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Economists Criticize Audit Office Head’s Suggestion of Scrapping PIT

Péter Cseresnyés 2021.08.13.

In an interview, the President of the State Audit Office of Hungary (ÁSZ), suggested that personal income taxes should be abolished from the Hungarian tax system. The idea is quite startling, as PIT  is the third most important source of state revenue, and its abolition would mean an immense loss to Hungary’s budget. Unsurprisingly, several economists consider the proposal of the President of ÁSZ to be a bad idea.

The President of the State Audit Office of Hungary shared a rather surprising idea in a recent interview. László Domokos said that ideally personal income tax should be scrapped altogether in Hungary, arguing that it is a burden on work and generally perceived as a “punishment”.

Audit Office Head Suggests Scrapping Personal Income Tax
Audit Office Head Suggests Scrapping Personal Income Tax

PIT is a burden on work and generally perceived as a "punishment," Domokos said.Continue reading

The proposal has left many people baffled, as the share of public taxes collected on labor income today in Hungary is 43.6 percent, one of the highest in the EU, according to OECD data.

Currently, an employee in Hungary pays 15% personal income tax, and an 18.5% social security contribution on labor income. Meanwhile, an employer pays 15.5 percent social contribution tax, and an additional 1.5 percent vocational training contribution (the latter will be completely scrapped in 2022).

If Hungary were to get rid of the current 15% PIT, it would suddenly become the EU country with the third-lowest tax and contribution burden on labor. But this would in turn result in a loss of revenue to the budget so high that it would be very difficult to compensate for.  A recent summary by the Finance Ministry shows that for the entire year of 2021, the government expects to receive HUF 2,717 billion from private income taxes, making it the third most important source of revenue for the treasury after the VAT and social security contributions.

The idea of lowering personal income tax is not a new one in Hungary, as the second Orbán government had already promised to target a single-digit PIT shortly after taking power in 2010.

This goal has not yet been reached, with the personal income tax only being reduced from its all-time high of 18% (in 2009) to today’s 15%.

As hvg.hu notes in its article on the subject, the Orbán government has long had the goal of gradually reducing taxes on labor year by year. Until 2016, this meant cutting the social contribution tax, and since then the reduction of social contribution taxes has been the solution, while next year the vocational training contribution will be phased out completely (which is paid by employers, not employees). But as hvg.hu notes, this comes at a serious price, as in Hungary, to make up for the lost revenue, the 27% VAT rate is by far the highest in the European Union.

PIT Exemption of Under-25s in Hungary to Affect More Than Previously Thought
PIT Exemption of Under-25s in Hungary to Affect More Than Previously Thought

In January, Prime Minister Viktor Orbán announced that from 2022 onwards, young Hungarians under the age of 25 will not have to pay personal income tax. According to the Central Statistical Office (KSH), in next January, around 270,000 youngsters will be affected by the policy. However, new research reveals that the number is closer to […]Continue reading

Government-critical conservative news site Magyar Hang asked several economists about the proposal of abolishing the personal income tax, but none of them seemed impressed with the idea.

According to economist Péter Róna, the idea of the President of the State Audit Office remains at the level of a simple idea, as do several previous measures of the government. The impact of abolishing the tax on the Hungarian economy, budget and society is not presented in detail.

Róna believes that it is worth considering what an immediate 15% increase in wages would mean. It would leave much more in people’s pockets, in turn increasing consumption and consequently the revenue of sales and other taxes. But extra consumption would also have an inflationary impact, which would reach the housing market as well as bank’s lending practices.

Péter Virovácz, senior analyst at ING Bank, also thinks that a move to a zero personal income tax rate is not a good idea.

According to the analyst, the Hungarian budget would be unable to handle such a huge loss right now. This would only be viable if there were a fundamental overhaul of labor taxes – for example, an increase in the social contribution tax to compensate for the loss of PIT.

The expert added that he was unaware of any attempts anywhere in the world to completely abolish taxes on labor.

In the featured photo illustration: László Domokos, President of the State Audit Office. Photo by Tamás Kovács/MTI