliance may systematically improved if burdens and benefits are linked.

Keywords: Fiscal policy, Flat rate tax, Social policy, Tax principles, Tax system
JEL classification: H2

Published: June 1, 2011  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Higye, M. (2011). Fiscal Consolidation and the New Flat Rate Individual Income Tax in Hungary. European Financial and Accounting Journal, 6(2), 8-27. doi: 10.18267/j.efaj.31
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Antalova, L. (2010): Contemporary Flat-Tax Reforms in Eastern Europe. Causes of Diverse Approaches: A Comparison of Slovakia, Czech Republic and Germany. [on-line], Wien, Wirtschaftsuniversität, c2010, [cit. 10. 2. 2011], <http://epub.wu.ac.at/1626/1/document.pdf>.
    2. Basham, P. - Clemens, J. - Emes, J. - Walker, M. (2001): Flat Tax: Principles and Issues. [on-line], Vancouver, Fraser Institute, c2001, [cit. 10. 2. 2011], <http://www.fraserinstitute.org/WorkArea/DownloadAsset.aspx?id= 2839>.
    3. Fuest, C. - Peichl, A. - Schaefer, T. (2007): Is a Flat Tax politically feasible in a grown-up Welfare State? [on-line], Köln, Finanzwissenschaftliches Forschungsinstitut an der Universität zu Köln, Discussion paper No. 07-6, c2007, [cit. 10. 2. 2011], <http://www.fifo-koeln.org/pdf/FiFo-CPE-DP_07-06.pdf>.
    4. Kiss, S. C. - Scharle, Á. - Szabó, B. - Szabó, P. A. (2008): Tax reforms in Europe. Reforms in Eastern Europe: The Flat Rate Tax System. Külgazdaság, 2008, vol. 52, no. 9-10, pp. 7-33.
    5. Economist (2005): Simpler taxes, the flat-tax revolution, Fine in theory, but it will never happen. Oh really? [on-line], Economist, 14th April, 2005, [cit. 10. 2. 2011], <http://www.economist.com/node/3861190>.
    6. Gale, W. G. (1999): Flat Tax. In: Cordes, J. - Ebel, R. D. - Gravelle, J. G. (eds): The Encyclopedia of Taxation and Tax Policy. Washington, D.C, Urban Institute Press, 1999, pp. 155-158.
    7. Hall, R. - Rabushka, A. E. (1995): The Flat Tax. Stanford, Hoover Institution Press, 1995.
    8. Higye, M. (1997): Principles of Taxation. In: Nemec, J. - Wright, G. (eds.): Public Finance: Theory and Practice in the Central European Transition. Bratislava, Nispacee, 1997, pp. 139-169.
    9. Jackman, M. (1984): The MacMillan Book of Business and Economic Quotations. New York, MacMillan, 1984.
    10. Keen, M. - Kim, Y. - Varsano, R. (2006): The "Flat Tax(es)": Principles and Evidence. [on-line], Washington, D. C., International Monetary Fund Working Papers 06/218, c2006, [cit. 10. 2. 2011], <http://www.imf.org/external/pubs/ft/wp/2006/wp06218.pdf>. Go to original source...
    11. Kesner-©kreb, M. (2005): A Flat Consumption Tax Concepts. Financial Theory and Practice, 2005. vol. 29, no. 2, pp. 205-208.
    12. Ministry for National Economy (2010): Hungary's Flat-rate Personal Income Tax. [on-line], Budapest, Ministry for National Economy Hungary, c2010, [cit. 10. 2. 2011], <http://www.kormany.hu/download/3/11/10000/Hungary%20s%20flat%20rate%20personal%20income%20tax.pdf>.
    13. Saavedra, P. - Marcincin, A. - Valachy, J. (2007): Flat Income Tax Reforms. In Gray, C. W. - Lane, T. - Varoudakis, A.: Fiscal policy and Economic Growth. Lessons for Eastern Europe and Central Asia. Washington, D. C., World Bank, pp.253-280.
    14. Sabirianova, K. - Buttrick, S. - Duncan, D. (2009): Global Reform of Personal Income Taxation, 1981-2005: Evidence from 189 Countries. [on-line], Bonn, Institut zur Zukunft der Arbeit, Discussion Paper 4228, c2009, [cit. 10. 2. 2011], <http://ftp.iza.org/dp4228.pdf>. Go to original source...
    15. Vörös, G. - Kodenko, J. - Komáromi, K. (2010): Flat Rate Personal Income Tax. Public Finance Quarterly, 2010, vol. 55, no. 2, pp. 357374.

    This is an open access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY 4.0), which permits use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content