Country Study, Hungary — страница 2

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Current Political Structure The current political conditions in Hungary are a system of many checks and balances. The Prime Minister whom is elected selects the ministers in the cabinet. Each of the cabinet members presides before four parliamentary committees in open hearings. The legislative body in Hungary is a unicameral house and is the highest authority in the state. Current Political State The Hungarian Socialist Party was re-elected in1994 in a multiparty election after receiving 54% of the popular votes. Although the (HSP) had taken back control of the government in the 1994 elections, the party has announced its intentions to: “continue economic reform, privatization and to preserve political rights.”(Wash. Post, 6) Economic Structure in Hungary Hungary’s history

of economic vitality has predominately been agriculture. In 1950 , over 50% of Hungary’s work force worked on the land. Hungary’s percentage of workforce working on the land in 1993 was 7%. Hungary’s agricultural decline is directly tied to lack of investment in the 1970’s and the 1980’s. Hungary’s decline is also a product of large amounts of foreign debt that were accumulated in the 1970’s and 1980’s.(6) The net foreign debt in 1972 was about 1 billion(U.S. dollars) and in 1993 Hungary’s net foreign debt was 15 billion(U.S. dollars). Although Hungary has the highest per-capita debt in central Europe their repayment record is stellar.(Wash. Post,7) One of the major functions to Hungary’s success to transition is their role in revenue policy. Hungarian Tax

Reform Hungary's movement from a centrally planed economy to a market economy has lead to massive tax reforms in the former soviet satellite country. These taxes basically fall into three major categories: Value Added Tax, Personal Income Tax, and Corporate Income Tax. In this section of the paper I will first examine the attributes and disadvantages of the separate categories of the taxes and compare them to the former means of revenue collection. Next, I will demonstrate the success (or as the case may be, failure) of such taxes. Finally, I will write about what effects Hungary has experienced due to the tremendous changes in the tax system. Value Added Tax On January 1, 1988 Hungary introduced a Value Added Tax (VAT) as part of a ovement from a socialist centralized country to

on with a market economy (Newbery 1). This tax is similar to the tax currently operating in the European Union member states. This tax is interesting because it is an inclusive tax. That is a tax in which the base is included in the invoiced amount of the good or service. In other words the tax is passed down to the end customer and in turn the seller is reimbursed the amount of taxes paid on that particular good or service. The concept of a Value Added Tax (VAT) was something that was entirely different to managers that were used to output based goals (in the old system) as opposed to budgets and cost minimization as practiced by their western counterparts. The Value Added Tax (VAT) has become a vehicle to flush out businesses that are experiencing market failure that

demonstrate no reasonable need to continue to operate (there are obvious exceptions to this such as utilities, etc....). It also cut down on over production of certain goods. The Value Added Tax (VAT) is also a way that a country such as Hungary can use to encourage (or as the case may be discourage) certain types of businesses in their country. According to Deloitte & Touche the standard rate for the Value Added Tax (VAT) is currently 25%. However, many products and services such as basic food products, medical instruments, and utilities are charged 12% . In addition, various supplies qualify for complete exemption such as education, cultural services, sport events, health services, and services contributing to scientific research and development (D&T 8). Personal Income

Tax Along with the Value Added Tax (VAT) the Personal Income Tax (PIT) was also introduced to Hungary in 1988. The Hungarian Personal Income Tax (PIT) is a progressive tax with a universal additional tax for investment. The tax is based on individual earnings from all forms of work, though interest income is not taxed if certain conditions are meet (D&TII, 1). As shown in figure 1.1 the progressive tax rates on income earned at work range from 0-44%. fig. 1.1 Personal Income Tax Rates Level of Taxable Income HUF Rate Applicable to Level (%) Up to 110,000 --- 100,001 - 150,000 20 150,001 - 220,000 25 220,001 - 380,000 35 380,001 - 550,000 40 Over 550,000 44 Source 1996 Deloitte & Touche LLP The Hungarian Personal Income Tax (PIT) has several interesting features. The first