Hungary To Switch To A Flat Income Tax Of 16%

Andra Marinescu

Written by Andra Marinescu
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Hungary To Switch To A Flat Income Tax Of 16%

Hungary is the last country in Central and Eastern Europe to decide to opt for a single tax on income, after the model of Bulgaria, Romania and the Czech Republic.

The Hungarian Prime Minister Viktor Orban has reaffirmed his plans to introduce from January 1st the single income tax of 16%, according to the Economy Minister Gyorgy Matolcsy. Moreover, he denied media reports that the tax reforms will be delayed. For the time being Hungary is taxing incomes with gradual rates that start at 17% and end at 32%.

“In the case of the two tax systems the problem is not only that of the already known advantages and disadvantages. There is also an analysis on whether or not the state can afford such a taxing system. Moreover, the political ideology is also taken into consideration,” said Ionut Dumitru, chief economist at Raiffeisenbank Romania and also President of the Fiscal Council. “It is difficult to support a tax system if one does not belong to an ideology. It is known that the left-wing ideology prefers a more progressive system, while the right goes for a flat system. “

Hungary follows in the footsteps of Bulgaria

The Hungarian Minister of Economy announced that the flat tax of 16% and the preferential taxation of families is the most important element of the plan drafted by the government which is considered to be creating one million new jobs in Hungary.

The Hungarian Prime Minister Viktor Orban in turn confirmed the importance of this decision. He said he was spurred by the example of Bulgaria, which has a single tax on income and profit of 10%, one of the lowest in Europe.

“The policies of Hungary will be directed towards the market so that this can repay its loans. This is one of the reasons why we opt for the flat income tax. The economic entities will benefit from the halving of taxes they must pay. All this will help the national economy to stabilize, so that not to have to resort to external financing sources, “said Orban.

Romania has an income and profit tax of 16%. In the Czech Republic, one of the most developed economies in the region, the income tax is of 15% and the profit tax is of 19%. Bulgaria has changed the tax system in 2008, but was among the last to do so. In the past 15 years, several states, mainly in Eastern Europe have opted for the flat income and profit tax. Other examples are Russia and the Baltics.

Orban announced in June his intention to introduce a single tax on income. Center-right Fidesz Party, led by Orban, won elections in April.

The flat tax: advantages vs. disadvantages

Behind the decision of the governments of former communist countries were the advantages it offers flat. These include equality, reducing tax burden for companies and individuals and, most importantly, increase revenue to the state budget, given that more companies tend to leave the “gray economy”. Apparently only the government will suffer a reduction in revenue. In essence, however, there are a number of benefits, such as the fact that such firms are urged to pay their taxes correctly and on time.

He also noted that a progressive tax on income and profit fuels consumerism, while the flat taxation urges people to save more and invest their earned money.

According to a study conducted by the National Center for Policy Analysis, called “The Economic Effects of The Flat Income Tax”, investment in industry will not move towards the most competitive and attractive sectors in the case of a progressive system of taxation. Because of subsidies and the differential treatment of industries, it appears more profitable to invest in sectors with modest rates of growth and low returns. A unique system of taxation, on the other hand, favors in the same way all of the sectors.

Regarding individuals, they are encouraged to work harder, earn more if there is a single rate. Progressive tax is levied as a punishment for people who are successful. The flat tax encourages both costs and start-ups, according to that study.

There are also arguments stating that a flat tax offers several benefits for high income families and companies.

Advantages of the flat income tax

* It promotes equality between individuals and among players in the economy.
* Reduces the tax burden.
* More and more companies tend to leave the “gray economy”.
* Encourages people to save and invest.
* Individuals are encouraged to work harder, earn more.

Progressive tax advantages

* Leads to an increased consumption.
* Helps people with low incomes.
* Encourages small and medium-sized companies.11

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