Hungarian Tax Cuts Hang In The Balance

by Ulrika Lomas, Tax-News.com, Brussels

19 September 2008

A package of tax cuts that would provide tax relief for businesses and individuals in Hungary is hanging in the balance as Prime Minister Ferenc Gyurcsany's minority Socialist government clings on to power by the skin of its teeth.

While the government has approved the proposed tax reductions, worth about EUR5bn, it narrowly survived a motion to dissolve parliament, which could have triggered an election, earlier this week, and remains a crucial five votes short of forcing through the 2009 budget, which contains Gyurcsany's tax plans.

The tax reforms, announced by Gyurcsany last month, would remove the 4% solidarity tax on corporate income and top rate individual taxpayers and give Hungary a base corporate rate of 18%. The plan also calls for long-term cuts in payroll tax and across-the-board individual tax relief through the raising of income tax thresholds. The tax cuts are paid for in large part by a planned crackdown on tax evasion.

However, the Free Democrats' Alliance (SzDSz), a former member of the governing coalition, has made clear its opposition to Gyurcsany's tax proposals, and the party effectively holds the keys that will unlock the door for the governing Socialists to pass the budget along with the tax cuts - and ultimately save Gyurcsany's job.

Meanwhile, representatives of the country's business lobby have complained to Finance Minister Janos Veres that the tax cuts are not deep enough. They are demanding bigger cuts in payroll tax to relieve the tax burden on the corporate sector, which has been carrying a heavier share of taxation as a result of the government's fiscal austerity measures introduced in 2006 and designed to cut the budget deficit, of which the solidarity tax was just one measure.

Unsurprisingly, these arguments have been rejected by Veres, who has told business groups that the government simply cannot afford additional tax cuts on top of those already proposed.

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