Usually Viktor Orbán chooses his words very carefully. Most of his promises and accusations are phrased in such a way that they are ambiguous double talk. Before the elections he was very careful about refraining from any specifics, items that later the electorate might demand be fulfilled. If in this election campaign of 2010 there was anything that was specifically promised it was an immediate and drastic tax cut. There was even talk about a tax cut as early as July 1. Of course, tax experts pointed out that to work out an entirely new system of taxation is not an easy matter, and it cannot be introduced within a month or so.
Time went by and tax cuts remained a popular speech and interview topic, but they didn't seem to be either immediate or drastic. One government member said one thing and another its opposite. Eventually critics of the government came to the conclusion that either the new government has no economic policy whatsoever or there are huge differences of opinion within the government.
Only a few days ago the undersecretary in charge of taxation indicated that the introduction of the flat tax will have to be postponed until 2013. A day later his boss, György Matolcsy, announced that his undersecretary was wrong: a flat tax will be introduced as of January 1, 2011. However, he added, this flat tax will be combined with "family taxation." As far as I can figure out, that means that there will be features in the new tax law akin to a joint return in the U.S. and deductions linked to the number of claimed dependents. However, a flat tax is flat because there are no deductions and, as some people pointed out, the Hungarian system would be unique indeed. A flat tax plus deductions! It will be interesting if it ever materializes. If you asked me today whether it will be introduced on January 1, I would say no.
And now enters the most important person in any political or economic discussion: Viktor Orbán, the prime minister. A day after Matolcsy's promise that Hungary would switch over to a flat tax system as of the first of the year, he gave an interview to a local internet paper called kemma.hu serving the county of Komárom-Esztergom. To show how cleverly Orbán can answer a question I will translate most of the exchange. The reporter asked: "Will there be a flat tax from January on?" Answer: "We will have a new system of taxation." (Note that he doesn't say that it will include the idea of a flat tax.) Then a few lines later: "I made a clear promise at the time of the campaign that Hungary will have a simple, work- and family-friendly tax system. I also said that there will be tax cuts. Business taxes were already cut from 19% to 10% and that is a radical reduction. In addition, we scrapped ten different categories of small business taxes…. Naturally there are experts who suggest that these changes should not be introduced all at once but in two or three different stages, but of course the final decision is that of the parliament. The government can only suggest. I suggest that the changeover to the new system be done at once and as soon as possible."
Note that Orbán not once uttered the phrase "flat tax." Also he said nothing about January 1st. He simply said that the new system–whatever that may be–will be introduced as soon as possible. But since the introduction of lower taxes is on everybody's mind, it became obvious that Orbán's interview on a local internet website would not satisfy the curious public. He agreed to give a television interview last night on "Az Este." The interview was in essence a shorter version of his earlier talk in Komárom-Esztergom. Again, without uttering the phrase "flat tax" he said the following: "I think I can convince the members of the cabinet and I think we have enough strength to convince at least 50% of the members of parliament" to vote for an immediate tax reduction in one stage. "One can bet that there will be such a tax system as of January."
My first reaction was: "That's really very funny." Viktor Orbán is hoping to convince the members of his cabinet of anything? Or he is hoping to receive the confidence of at least 50% of the parliamentary members? As far as we can ascertain the cabinet does what he tells them to and very often he speaks of government decisions as his own. (Several times he was caught saying "I decided" this or that.) Fifty percent of the members of parliament? But they have a comfortable two-thirds majority and Fidesz and KDNP members vote like robots. There is no question that if the government comes up with a new flat tax plus deductions there will not be one Fidesz-KDNP member who will vote against it.
So then what? Can we speculate that this time it's different? Is it possible that in the final analysis the members of the government will not heed his suggestion? Is it possible that they will convince him that, given the state of the budget, there is no way to introduce such a low level of taxation? It's possible. In this case Viktor Orbán will be able to tell his people: "You see, I tried, but tax experts are convinced that the introduction of a flat tax must be postponed."
I can of course be wrong. Perhaps the cabinet and the number crunchers will be convinced by Orbán that such a drastic step can be taken, but I somehow doubt it. As it is, staying under the 3.8% deficit target seems to be in jeopardy. Experts are convinced that the deficit right now is about 4.4%. Less money has been received than estimated and, although the government claims that it is very careful with expenses, I believe that there must have been an increase in expenditures. In the television interview Orbán also talked about the deficit. According to him by September 30th they will know whether the government, given the present situation, can keep the 3.8% deficit or not. If not, they will "have to take some steps but whatever these steps are they will not affect adversely the pocketbooks of the people. There will no be no austerity measures."
According to Péter Róna, the immediate introduction of the flat tax would be ruinous for the budget. My feeling is that there might be some changes in the tax system as of January 1 but they will not be the ones Orbán was originally talking about.