After many years as a recurring topic of campaigns and political debates, the Trump Administration recently submitted a tax reform package to Congress. It is designed as the beginning of a longer process of simplifying not only the tax code (now 74,000 pages) by eliminating loopholes, handouts, and exemptions, but also making the United States more competitive and productive.
The debate promises to be lengthy and difficult. Tax systems do not just provide funds for various government services, but are also critical elements of competitiveness in the shrinking global market. They encourage or discourage growth essential for the well-being of the citizens.
Various countries differ in the manner in which they balance these competing interests in their tax systems. The proposed tax reform in the U.S. is designed to shift some of these priorities, recognizing that U.S. corporate tax rates rank among the highest in the world. That has caused corporations to move operations and jobs overseas, which in turn has resulted in companies keeping profits parked outside the U.S. instead of invested back home. The U.S. tax system has also been designed to socially engineer society to support the growing government benefit system.
It is instructive to compare these challenges to the ones Hungary faced after converting from a communist planned economy to a free-market approach. That's because Hungary has successfully overcome some of these same challenges.
In 2008, even before Greece's fiscal crisis, Hungary found itself in the throes of a serious and similar crisis, teetering near the brink of bankruptcy. The country required a substantial IMF bailout. When it came into power in 2010, the current right-of-center government inherited this loan and distressed financial condition.
At that time, out of 4.2 million people employed, only 1.8 million paid taxes supporting a country of 10 million. This created an obviously unsustainable situation. Government debt had reached 85 percent of GDP and unemployment had risen to 11 percent. The budget deficit far exceeded the EU goal of 3 percent and growth had turned negative.
Special, sectoral taxes had to be imposed to service the IMF loan, which was paid back in full and on time. The new constitution, passed by parliament in 2011, contained a provision designed to control the government's deficit spending. The government instituted a number of programs designed to provide more incentives for people to work, in some cases on public works projects, as opposed to remaining inactive and receiving social benefits. New rules required children to attend school regularly in order for the parents to receive child support.
In short, a workfare system replaced a welfare mentality. A cut in personal income tax — initially slashed to a flat 16 percent and then to 15 percent last year — offered further rewards to get the nation back to work. On the other hand, consumption was taxed progressively at a fairly high rate, the highest being 27 percent. And the corporate tax was reduced from 19 to 9 percent, which is the lowest in the European Union.
As a result of these measures, the number of taxpayers has more than doubled, to 4 million; unemployment has dropped to a record low of 4.5 percent; growth has risen to a respectable 3.5 percent; government debt has shrunk to 74 percent of GDP; and the rating agencies have upgraded Hungarian bonds from "junk" to investment grade.
As the debate on tax reform in the U.S. begins, some of these government measures and economic trends provide useful insights. Hungary grappled with many of the same challenges we hear about in the U.S., like creating a tax system that treats the rich and the poor fairly, balances work versus welfare, increases global competitiveness, and keeps jobs at home. While the economy and social system of Hungary differ greatly from the U.S., many of the same fundamental issues — debt, deficits, jobs, growth, and tax rates — pushed Hungary to pursue a major tax reform.
It took time and required overcoming much opposition, but the Hungarian economy is beginning to see the fruits of the effort.
Eugene F. Megyesy Jr. practiced law in Denver and is now senior adviser to Prime Minister Orban of Hungary.
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