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Consultancies draft stimulus package

Hungarian tax consultancies presented a number of proposals for tax changes, including ones to introduce a 20% personal income tax rate for all annual income under Ft 15 million and a 30% rate for higher earners.

The proposals, drawn up by the consultancies Deloitte Magyarország, Ernst&Young and KPMG, are backed by the National Association of Employers and Industrialists, the American Chamber of Commerce, the Joint Venture Association and the Hungarian Association of International Businesses.

The consultancies proposed scrapping special forms of income tax for certain professions and eliminating tax exemption for minimum wage earners. They urged the government to reduce payroll taxes by ten percentage points.

Among the other proposals made were ones to raise the main VAT rate to 23% from 20%, scrap the 4% “solidarity tax” and introduce a property tax. Later, to coincide with the reform of Hungary's local government system, the government could scrap the revenue-based local business tax and reduce the dividend tax to 20% from 25%.

Adopting the measures could raise Hungary's GDP growth rate a full percentage point to 4.5% in the first year, without creating additional inflationary pressure, said Deloitte Magyarország head Péter Oszkó. Acting on the proposals could also raise the employment rate half a percentage point in the first year and another half percentage point in the second half of the year.

Because of the Ft 1,000 billion – Ft 1,100 billion effect the changes would have on the budget, they could only be carried out over several years, said KPMG partner Csaba László. He added the proposals would not cause the budget deficit to grow, if they are paired with commensurate cuts in spending or other measures, such as the elimination of tax preferences or an increase in the flat monthly health care contribution to Ft 8,000 from Ft 1,950.

Responding to the proposals late in the afternoon on Tuesday, the Finance Ministry said acting on them would require cuts in social spending, but it acknowledged the proposals would be of help as the government prepares tax changes for next year.

The ministry said the proposals would reduce budget revenue by Ft 1,250 billion, or 4% of GDP, not by Ft 1,100bn as the consultancies said.

The fall in revenue would require significant cuts in state welfare spending, hurting low- and mid-income earners, the ministry said. The proposals would be most advantageous for high-income earners, it added.

A proposal to cut payroll taxes would hurt pensioners, and another to raise the flat monthly health care contribution to Ft 8,000 from Ft 1,950 would hurt SMEs - precisely those businesses the government wants to support in order to create workplaces, the ministry said.

The ministry said it sees eye to eye with the consultancies on many of the elements in the proposals, including measures to clamp down on the shadow economy, simplify the tax system and lessen the tax burden on employers. (MTI – Econews)