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Is a new tax system needed to boost employment in Hungary?

Would a monthly lump-sum tax based only on age and qualification present significant advantages to the current personal income tax system in Hungary? 

Reforms of public services carried out throughout Europe have often yielded good results; their imitation, however, would not necessary do so in Hungary. The main reason behind this is to be found in social and regulatory differences as well as ones in thinking.

In Western countries, reforms of public services often contain measures obliging customers to pay a certain minimum sum of money (co-payment) for the otherwise “gratis” service. The amount can be linked to their income. But in Hungary, any system based on traceable income would be unfair from the very beginning because it says nothing about one’s burden-sharing capacity.

In Hungary, personal income tax appears as one of the main components of public burden sharing: the more income one has, the more tax one pays, for legislators presume that those with high incomes are rich. This, however, is not so much true. There are a lot of people with a low official income who live much better than the average. The explanation can be found in the black economy, the elimination of which has not yielded any considerable results yet.

Since the current tax system thus turns out to be manifestly and basically unjust, the need for another, new approach arises. Let’s try to approach the question of taxation from the other side: why do we have to pay taxes? The overwhelming majority of a nation’s budget expenditure consists of expenses related to the development and running of public services.

If we now consider to what extent one has access to public services, we will find no huge differences among people. This relative evenness of how people benefit from public services may serve as a good basis for shifting towards a system where there are no important differences in how people share their tax burdens.

In order to introduce, however, some differentiation among people’s public burden sharing, I suggest two indicators being taken into account: age and qualification. Personal income is closely linked to these factors: the higher the qualification, the easier one can find a job. Second, middle-aged people at the peak of their mental and physical condition generally earn more than either younger or older workers.

A monthly lump-sum tax based only on age and qualification would present significant advantages: it is simple, there is no need to be an expert for its calculation, it’s hard to dodge, and mainly, once you paid it, all further income is free of tax. If anything, this would steer people toward looking for new earning possibilities. The advantages of the system are simplicity, accuracy and calculability. As a result, the employment of higher skilled workers would become significantly cheaper, which could enhance the creation of modern jobs in Hungary. Finally, hiding one’s income won’t be worth it any more. This would deter people from participating in black economy.

My suggestion is that, as a rule, all adults should pay a lump-sum tax. Exemptions would be available to parents staying at home with their children, higher education students if enrolled in day courses (up to a certain age limit), sick and invalid persons, pensioners and the unemployed. The question arises: what happens to those who are not able or do not want to pay their monthly tax. In this case, society can rightfully expect that those who do not pay their share in money will pay it in kind, that is, by working. Non-payers would hence be obliged to register as fully or partially unemployed into a modified system in which they have not only rights but also duties. To receive the dole, they would have to do some work and their time would be distributed by the unemployment agency.

These days, public works – as almost all other public services – should not necessarily be done by publicly owned companies. Based on Western experiences, it can be stated that there are lots of ways to organize services. Since employing public workers is anything but easy, private companies would be authorized to offer them some financial incentives. Thus, it may later happen that companies will put on their payroll some of those people they first tried in public works.

With an eye on the state of infrastructure, I recommend the following sectors to be taken into account in the enlarged public works program: environment, forestry, water management and modernization of the railways network, which could boost national workforce mobility.

Naturally, lots of other sectors could employ public workers. For this, it is important that information about suddenly arising needs reach unemployment centers at an adequate speed. It would thus be possible to send the adequate workforce in time to a given workplace – e.g. to a school where the replacement of a teacher in a certain specialization may be troublesome.

The above proposal is far from being a panacea, but it may generate positive processes both in the economy and society. Instead of an extremely polarized tax system resting on an unfair basis, it presents a new one which, apart from being transparent, well-balanced and calculable, would provide good incentives to work.

Miklós Somai is senior research fellow at the Institute for World Economics of the Hungarian Academy of Sciences