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Where do Taxes Go?

“Taxes” is a topic that entrepreneurs in Hungary are most concerned about. In a roundtable discussion organized by Bridge Budapest last year, it transpired that many entrepreneurs here are not aware of the complex legislation and do not feel that they would be able to get a proper understanding. Therefore, it is not surprising that those who are proud of keeping their business clean, mention their accountants as the guardians of transparency in the organization. And they are very right, since, as the legislation changes frequently, it is hard to comply with all the amendments. 

Noémi Alexa Ph.D. Assistant professor of integrity and leadership at CENTRAL EUROPEAN UNIVERSITY BUSINESS SCHOOL 

Hungary ranks 23rd on the International Tax Competitiveness Index. This seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rates low. A neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions. The Organization for Economic Cooperation and Development (OECD) published an overall study about tax rates around the world in 2015. Rates vary between 17.4% (Mexico) and 46.6% (Denmark) of the GDP. Hungary’s overall tax rate is 38.6% of its GDP which is relatively high. As a comparison, Finland collects 44% of its GDP through taxes, while for Latvia it is 20.9% only, and Norway’s tax rate is similar to Hungary’s at 38.1% of the GDP. 

One would assume that a relatively high level of tax income is converted into improvements to the standards of living. The Social Progress Index, though, indicates that the same ratio of taxes can result in very different opportunities for people living in a given country. Despite the similarity in the level of taxation, Norwegians are seventh in the Social Progress Index, while Hungarians are only 35th. One factor that might explain this gap is corruption. The Corruption Perceptions Index of Transparency International, published earlier this week, indicates that Hungary’s corruption situation – within the region and Europe – is worrisome. The index is measured on a scale from 0 to 100 where 100 would mean a corruption-free country. Hungary scored 48 and ranked 57th in the index. This is the first year when Hungary has scored below 50, and below all those countries that joined the European Union at the same time in 2004. At the beginning of this century, Hungary had overtaken most of the countries in the region, except for Estonia and Slovenia. As of today, Hungary is among the file-closers in Europe, which is a signal of declining competitiveness of the country.

Fair entrepreneurs supported by great accountants do contribute to the competitiveness of Hungary. However, their job would be much easier if the government focused on curbing corruption and ensuring transparency in public spending. This would facilitate using the same ratio of tax revenues more efficiently, and move the country up from its 69th place in the Global Competitiveness Index closer towards Norway’s 11th position.

This column is part of a continuing series of opinion pieces from experts at the CEU Business School in Budapest. The opinions stated here do not necessarily reflect those of the Budapest Business Journal.