Hungarians can bid farewell to economic growth and the rising prosperity they have experienced in the past decade and a half. As soon as Tisza takes over government, focus will be on accession to the stagnation-inducing euro zone—and on classic socialist economic redistribution.
A smaller pie divided equally is going to be more important than anything a bigger pie would bring to the table.
I have repeatedly warned about the backlash for the Hungarian economy that awaits with the new Tisza government. Immediately after their election victory, I pointed out that Prime Minister-elect Magyar intends to fast-track a plan to replace the forint with the euro. As a direct result of the currency transition, Tisza will gradually roll back Hungary’s major economic progress over the past 16 years.
Tisza also intends to upset Hungary’s tax system. When the first indications of his tax-policy plan became known back in November, I explained that the plan aligns well
with the tax-and-spending policies you can see in other European countries where the Left has an established influence over fiscal policy.
Now that Tisza has won the election, they have begun releasing more details about their tax policy intentions. In the plan leaked last fall, they proposed abandoning Hungary’s current flat-rate model for a standard European progressive structure: in addition to the current 15% that everyone pays today, Tisza’s plan proposed two more brackets: one at 22% and one at 33%. Notably, the highest tax bracket would more than double taxes on incomes above HUF1.25 million (€3,284), which is twice the median income in Hungary.
Since last fall, Tisza has modified the reform ideas in its tax plan, but not the underlying ideological architecture. The ideas that have replaced the new income tax brackets are no less nefarious in terms of economic disincentives and distortions. Instead of raising taxes, according to online news outlet Daily News Hungary, Tisza
aims to restructure personal income taxation through a system of targeted tax credits, effectively creating a more progressive framework without formally replacing the current flat 15% income tax rate.
There will be two types of credits, with the first aimed at those with the lowest incomes. The credit would liberate part of their earnings from income tax; the expected effect is similar to a reduction of the income tax for this group from 15% to 9%. While this looks like a nice idea, its consequence is to disincentivize low-wage workers from pursuing higher-paying jobs. This tax credit increases the earnings threshold that a worker has to climb over in order to find it ‘worth the while’ to take a new job.
The second credit is equally problematic. Explains Daily News Hungary:
For employees earning below the median wage—currently around HUF 625,000 (EUR 1,715) gross per month—the party proposes a sliding scale of tax relief.
In practice, this would increase the after-tax income by 3.6% for those earning up to HUF420,000 per month, by 2% on incomes between HUF420,000 and HUF500,000, and by 0.8% on earnings between HUF500,000 and HUF625,000.
This classic redistributive feature, first and foremost seen in Western European tax systems, can be motivated in two ways:
The two perspectives are of course not mutually exclusive; on the contrary, they work well together in presenting the ideology behind Tisza’s tax plan. When taxpayers are discriminated against based on their income, the purpose is always economic redistribution—in other words, an ambition to reduce income differences between individual citizens.
Asking people to pay different shares of their income in taxes depending on how much they make may look good in this ideological light, but it is not good tax policy. Since the effective tax rate goes up faster than a person’s income does, people are incentivized to stay in lower-paying jobs.
At a large enough scale, these disincentives discourage overtime, skills improvement, educational advancements, and entrepreneurship. So far, Tisza’s proposed changes to the Hungarian tax system are negative for the economy, but not negative enough to hit all these buttons. There will be negative repercussions for economic growth, but the more significant of those repercussions are probably going to emerge from an odd combination of two other taxes.
Tisza plans to reintroduce the so-called KATA, a lumpsum-style tax on small and emerging businesses. This tax, which was introduced and later repealed by the Fidesz government, was significant in stimulating entrepreneurship, especially among younger workers.
So far, so good. The problems for Tisza begin when this tax is coupled with a wealth tax. Entrepreneurs are encouraged—until they become successful.
The most frequently cited wealth-tax rate is 1%, which would apply to a broad spectrum of assets, not just financial equity. From the looks of various media reports, this would be a gross-wealth tax rate, in other words, based on the market value of a taxpayer’s property without deducting any debt he may have. However, while we await the details, it is important to note that the negative effects of a wealth tax are similar in nature even if its application is limited to net wealth only.
At the forefront of those negative effects is the practical function of the wealth tax: it is a tax on income, not wealth. Very few taxpayers liquidate their equity in order to pay the wealth tax—they just pay it out of their current earnings. This means that, in effect, the wealth tax raises the marginal income tax on economically successful Hungarians; entrepreneurs are taxed on the value of their businesses—a value that increases with their success.
The wealth tax is the epitome of punitive taxation on economic success. It is a staple of socialist tax policy and signals, stronger than any other reform thus far proposed by Tisza, that the new government under Peter Magyar will take Hungary through a sharp left, economically anachronistic turn.
