Data

Cutting Taxes Before Elections Won’t Bring Competitiveness

The much-advertised tax cuts for Hungary in the run-up to the 2018 elections are commendable – but they hardly make the country more competitive or attract real FDI. 

There is something very revealing about setting tax rates according to how much they want to collect – while they justify taxation by its benefits and the positive incentives it supposedly provides. They should really just say we want more – and shut up about how it’s supposed to be good for us.

2017 adóelvárások.png

Revenue targets for all 60 tax types in Hungary for 2017 (down from 64 last year) Source: Budget

Out of the 60+ different taxes that exist in Hungary, the 10 smallest bring in only 0.022% of tax revenues. But fear not, they are not useless. They deliver all those opportunities to fine you for paying your taxes wrong. And that’s another thick revenue stream. (The only thing sicker than setting taxes according to expected revenue is setting revenue targets on fines for the tax authority. If there wasn’t a single case of tax avoidance in the country they would still have to come up with a very high revenue from fines – while they conspicuously have to avoid the biggest, and thus politically connected cases.)

What is also shocking on this chart is that 5 out of the 6 biggest tax types are paid by a 27% VAT and employment-related taxes. Only the 7th biggest revenue source is corporation tax (5.21% of revenues).

Sliding back on competitiveness and Doing Business rankings had its effect on the government – as well as an election looming in 2018. (Hungary ranks ahead of only Madagascar and Venezuela in government transparency among 138 countries in the 2016 Global Competitiveness Index of the World Economic Forum.)

But Orbán is still at denial and believed what he was saying about corporations being only after low taxes. Instead of transparency and rule of law, he pledged to slash the corporate tax rate to single digits in 2017 as part of an agreement with business representative in October to increase minimum wage by 15% next year. In the meantime Hungary has left the Open Government Partnership, which promotes more accountable and responsive governance, because they dared to point out that he and his cronies are stealing that it is hard to follow what happens, to whom, and why in this country.

But the government’s latest push to turn Hungary into a tax haven for companies is just a show (alongside this pre-election push to increase wages with the good old corporatist method). And not just because corporate taxes don’t bring in that much revenue. When we look at the effective tax rates paid by the 10 biggest corporate players (by revenue) and compare it to the official 19% corporate income tax rate, the relevance of turning Hungary into the new Bahamas seems negligible.

10.png

Effective corporate income tax rates paid by the 10 biggest corporations in Hungary (by revenue) in 2015 vs the headline tax rate (black bar) Source: Index.hu

Tax rates for large foreign companies are already significantly reduced by subsidies and tax concessions. German car maker Audi, for example, did not pay any corporate tax in 2015, as it benefited from R&D tax allowances. WizzAir, Suzuki, GE, Mercedes and Bosch paid 1-2% corporate tax, while South Korean electronics producer Samsung was the only one of the top 10 companies by revenue whose corporate income tax payment (15.9%) was close to the headline corporate tax rate (19%).

But also, don’t forget that Orbán came into power in 2010 and immediately started fleecing and squeezing out multinationals. Anyone with a short enough memory or the bloated confidence to be able to make it in Hungary actually deserve their fate.

The biggest companies (and the hand-selected startups often dominated by young cronies) pay corporate income taxes way below the 19% official rate. (Why normal companies don’t deserve tax relief is a mystery – SMEs pay 10%.) Yet, the burden of compliance with the inane tax bureaucracy pulls them down.

Fogadjunk, nem is tudod, mennyi idegesítő kisadót fizetünk ma Magyarországon!

How many hours does it take to comply with tax bureaucracy (Source: PwC Paying Taxes)

As of the second-highest tax wedge on labour in OECD – it will stay high even with the government’s multi-year reduction program – aimed to be completed by 2022. Hungary’s tax wedge would still remain the highest in the region.

As of the inflow of much-coveted FDI, it is quite possible that the corporate tax reduction would attract companies that aim to reduce their tax burden by profit shifting, without actually increasing business activity.

Citing strategic interests, the government took over utilities and rewrote the rulebook for entire industries from banks to chimney sweeps and tobacco shops. France’s Electricite de France SA this month sold its Hungarian unit to the state. Italy’s Eni Spa and France’s Suez SA quit earlier.

Orban was quickly able to reshape the economy as he spurned checks and balances. Independent institutions are run by his people: the head of the state prosecutor’s office is a former lawmaker of the ruling party, the central bank chief is an ex-minister Orban once called his “right arm” and the Constitutional Court is stacked with loyalists. Parliament, dominated by Orban’s lawmakers, routinely fast-tracks government legislation. Independent media is disappearing and outlets have come under the control Orban’s allies.

All that has had an impact on investments — they slumped more than 14 percent this year through September — and on economic growth, which is the slowest in three years

Populist Magic Fades in Economy of Europe’s Big Trump Fan – Bloomberg

This is probably why Bloomberg finally stopped brown-nosing the crony economic miracle and finally released opinions to the contrary: that cronyism made downtown Budapest look shiny, but it made the investment environment hostile, unpredictable and whimsical. The resulting growth is mere paper growth. The improving credit rating is just that: the government can get indebted cheaper while competitiveness is in free fall. And the statistics are just shiny covers of a Potemkin-economy.

“Hungary has gone from black sheep to success story,” said Orbán on 2 Dec 2016

The numbers are good but the patient is dying.

“Hungary is a story of a gradual decline of growth and growth potential as a result of state capitalism, which is being propped up by short-term interventionist measures,”

But their success propaganda works – in the sense that analysts and economists wanting to believe in Orbán or something about him (that he is “right-wing” or strong, or anti-migrant) can point at the numbers and feel vindicated.

“As long as the government keeps grabbing a bigger and bigger slice of the private economy and as long as the decisions are based on who you know and not on market forces, there won’t be lasting improvement,” said Attila Chikán former minister of economy (under Orbán) and professor at Corvinus.

 

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