Friday, November 28, 2008

The Flat Tax is on the Agenda in Hungary

January 14, 2008

By Alvin Rabushka

Hungary is surrounded on several sides by flat tax countries: Slovakia in the north, Ukraine in the northeast, Romania in the east, and Serbia in the south. Near flat-tax neighbors include Bulgaria, Montenegro, Macedonia, and the Czech Republic. Hungary’s business daily Világgazdaság reported on January 11, 2008, that the current coalition government, which consists of the Socialist Party, the senior member of the ruling coalition, and the market oriented Free Democrats, is considering four tax measures to boost economic competitiveness. The chosen measure is expected to take effect in January 2009.

One tax reform proposes to reduce the tax wedge on labor by lowering the social security contribution (payroll tax) from 29% to between 19-21%. Part of the lost revenue would be recovered with an increase in the value added tax from 20% to 22-24%.

Another would reduce the corporate tax burden either by lowering the current 16% corporate rate or abolishing the 4% solidarity tax imposed on corporations.

The remaining two reforms constitute alternative flat taxes. One would broaden the tax base by including social security contributions in the income tax base and slashing the rate to a very low level, which was the approach taken in the Czech Republic’s 15% flat tax. The other flat tax would be applied to personal income, excluding social security contributions from the tax base, and perhaps also applying the same flat rate to the corporate and value added taxes.

Coalition deliberations are expected to conclude in late January to permit the spring session of Parliament to enact the chosen measure into law.

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