Hetényi Kör

2012. június 6-án megalakult a Hetényi István (1926-2008) ne­vét viselő szakmai-baráti kör, melynek tagjai a volt pénzügy­miniszter egykori munkatársai és tisztelői. A Hetényi Kör adó­szakértőkből és közgazdászok­ból áll, célja a magyar adó­rendszert érintő javaslatok ki­dolgozása és nyilvános szak­mai vitája.

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Proposal for a Hungarian tax reform


by the Hetényi Group (Hetényi Kör) of tax policy experts and economists in support of an economic policy change in Hungary.


The Hungarian economy is headed in the wrong direction. We therefore propose a complete about-face in economic policy. This is, however, only possible in the long run. This proposal concerns itself with the initial steps, the ‘quick fix’: to remove the internal obstacles to growth, restore the rule of law and economic confidence. It therefore represents only the emergency measures.


Why emergency? Since 2008 economic growth has virtually stopped. The international crisis is not the sole reason. The Hungarian economy is not only lagging behind Europe; the gap between Hungary and other Visegrád economies has also widened. We have only ourselves to blame. Economic policies between 2000-08 did not help competitiveness. They have made Hungary vulnerable due to high deficit and debt, and the postponement of essential reforms. After a short but successful adjustment of 2009-10 we are, once again, headed in the wrong direction. The stagnation (or shrinkage) of GDP is the consequence of bad economic policies – and above all tax measures. The Government had the right economic objectives in 2010 (increase employment, stimulate growth, reduce deficits and public debt) but its actual measures have worked against these very goals.


The situation in 2012

Its most severe consequences are:

a) Introduction of the flat rate personal income tax has reallocated income to significantly above average earners – striking a hole on public sector revenues. It has, however, not stimulated the economy through increased domestic consumption – opposite to government expectations. Quite the opposite has happened.

b) Abolishment of the tax credit for below average earners has significantly decreased their net income, thus resulted in a reduction of domestic spending. When facing with these effects, the Government has put pressure on the employers through a series of complicated rules of wage compensation and a popular but unreasonable increase of the minimal wage. It has shifted the cost of preserving the net value of nominal wages on the employers, thus increasing labour costs. It has effectively worsened the conditions of employment.

c) The hole in government revenues has been covered by extra taxation of the most dynamic sectors, mostly the banking system, in order “to avert the burden from Hungarian businesses”. The consequences are severe. Bank lending has dropped dramatically. As a result, production in sectors crucial for investment stagnates or is in decline (e.g. construction).

d) The above problems have been exacerbated by the increase of VAT, employee social security contributions, and the introduction of new “minor taxes”. The reduction of disposable income has sent retail spending into a tailspin, giving a boost to the black economy.

e) Prospects of SMEs have deteriorated. Personal income tax reforms have decreased consumer demand while raising labour costs. The drop of bank lending has also hit SMEs the hardest. Employment growth in the SME sector has been damaged, even though it is a crucial sector in terms of new job creation.

f) Further damage was inflicted by the manner the new tax system was introduced in: hastily, unpredictably, ignoring promises and with the occasional use of retroactive legislation.

Many among our experts have repeatedly argued for some version of a flat tax. But not in such economic conditions and certainly not in this manner. Tax policy since 2010 has simultaneously hurt employment, consumption, bank lending and investment climate, eroded consumers’ and investors’ confidence.


Our proposal

We therefore propose a radical change in economic policy. The first step should be a partial reversal in tax policies. This, however, does not mean the return to the pre-2010 tax policies and system – for both practical reasons and in principle. The focus of this proposal is the elimination of the biggest obstacles to growth – the tax system.

This proposal falls short of a complete about-face of the tax system. For practical reasons a significant part of the measures since 2010 should remain in effect or only moderately change (e.g. tax credit for children or the elimination of the previous form of tax credit). We acknowledge that principally wrong measures cannot be reversed overnight (e.g. the exceptionally high VAT rate or the extra tax of certain sectors).

We refrain from risking the budget deficit targets. On the contrary, our starting point is that government revenues must not decline. Social inequality and the burden on small enterprises must not increase any further.

According to experts the 2013 budget carries an additional deficit of HUF 300-400 billion compared to the convergence program a couple of months ago. [The estimated additional deficit has since grown to 500-600 billion, or approx. 2% of GDP – Editor.] We assume for the purpose of our calculations that the Government will be able to plug this hole during 2012. The 2013 situation will therefore not get any worse.


We propose three crucial and immediate changes to the 2013 tax law:

1) Reduce tax burden on labour for below average wages – in order to stimulate employment.

2) Reintroduce the progressive personal income tax – to increase household spending and to boost the business of small enterprises – without raising the budget deficit.

3) The progressive elimination of sector specific taxes (or a credible schedule to this end where the immediate abolishment is not feasible) – to restore predictability, business confidence and stimulate investment.

Further increase in consumption related tax is unreasonable, while taxing wealth requires long preparation – not feasible in the short run. Extra revenues are therefore expected from the adjustment to the personal and corporate income taxes. This, in turn would cover the shortfall from the elimination of the sector specific taxes.


The flat rate personal income tax is not sustainable in its present form. The adjustment would entail a reallocation of income to low earners by the reintroduction of progression and employee benefits. The reduction of personal income tax for low earners would increase net income while not increasing labour costs. It would hopefully also boost domestic consumption. Long-term investment of higher earners should be incentivised by savings available through tax benefits. Efforts must be taken not to complicate the system any further as well as to reduce the tension related to the child tax credit. (The limits and thresholds might thus change accordingly depending on the actual fiscal circumstances.)

  • Introduction of an employee tax benefit (a reduction of the tax base) under half the minimal wage (approx. HUF 480 000 per annum)
  • Introduction of a solidarity tax of 9% on income above twice the average wage (HUF 5 million p.a.), which will amount to a 25% marginal tax for earnings above the threshold.
  • For income above the upper limit for employee pension contribution (approx. HUF 8 million p.a.) the top marginal rate of solidarity tax should be 12% (total tax burden on income in this bracket would thus be 28%)


As a result:

At the minimal wage net earnings would rise to 110%. For the average wage it would be 104.4% (without the impact of child benefit). Above HUF 6 million per annum net earnings would start to decrease.

The tax wedge (ratio of tax in labour cost) would decrease for below average wages. (At the minimal wage it would decrease by more than 5% points to 43.5%.) It would only increase from above HUF 600 000 per month – even there it goes hardly above 50%.

As a result net wages could increase without pushing up labour costs.


Solidarity tax would be extended to dividend and other types of income – they should be included in total income for tax purposes. (It would effectively make tax on dividend progressive.)


Child tax credit would remain with the following changes:

a) It should only be claimable in the 16% tax bracket – higher income holders would thus not benefit further.

b) Low income holders must not lose out on child tax credit due to the employee benefit. (One practical solution would be handing out the child tax credit claimable on the amount of employee benefit as part of family allowance.)


Tax breaks on medium and long-term investment should be limited per person in order to avoid tax evasion by this means.

Corporate tax burden must be increased, its base widened. The lower, 10% rate on corporate income is available in too wide a circle, since every enterprise can exploit it for the first HUF 500 million of corporate profit. The threshold should therefore be lowered to near its original level of HUF 30-50 million. This would increase the effective tax rate while preserving the benefits available for SMEs.

Withholding tax on dividend (and other payments) transferred abroad must be restored. This would substantially not affect investment climate, since tax paid here can be deducted from tax paid elsewhere, in case of countries with which Hungary has an agreement on double taxation.

Sector specific taxes must be reduced. We assume the Government to fulfil its commitments in that the 2010 special taxes would be abolished, the bank levy halved – replaced by new taxes on the telecom, insurance and energy sectors.

The bank levy must be abolished immediately – in the first phase of restructuring.

Taxes on certain types of insurance, telecommunication and the energy sector must be streamlined but remain in effect for now. Their complete abolishment would take three years and needs to be scheduled transparently.

Transaction fees (misleadingly called the same as the European proposal of bank transaction tax) should not come into effect. To cover the shortfall, we propose either a bank levy in line with other European countries’ bank levies, or a consumption-type tax built into the fees commercial banks charge to customers.

Emergency measures are only effective if combined with reduced tax avoidance. One tool is the reduction in the volume of cash transactions. This would require administrative steps as well as technological development.


On counter-arguments

The aim is not to enrich bankers at the cost of the taxpayer. On the contrary, eliminating the obstacles of bank lending would revive growth.

Some commentators might criticise us by saying that we are seeking the miracle of boosting domestic demand. Not true. We don’t intend to generate additional demand. We would like to give back the income to people whose jobs were lost under the present tax regime, therefore they don’t have wages to spend. Preserving domestic purchasing power is vital for SMEs, too.


For the future

Emergency measures and quick fixes are not sufficient. Forward-looking, systemic changes are needed. The Hetényi Kör thus wishes to continue its work. We wish to prepare a more comprehensive proposal for the tax system by the autumn, including the principles of financing healthcare, local municipalities, and the pension system. Further points of discussion could be the inclusion of employer’s contribution into gross wages or the role and means of taxing wealth.

This set of measures is by no means the only possible solution to the problem. The economic policy must, however, change path. We wish to present an alternative path based on professional and macroeconomic considerations without taking political sides. Public debate is necessary with the participation of employers, employees and experts in order to convince the Government. We have now taken the first step.


19 July 2012


László Akar,

vice-chairman of GKI Zrt.

János Atkári,

Deputy Mayor of Budapest (1994-2006)

István Csillag,

Minister of Economy and Transport (2002-04)

Tibor Draskovics,

Minister of Finance (2004-05) and as Minister of
Justice and Law Enforcement (2008-09)

László Herczog,

Ministry of Social Affairs and Labour (2009-2010)

Irén Karácsony,

Under-secretary, Ministry of Finance

Ádám Kerényi,


Imre Kocsis,


Álmos Kovács,

Under-secretary, Ministry of Finance (2006-10)

László Lengyel,

Chairman/CEO, Financial Research Institute
(Pénzügykutató Zrt.)

Aladár Madarász,

Economist, Institute of Economics, Hungarian
Academy of Sciences

Tamás Mellár,

Economist and Statistician, Head of Central
Statistical Office (1998-2003)

Péter Mihályi,

Professor of Finance, Institute of Economics,
Hungarian Academy of Sciences

András Simonovits,

Professor of Economics, Institute of Economics,
Hungarian Academy of Sciences

Károly Attila Soós,

Economist, Institute of Economics, Hungarian
Academy of Sciences

Éva Várhegyi,

Economist, Financial Research Institute
(Pénzügykutató Zrt.)

András Vértes,

Chairman, GKI Zrt.

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