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Fidesz set to lose votes over simplified tax spat

Besides increasing the burdens on businesses, eliminating EVA would also be an administrative nightmare for entrepreneurs.

Fidesz could lose further potential voters if the elimination or modification of the popular simplified business tax (EVA) increases the burdens on Hungarian entrepreneurs, according to experts.

The government and the parliamentary groups of the ruling Fidesz and KDNP parties have banged heads in recent weeks over the future of the EVA. The cabinet wants to scrap it completely, claiming it has become redundant due to the 16% flat tax, while the party groups are lobbying to keep it alive for at least another year, even if at a higher tax rate.

An administrative nightmare

Unfortunately, the public ping-pong match over EVA has further increased uncertainties in the business environment, which has already caused serious damage to the economy. Business owners are now totally confused about what to expect concerning EVA. “The original idea of eliminating the tax form at the beginning of 2012 would be an administrative nightmare for many,” said Attila Tibor Nagy, an analyst at the Méltányosság Center for Fair Political Analysis.

As unhappy taxpayers, who are of course also voters, are seeing both their taxes and their supposedly beer mat-sized tax declaration forms growing, the government’s credibility and the effects of its slogans are weakening, Nagy said. “It is similar to marketing: if I buy something and it is not quite what it says on the tin, the whole thing could easily backfire,” he added. 

“Taxpayers who have chosen EVA are not typical entrepreneurs in the sense that they set up a business to earning their living rather than making big profits,” Nagy said. For instance, there are numerous actors, journalists and language teachers who pay their taxes this way. “They will probably be quite angry seeing their tax burdens and bureaucracy rising,” he noted. 

“The EVA story also puts into the spotlight the practice of extra fast-track legislation, which seriously damages the quality of the laws passed,” Nagy said. The contradictory statements of Fidesz politicians over EVA have been the result of the need to handle too many laws at breakneck speed. Currently, major new regulations such as the Labor Code or the Municipality Act as well as other cardinal laws are also under debate, in addition to the usual budget act.

Time to end the match

The public clash of views between the government and the Fidesz parliamentary group reflects the fact that there wasn’t enough time and energy to thoroughly consider the consequences of eliminating EVA, Nagy said. The problem is that part of the administrative preparation process of bills now regularly spills over into the parliamentary phase. “Thus, the first opportunity for different ideas to clash and to discuss the possible consequences takes place in Parliament, which I think is wrong,” he added. 

Back in April, Péter Szijjártó, the prime minister’s spokesman, dismissed a claim by the Socialist Party that Fidesz was secretly planning to scrap the tax regimes brought about by the Socialists, such as EVA. Then, on October 27, completely out of the blue, Fidesz MP László Koszorús submitted a proposal to Parliament to scrap EVA.

This was rejected by parliament’s relevant committee; instead, it proposed raising the annual revenue cap on companies eligible to pay EVA from the current HUF 25 million to HUF 30 million, and increasing the tax rate from 30% to 35%. Companies that pay EVA do not deduct any costs from their tax base.

Consulting the parliamentary groups, Prime Minister Viktor Orbán reportedly took a decisive and firm stand on eliminating EVA, but eventually put the decision in their hands. The two sides seemingly reached a compromise this Monday, with EVA to stay at least another year. The annual income threshold will likely be raised to HUF 30 million and the tax rate is to be hiked to somewhere between 35-40%. A final decision is expected on November 20. Meanwhile, the government will next year work on hammering out a new kind of simplified tax form that is to replace the EVA from 2013.

Net gain or loss?

The economy ministry claims that eliminating EVA would raise budget revenues by HUF 50 billion, next year. In January-September, the tax generated HUF 86.5 billion in revenues, while annual receipts this year are expected to reach HUF 180.1 billion, compared to HUF 181.9 billion in 2010.

Others, however, doubt the economic rationale behind the move, saying it would actually lead to less money flowing overall into state coffers. The risks related to the elimination of EVA imply a decrease in tax revenues due to a slowdown in economic activity and increased tax evasion, according to an analysis by the Institute for a Democratic Alternative (IDEA). The drop in tax revenues could be substantial if these businesses transfer their headquarters abroad or their costs are raised to the average cost level of those who pay corporate income taxes. The decision obviously has advantages, but in the event of zero economic growth (which is a realistic scenario for 2012), the move will altogether be detrimental, IDEA noted.