Hungary’s Tax Morale Improves, but Still Average for the Region

Krisztina Kőmíves

Research suggests that tax behavior is shaped partly by compulsive and partly voluntary motivations, collectively known as tax morale, an internal tax incentive. In countries with a better tax morale, coercion is less likely to be needed. Ironically, both excessive sanctioning and a lack of it can worsen morale, as taxpayers feel the system is unfair at either end of the spectrum.

“It is important to note, therefore, that the tax system affects tax morale, and that the tax system and the tax authority’s behavior should feel fair to taxpayers. Further, the tax system should be as transparent as possible,” PwC Hungary tax director Krisztina Kőmíves, who used to work at the National Tax and Customs Authority, tells the Budapest Business Journal.  

Nevertheless, other variables can also affect the tax morale, such as individual characteristics, belonging to social groups, the use of taxes and social traditions.

While research into Central and Eastern Europe does not clarify whether tax morale or coercion plays a more important role regarding taxation (neither are there studies directly ranking countries in this regard), tax experts tend to agree that Hungary traditionally had poor tax morale.

“The tax morale is clearly improving [in Hungary], but this is mostly due to the effective measures of tax regulation implemented in the recent years to combat the historically bad tax morale,” Balázs Kántor, tax advisor and lawyer at Lakatos, Köves and Partners Law Firm, tells the BBJ.

The improvement in the Hungarian tax morale is a result of many ingredients. On the one hand, the introduction of electronic surveillance systems such as EKÁER in freight and online invoicing across many sectors, chiefly in retail, have provided a boost in this regard.  

Lajos Bagdi

Whiter Economy

On the other hand, corporate income tax (9%) and the personal income tax (15%) reaching low to moderate levels also help whiten the local economy.

“As a result, the tax moral has significantly improved,” says Lajos Bagdi, head of tax advisory services at Niveus Consulting Group. “Hungary introduced and is still introducing different instruments to better the tax morale,” he adds.

And good tax morale is important for the economy. “Despite being also a cultural heritage in Hungary, I think tax morale is closely related to the overall healthiness of the economy,” Kántor says.

Dániel Bajusz, a senior manager and attorney at EY Law Hungary, agrees that the local environment is not only attractive for businesses, but also works for a better tax morale.

“Nonetheless, tax evasion-related activity is still and issue at the level of households. According to the Convergence Program 2019-2023 the highest and lowest income households are still hiding approximately 20% of their wealth. In Budapest, 10% of household income is concealed on average, while in rural areas this rate rises close to 25%,” Bajusz of EY says.

Hence, the Hungarian government’s continuous fight for whitening the “gray economy” with different measures. But with such a high value added tax rate, VAT fraud is still quite a big issue in the country. “Since the general VAT rate is one of the highest in the world (27%), carousel and similar fraud schemes are still flourishing making advantages of non-borders among EU members. However, we have seen some positive developments recently,” Bajusz says.  

Dániel Bajusz

Mind the Gap

“Between 2010-2018 approximately HUF 500 billion additional VAT budgetary income was generated thanks to these newly introduced initiatives. By 2019, the VAT gap had fallen to less than 10%, which is very favorable in comparison with other countries in our region or even on an EU average. However, we are still seeing many tax audits and criminal procedures being initiated due to VAT frauds,” Bajusz adds.

It is possible that data tilting toward positive trends, however, is not a signal of a better tax morale yet. “The positive results in Hungary are likely to have been influenced by the introduction of coercive measures rather than improvements in tax morale (especially the introductions of real-time taxation measures), but they have probably not crossed a critical threshold yet, and have not had a very negative impact on tax morale,” PwC Hungary’s Kőmíves argues.

Research has found a positive relationship between the tax burden and the gray economy. PwC and the World Bank Group’s annual study entitled “Paying Taxes” compares and ranks tax systems on a global scale, both from taxes and administrative burdens point of view.

The results show “that Hungary made a significant improvement regarding the tax burden; however, there is still room for improvement in the field of administrative burdens and overall Hungary does not have a leading role among the V4 countries,” Kőmíves adds.

The Visegrád countries (also known as the V4, and comprising Hungary plus the Czech Republic, Poland and Slovakia) share many similarities in their tax systems.

“Their tax rates are low (except for VAT) in comparison to Western European countries (with the prime example being the 9% CIT in Hungary, the lowest rate in Europe), which is related to their current level of economic development and a lower share of their governments’ expenditures in GDP,” EY’s Bajusz explains.

VAT provides one of the most important sources of revenue for the state budget in all modern tax systems. “Most of the countries around the world, especially in Europe, have a VAT rate around 19-22%, although in Hungary the [general] 27% VAT rate is considered exceptionally high. Taxes in Hungary which are related to labor, such as PIT, are higher than the V4 average,” Bajusz says.

It is extremely difficult to get an exact measure of tax morale, since it depends on too many variables. “Traditionally, due to historical and other reasons the tax morale of Southern and Eastern European countries’ is lower than that of Western Europe, especially those traditionally protestant countries. I think the Hungarian tax morale is more or less average in the region,” the EY expert adds.