Hungary's Liberals Push For 20% Flat Tax

by Ulrika Lomas, Tax-News.com, Brussels

18 January 2006

Hungary's liberal SZDSZ party, a junior partner in the country's governing coalition, wants to follow the example set by many other countries in Central and Eastern Europe by introducing a flat tax following elections which are due to be held in later in the Spring.

Speaking at a business conference on Monday, Hungary's youthful Economy and Transport Minister Janos Koka proposed a 20% flat tax system, including personal income tax, value-added tax and corporate tax.

Koka, an IT entrepreneur who was appointed to the cabinet last year at the age of 32, also wants to abolish the unpopular local business tax, which is levied on a company's total revenues rather than its profits at rates of up to 2%.

"We're seeing a flat tax race in this region (Central and Eastern Europe) and we need to address that," Koka stated.

However, he went on to stress that the proposal was a liberal programme and not endorsed by the Socialists, the main party in the coalition.

The Socialists have rejected flat taxes on the grounds that it would mean that "the head of a successful business would pay the same tax rate as a low-income worker."

In June of last year, a proposal to introduce a single 21% flat-rate corporate, personal income and value added tax was rejected by the government, which has instead committed itself to a five-year programme of tax reforms designed to reduce the total burden of taxation as a percentage of the country's economy and to create a higher degree of stability in the tax system.

At present, Hungary's personal income tax rates range from 18% to 36%, while corporate tax rate is levied at 16%. The top VAT rate in Hungary was cut to 20% from 25% on January 1.

Flat taxes have become a much used tool by the former members of the Warsaw pact to raise levels of investment and attract foreign business, a trend which began in 1994 when Estonia introduced a flat tax rate of 26% for all personal income and corporate profits (which it plans to reduce to 20% this year).

Since then, a number of countries in the region have followed Estonia's lead: in 1997 Russia introduced a flat tax of 13%; the Polish government has announced that it will be putting in place a single 18% rate of corporate tax, income tax, and VAT by 2008; while Hungary's neighbours in Slovakia and Romania have also forged ahead with flat taxes.

Parliamentary elections are due to be held in Hungary in April or May.

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