New economic ideas

It seems to me that Ferenc Gyurcsány is in his best form when he or his party or both are in the deepest trouble. In such cases he comes up with some excellent ideas. This time is no exception. It was only a couple of weeks ago that he announced the government’s plans concerning state-owned properties which he called "New Owners’ Program." The initial interest in purchasing shares in these companies is quite promising. Yesterday he gave another speech, this time at the Academy, in which he outlined the government’s plans for overhauling the system of taxes and benefits. It seems that as far as personal income in Hungary is concerned, the tax burden is not very high by European standards. Hungary is in the middle of the pack. If you live in Greece you pay very little but if you live in Denmark it is very, very high. By contrast, the tax burden of the companies, big and small alike, is enormous. The highest in Europe: 49%! In Denmark it is only 12.9%, in Ireland 13.5%, and in the United Kingdom 18%. For the time being no decision has been made about how to overhaul the tax system. Gyurcsány simply outlined three possibilities offered by economists and financial wizards. In the next couple of months he would like to conduct a public debate about the best way of introducing necessary changes in 2009.

One of the possibilities is to raise salaries but make the employees solely responsible for paying all the taxes and benefits the employers previously paid on their behalf. Other than its modest educational value (letting people know what their real salary is once benefits are added), I don’t see the upside to this option. A second possibility is to lower personal income taxes. The rate would be 20% for someone making less than 2.5 million forints per year; above this income level it would be 30%. To compensate for the loss of revenue from personal income taxes, real estate taxes would be made compulsory. The third possibility, obviously favored by Gyurcsány, would be to lower business taxes and benefits payments from the current 49% to 22%; at the same time the personal income tax could be raised on higher income levels.

Of course, the introduction of any of these three plans will result in some loss to the budget. The most expensive from the point of vew of the state would be the second option: lowering personal income taxes. The budget would be poorer by 420 billion forints which, according to the finance minister, the state cannot afford. According to tax experts the first plan, that is passing on the burden of taxes and benefits to the employees, is less expensive (a loss of 250 to 300 billion), which is more in line with János Veres’s thinking. But according to experts this plan will not increase the number of people employed and will be beneficial only to people in higher income brackets. They also claim that it would bring about inflationary pressures. The third option–lowering the tax burdens of companies–would be the least costly from the point of view of the budget (a loss of 200 to 240 billion), it would have a positive impact on employment, and it would help economic growth. The next few months will see heated debate on these issues. But at least this will be a debate on a more important question than a 300 ft. co-payment.

Sort by:   newest | oldest | most voted
Varangy
Guest

Wow. I honestly don’t where to begin.
‘Excellent ideas’? ‘New economic ideas’?
I know you have a crush on the Csótány, but take it easy already.
I am not convinced that the ‘New Owners’ Plan’ is not a simple átverés. How? First off, valuation of State assets are always questionable. Second, what is to prevent the following happening.
1) State companies are made public at X Ft/share.
2) The managers don’t fulfill their fiduciary responsibilities and drive the share price down.
3) As market capitalization is significantly and artificially down, the managers then jointly take the company private with a PE shop ala a LBO, fix the processes that they had sabotaged before and sell it off to an investor.
The average Hungarian investor will have provided them the liquidity to illegally and immorally line their pockets. Too much corruption endemic to Hungary combined with naive Hungarian investors equals sure disaster.

Varangy
Guest
Now onto your discussion of taxation. ****It seems that as far as personal income in Hungary is concerned, the tax burden is not very high by European standards. Hungary is in the middle of the pack. If you live in Greece you pay very little but if you live in Denmark it is very, very high.**** As any man-on-the-street Hungarian will tell you this is complete nonsense. In Denmark you may pay nominally higher marginal tax rates (and you may even have a overall higher tax burden), but you also get more in return! Be it in general public goods, infrastructure what-have-you. Adjusting for that, you see that Hungary is not middle of the pack, but rather quite high! ****By contrast, the tax burden of the companies, big and small alike, is enormous.**** Why is it that nobody understands that corporations don’t pay taxes? They merely collect them. Corporate taxes are nothing more than a largely invisible tax on capital, consumers and labor, not on the corporation itself. This enormous tax burden is shouldered by the aforementioned trio! ****I don’t see the upside to this option. A second possibility is to lower personal income taxes. The rate would be 20%… Read more »
Varangy
Guest

Actually, it does have taxation problem, just not in the way that the hungarokrata like Veres think.

Viking
Guest

“Wow. I honestly don’t where to begin.”, to copy Varangy…
Varangy about your 1st comment: Did you not mix up Executive Management and Owners? Shareholders are Owners, they make the final say, not the Managers.
According to what is known today the Hungarian State would still control 51% of the shares (= votes). Any “Golden Shares” are in the process to be forbidden in the EU, so let us assume 1 share = 1 vote.
If 49% of the total shares are sold to non-institutional owners, then there are a lot of weight these shareholders can put on, *if* they organize themselves.
There are some different rules that protect the minority share owners, giving normal people extremely much more to say over how State Companies are run compared with today.
What political suicide would it not be if the Owner State would crash the company and sell its 51%. The new owner would still have to fight with an hostile 49%, who it has to buy out at a good prize.
For myself, I will buy the highest number of shares allowed in the Hungarian Gaming Corp (SzZrt). Other infra-structure companies are also interesting.

NWO
Guest
On the tax issue, I have more sympathy with Varangy’s views. The Hungarian economy in order to ensure long term competiveness requires more radical changes to the tax system. Lowering the “employment tax wedge” by reducing the “social security” burdens on corporations and ultimately on employees is a necessary and good first step. Raising marginal rates (even on the richest) is not a great idea, as it will just encourage more tax exiles to “move” to Slovakia and Romania. What is needed but will not be done is: (1) REDUCE the size of the state sector (which, according to the FT, is about 50% of GDP), which (a) crowds out the private sector, (b) increases borrowing costs, (c) requires high taxes to sustain itself and (d) just plainly (and unlike Denmark), invests the money it takes horribly. (2) Change the incentives built into the tax system that encourage Hungarians to spend an inordinate amount of time “messing around” with their KFTs in order to minimize tax. The whole “AFA Szamla” culture must be changed. The amount of time spent on unproductive tax minimization exercises in Hu. is insane. Of course, the real chances of either (1) or (2) occurring is… Read more »
John Hunyadi
Guest
I’ve recently noticed your blog and welcomed the intelligent, analytical commentary on the Hungarian political scene. However, like the other commenters, I believe that your analysis on this particular issue is lacking. “It seems that as far as personal income in Hungary is concerned, the tax burden is not very high by European standards. Hungary is in the middle of the pack. If you live in Greece you pay very little but if you live in Denmark it is very, very high.” The above comment misses the point. As a low income country by European standards, it is worrying that Hungary is in the middle of the pack in terms of tax burden (and thus in terms of the state’s share in the overall economy). A better comparison is with the other new EU Member States; here Hungary lies close to the top of the league. One of the most serious problems with Hungary’s tax system is that the tax base is rather narrow. Hungary has one of the lowest official rates of employment in the EU at around 30%. A majority (but by no means all) of this 30% – those who pay tax on, more or less, their… Read more »
John Hunyadi
Guest

I see now that you were referring to personal taxes when you said “middle of the pack”. I agree that they are not excessive in Hungary. But I am curious where you found the figure of 10% for Hungary. A typical young professional (well above average salary by Hungarian standards, but well below the average by EU standards) pays about 50% income tax in Hungary (including social contributions, which are de facto just another form of income tax). I believe (I may be wrong) even someone on the minimum wage pays over 10%.
My point still stands about the overall tax burden. The tax ratio in Hungary (defined as total tax take as % of GDP) was 9th highest out of the EU-27 in 2005 according to Eurostat data. Among the new Member States Hungary has the 2nd highest tax ratio.
The current Hungarian government has done little (if anything) to reduce the overall tax burden. It seems to me that they are more concerned with

John Hunyadi
Guest

…more concerned with cosmetic changes to give the (false) appearance of beginning to reform the system.
I tend to agree with NWO that the major reforms that are required will probably not take place.

Varangy
Guest

*****Varangy about your 1st comment: Did you not mix up Executive Management and Owners? Shareholders are Owners, they make the final say, not the Managers.*****
@Viking
Knowing all you know about Hungary, what makes you think that shareholders in a formerly state-owned company would be anything other than owners in name only?

Varangy
Guest

****This 10% is average. This low figure is most likely due to the fact that on minimum wage there is no income tax. This brilliant idea was Medgyessy’s. Not surprisingly, suddenly everybody earned the minimum wage. I don’t remember the exact numbers but perhaps close to a million people pay no income tax whatsoever. In my opinion this practice should be abolished and I have the feeling that it will be before January 1, 2009.****
That doesn’t sound right to me at all. Gonna see if I can find those numbers.
But in the meantime, tell us why that practice should be abolished?

Varangy
Guest

****Varangy (you could have found a nicer name!)****
I think toads are quite nice and under appreciated, while perhaps, warty.
****asks “tell us why that practice should be abolished?” I think it is quite obvious why. Because suddenly the employers claim that their employees are on minimum wage. This way neither the employer or the employee have to pay or have to pay very little. The rest of his pay comes in cash, under the table.****
This is precisely b/c the current taxation system is so brutally punitive. Were the system to be ‘fair’ and transparent, we could do away with all the stupid ÁFA számla games Hungarians must to fritter and waste their time with.
Clearly, you have never run a business in Hungary, nor have friends who do.
Also, you overlook the employers’ social security contributions, which have been raised most recently, even for the minimum wagers. So much so, that a relative of mine will most likely shutter his business in the near future — putting 20 or so people out of work.

Varangy
Guest
Back to “New Owners’ Program” for a minute. This is clearly shaping up to be a monstrous átbaszás. As, always astute, Erik notes: (from: http://www.realdeal.hu/20080228/governments-share-offering-may-be-an-offer-hungarians-can-refuse) *****…the three companies Gyurcsány are all regulated to the point that the government could erase their profits with the stroke of a pen. Assuming, of course, that they have any to begin with.***** Bingo! Recipe for Hungarian politicans to start minting money is as follows: Float the stock, erase profits via government regulation or intentional mismanagement, drive market cap down, down, down, collude and sell to private investors on condition of government assistance in future profit generation. From Portfolio.hu (http://www.portfolio.hu/en/cikkek.tdp?cCheck=1&k=2&i=14263) *****“We have a period of about two months to address about 20 questions” about the programme, the PM said, adding that in May or June the government will launch an aggressive information campaign to “teach” the public the nitty-gritty of shareholding, the risks involved, dividends, etc. The campaign is to be continued by around the end of the year, the PM added.***** ‘To teach’ is a great euphemism for two months of marketing/propaganda while using the potential marks’ money! *****According to plans, HUF 1 million worth of shares may be bought by one person at… Read more »
New World Order
Guest

Having a tranche of shares allocated at a “discount” to market prices for locals is widely done and has been successful, when done in conjunction with a larger institutional offering. In Hungary, this was done-to be great benefit of the punters who participated-in the OTP, MOL and Richter Gedeon offerings,to name just three. [BTW, in all three of these companies management has at time been outrageously indifferent to outside shareholder interests and acted in their own interest. Nevertheless, all three have been outstanding investments for those who got in to the stocks at the privatisation. Ironically, all three were all privatised by an MSZP led government] The UK (during Maggie’s reign)did the same things in its large privatisations of BT, BP and others.
The mistake would be to sell a small minority tranche to local, retail investors and leave the remainder in State hands. I agree this would work better if done in conjunction with bringing in some more expereinced outside investors alongside the locals.

Varangy
Guest

LOL.
Mini drops me an email with:
****”Fuck me sideways and Zsuzsa.”
You forgot the “call me” bit, or maybe you meant Zsuzsa as well.****
Last thing and I will get back to work.
If 1,000,000 Ft is invested at time 0 and it ‘magically’ snowballs into 20,000,000 Ft in eight years time, this implies an IRR of 1,900%, if I am not mistaken.
Unreal, to say the least.

Varangy
Guest

Why offer a discounted tranche? Aren’t you just leaving ‘change on the table’, then?
Perhaps not, if we are talking about political capital.

Varangy
Guest

Évikém, Isten hozta a blogoszférában!

Viking
Guest

“@Viking
Knowing all you know about Hungary, what makes you think that shareholders in a formerly state-owned company would be anything other than owners in name only?”
Varangy,
The small Hungarian shareholders need to organize themselves in shareholders-associations, which can claim seat/s/ in The Board. This will give, compared with today, a much increased control over decisions and “under-the-table-deals”. These independent owners can also take the Executive Management to court. Secret deals will be very hard to do anymore. That the State would trash the Company is politically out of the question.
I can agree that Hungarian shareholders are not very educated, but the day is coming closer when they will organize themselves and take responsibility for their investment.
Of course Hungary is a bit upside down – The non-Socialist Government (Fidesz) introduced the Minimum Wage and MSZP sell out State Companies to non-institutional shareholders.

wpDiscuz