Government's pledges to cut taxes were consulted with social partners

On 28 June 2005 at the Economic and Social Council the Prime Minister announced a new package of reforms of the tax system and of the minimum wage regulation.

In May 2005 the Hungarian government launched a wide-ranging reform package consisting of 100 small scale measures in the world of work, welfare services, broad areas of public services and economic regulation in Hungary. (HU0506101N) As part of the piecemeal reforms, the Prime Minister announced plans to address the problems of the tax system and to introduce a new system of minimum wages.

Reducing taxes - the highest in Europe - on economic activities in order to boost competitiveness of the Hungarian economy has long been a major topic of discussions. On the Slovak and Romanian model, its 2002 elections campaign the Alliance of Free Democrats (Szabad Demokraták Szövetsége, SZDSZ), the junior coalition partner in the government, proposed a 20% flat-rate tax. At the same time, the Hungarian Socialist Party (Magyar Szocialista Párt, MSZP), the major partner in the current governing coalition, wants to maintain the progressiveness of the tax system to please its lower income electorate. Furthermore, the tax system has long been under attack by businesses, who say - as they did last year in the discussion of the annual amendment of the budget and tax laws in National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT) (HU0502105F) - that it does not allow any long term strategic planning.

At the 3rd meeting of Economic and Social Council (Gazdasági Szociális Tanács, GSZT) 28 June 2005, the Prime Minister announced a package of new taxation and minimum wage regulations. GSZT, which was set up in 2004, comprises the social partners (all employers’ associations and trade unions represented in OÉT), as well as various business interest organisations, such as the chambers of commerce and industries, major associations of foreign-owned firms, commercial banks, academic researchers, the Monetary Council of National Bank of Hungary (Magyar Nemzeti Bank, MNB) and non-governmental organisations (HU0501105F).

The reform package addresses some of the most heavily criticised parts of the tax system. On the whole, the reform promises a HUF 800 billion (EUR 3.2 billion) cut in the tax bill. This cut includes the reduction of VAT from 25% to 20%, which is expected to lower the price level, too. The government also envisages to slightly reduce the progressiveness of the personal income tax system, which currently is a two-bracket one, 18% and 38%, depending on one’s level of income. According to government plans the higher bracket will be reduced to 36%. At the same time, employers can offer various tax-free benefits to employees up to 15% of their monthly wage, but only up to HUF 500,000 (EUR 2,000) annually. The government also announced that after 2007 it will levy a flat 10% tax on interest gains on bank accounts and on the stock exchange, over a certain level. This tax level would be raised to 18% in 2010, when Hungary plans to join the EMU. Furthermore, the government plans to introduce a flat-rate luxury tax on properties worth more than HUF 100 million (EUR 4 million). This tax would annually be 0.5% of the value of the property.

According to plans, the company tax rate would be reduced to 10% for small enterprises making an at maximum HUF 5 million (EUR 20,000) turnover, provided that they are paying their employees at least the double of the national minimum wage. The government reduces the local tax level paid by businesses, which at the moment is 2% in the majority of the municipalities, and it plans to scrap it altogether in 2008. None the less, it would introduce a new kind of contribution to local governments’ business promotion activities, which would be 1% of businesses’ turnover. The government will also reduce the social security contributions paid by enterprises from the current 33.5% to 28.5% by 2009 in several steps.

According to the government, in the first phase, between 2005 and 2007, the package would reduce the personal income tax burden, and next, between 2007 and 2010, the levies on companies.

The Prime Minister has proposed tying the value of the minimum wage to the figure calculated periodically by the Hungarian Central Statistical Office (Központi Statisztikai Hivatal, KSH) for the minimum standard of living for an individual. He also has suggested the introduction of a statutory minimum wage tariff scheme instead of the current unitary national minimum wage. The statutory minimum wage tariff scheme would consist of three minimum wage levels, one for unskilled workers, one for skilled employees, and one for employees with a university degree. This proposal, first of all, would mean a higher base minimum wage level than the current one, i.e., the minimum wage would be increased for all categories of workers. The current (2005) minimum wage, agreed upon by the national tripartite committee, is HUF 57,000 per month. The new minimum wage level calculated on the basis urged by the Prime Minister would be HUF 63,000. The second minimum wage level for skilled workers would be 10% higher than the base level, and the third level for employees holding a university degree would be 20% higher than the base level. Skilled workers would earn at least HUF 70,000 and employees with a university degree would earn at least HUF 77,000 per month.

The introduction of the three tier minimum wage system is a long term demand of trade unions, especially of the National Association of Hungarian Trade Unions (Magyar Szakszervezetek Országos Szövetsége, MSZOSZ). Hiwever, the first reactions of representatives of the trade unions and the employers’ associations at the meeting of GSZT were cautious. The representative of MSZOSZ, expressed his opinion that fixing of the minimum wage is subject to agreement among the members of the OÉT, and that they would not like to see an automatic mechanism displace their annual judgment in setting its level. The repesentative of the employers warned against increasing the minimum wage above its present level as it would threaten the country’s economic competitiveness.

Those elements of the tax reform which seem to tax the rich more, such as the luxury tax on valuable properties and on big savings, are likely to please the typically left voters. However, the 2% reduction of the tax rate to 36% will benefit the wealthy, plus an additional 40% of the taxpayers. One of the peculiarities of the announced packaged reform is that it outlines a 5 years period of strategic reforms. Commentators and the opposition parties warned that the 2006 elections may bring in a new government, which would not necessarily continue these reforms. At a recent meeting held at the American Chamber of Commerce, the candidate representative of Alliance of Young Democrats-Hungarian Civic Party (Fiatal Demokraták Szövetsége-Magyar Polgári Szövetség, FIDESZ-MPSZ), the major opposition party, made it clear that FIDESZ would prefer a flat-rate tax system.

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