Economic and psychological research suggests that tax behavior is formed by both compulsory and voluntary motivations. A country with better tax morale will see coercion as holding a less important role in its society; indeed, excessive sanctioning has been shown to worsen tax morale, just as much as too little punishment of tax evaders does.
A fine balance must thus be found between underdoing and overdoing sanctions or else taxpayers will feel the system is unfair. The tax system itself is, therefore, a major factor in affecting the tax morale of a nation, and the tax authority’s behavior should feel fair to taxpayers while maintaining the highest levels of transparency possible. Individual characteristics, such as belonging to a group and social support traditions all weigh in on forming tax morale.
The tax morale in Hungary, the willingness of its citizens to pay into the system, is seen to have made improvements lately.
“As a general statement, the tax morale in Hungary has significantly improved in recent years, especially due to the moderate corporate income tax and personal income tax rate (at 9% and 15%, respectively),” Lajos Bagdi, head of tax advisory services at Niveus Consulting, tells the Budapest Business Journal.
“Also, the so-called ‘tax-wedge’ for VAT has considerably decreased (currently at 6.6%), based on which Hungary is one of the best performers in the EU. As a result, the amount of taxes collected by the Hungarian tax office is higher than in the previous years. Based on the recent statements from politicians, further tax reduction can be foreseen, for social taxes especially,” Bagdi says.
Hungary’s considerable improvement in tax morale since the late 1990s has led to clear gains. “As a result, more taxes can be collected than earlier and the hidden economy is continuously shrinking,” he continues.
“However, there is still a problem in using alternative tax methods such as KATA [the simplified tax system intended for small businesses and the self-employed] for a contractual relationship instead of employment to pay salaries to individuals,” Bagdi adds.
These alternative tax methods are exploited by some companies that contract their staffers instead of employing them to avoid paying certain other payroll levies.
“The government identified the problem and set certain restrictions as from 2021 in order to reduce the tax avoidance regarding KATA taxation; for example, 40% extra tax is now applicable for a total yearly amount above HUF 3 million paid by one service recipient,” the tax expert explains.
Hungary has introduced, and is still introducing, various tools to combat the black economy. These include the introduction of real-time reporting obligations, such as online cash registers; the usage of transportation control systems, such as EKÁER; and the launch of the universal online invoice reporting system. The government is planning to introduce more real-time obligations to restrict potential tax avoidance. With these tools in action, hiding revenues and income becomes harder. But there are downside, too.
“Companies treat these tools as a significant administrative burden; however, they should accept and adapt. One can argue that Hungary is one of the strictest countries within the European Union in respect of its tools introduced: EKÁER is a Hungarikum and online invoicing is also very rare within the EU,” Bagdi explains.
While these tools have a real positive impact on the economy, the disproportionately increased administrative burden may dent tax morale in some cases.
Improving tax morale is a self-generating cycle. In an improved tax morale environment, more taxes can be collected and the reputation of the tax office is further elevated, which boosts taxpayers’ willingness to pay their dues. So, what else can be done to boost matters here?
Social security and local business taxes are still seen as a significant burden. If these contributions were reduced, the tax morale would further improve.
“Hidden-employment could be whitened if social taxes were reduced. Also, as the local business tax is a significant and special tax type in Hungary, the simplification of the tax system could be improved if the local business tax would be cancelled permanently and, for example, the current 9% corporate tax rate was increased a bit,” Bagdi said.
While the corporate income tax rate of Hungary is at an attractive level (for more detail on this, see “Competitive tax System may Need Tweaks to Mitigate Pandemic” on page 14), the general Hungarian VAT rate is still the highest in the European Union
at 27%. “This fact could lead to tax avoidance since the respective saving for not declaring the VAT can be significant. As an alternative solution, Hungary should consider moderating the VAT rate to a more acceptable level or to make the tax collection more effective in order to reduce tax avoidance,” Bagdi suggests.
As the COVID-19 pandemic shook Hungary, the government introduced measures such as remitted or postponed contributions for certain industries and a general reduction of the local business tax for SMEs as of 2021. This approach may not only help businesses to survive, but could also help improve tax moral.
“The current intention of the government is to save the companies in particular sectors. Although these measures could lead to the loss of certain tax revenues for Hungary, if the companies are still alive and no massive liquidations happen, more taxes can be collected in the future,” Bagdi concludes.