Editorial: Real tax overhaul will have to wait – again

Banking

The following is the Editorial column from the May 22-June 4 print edition of the Budapest Business Journal.

The good news on the 2016 budget proposal released in mid−May is that taxes may actually be edging down next year. Since the current government took over in 2010, and ushered in the new era of “unorthodox” economics, an increasing tax burden has been the norm. Finally GDP is growing at a good pace, and perhaps the ruling Fidesz party’s concern about its worsening poll numbers is also growing. For whatever reason, the leadership has apparently decided it can afford to reduce the tax bite without losing revenue.

The bad news is that the tax bill is still based on the “unorthodox” formula, with a confusing hodgepodge of special taxes, including extra levies against banks, telecoms and anyone selling advertisements. We are still waiting for the tax overhaul that this country has needed for more than 50 years.

Under communism, and in every government since then, bizarre tax regimes and overloaded bureaucracy have essentially added an extra obstacle to doing business in Hungary. Instead of seeking to fix this problem, the current government appears determined to make things more complicated and arbitrary than ever. The tax code often seems designed to favor government allies, an approach that creates an appearance of impropriety, and also has the effect of making the country’s business environment unpredictable, scaring away potential investors.

Take the bank tax. Come 2016, banks can hope for a moderate reduction in their total tax burden, but they should not have been hit with this burden in 2010 to begin with. While the banking system clearly played a role in the 2008 financial crisis, so did bank consumers and other investors who thought there was no risk involved in bargain−basement credit. Still, it’s easy to paint bankers as being rich and greedy. That may be why the government sees no political risk in a tax on banks – or in penalizing banks for fluctuations in foreign−exchange rates with the so−called “fair banking law”.

Unfortunately, the result of the legal assault on banks has been that foreign banks are leaving, with Raiffeisen being the most recent institution to reduce its presence here. That means the government is achieving its goal of putting more bank ownership in “local hands”. As nice as that goal may sound, the problem is that the government is in a position to influence which “local hands” actually end up owning banks.

After promising the European Bank for Reconstruction and Development earlier this year that the bank tax would be reduced without conditions, officials tried to backpedal. Now the prime minister and economics minister say that, even if banks will not legally be forced to “help Hungary” by loosening credit, they will be informally encouraged to do so. Given the government’s heavy involvement in the sector, and the fact that it currently controls two banks that it has said it will privatize, we have to wonder what kind of encouragement banks are receiving, and what kind of rewards might go to banks who cooperate with the leadership.

The government’s meddling in the bank market runs a serious risk of reducing the kind of competitive environment that will really encourage loans. As with other sections of Hungary’s historically cumbersome tax code, it seems that the economic good of the country is almost a secondary consideration. Which means the real tax reform we need will be put off one more year – at the very least.

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