For a brief time certain countries in the European Union advocated the idea of a tax on financial transactions (the so-called trader tax). Initially, it was James Tobin, the Nobel prize-winning economist, who came up with the idea of taxing short-term foreign exchange transactions. But the European plan strongly supported by the German finance minister, Wolfgang Schäuble, was a different kind of tax. It would have taxed transactions between financial institutions. The idea didn’t receive any support in Europe, and the IMF wasn’t too crazy about the idea either. Out of the twenty-seven member states only three were wholeheartedly in favor of the introduction of such a tax. And because this tax would make sense only if it applied across the board, the idea was dropped.
It may have died in Brussels, but it was reincarnated in Budapest where György Matolcsy picked up the idea. On April 5 Matolcsy published a book review in Heti Válasz in which he went on and on about his unorthodox ideas on how to fix the Hungarian economy. Among other things, he mentioned the desirability of introducing a new tax on financial transactions. He was sufficiently vague on the details that it was difficult to figure out whether he was talking about the introduction of the Tobin tax, its Schäuble variety, or some uniquely Hungarian tax.
As one might expect, the tax will be uniquely Hungarian and will bear little resemblance to any previously discussed version of a financial transaction tax. As of January 1, 2013, it seems, Hungary will impose a new tax that is designed to shore up the budget, however modestly. Apparently the cabinet expects only 50 to 100 billion forints a year in additional government revenue.
So how will this new tax work? When Matolcsy first mentioned the possibility of a financial transaction tax everybody was thinking in terms of the Tobin tax. Tobin, by proposing a tax on short-term foreign exchange transactions, hoped to stabilize the increasingly volatile market. But the leaked Matolcsy plan has nothing to do with Tobin’s idea or with any other iteration of a trading tax. It seems that the cabinet is planning to impose the tax mostly on retail services, which goes against “the social interests Tobin hoped the levy would serve,” as Portfolio rightly pointed out. The so-called transaction tax can be viewed as a personal income tax if it is levied on deposits of an employee’s monthly pay check to his bank account. If the tax is also imposed on cash withdrawals from ATM machines or paying bills by “yellow checks,” then it is a new sales tax. (Yellow checks in Hungary function like money orders.) As a result, the poorest strata of society would have to carry the heaviest burden since these people are the ones who must spend practically all their earnings on maintaining themselves and their families.
The general feeling is that the introduction of this new tax that would produce at most only about 100 billion forints would be very expensive for the Hungarian economy as a whole. This tax will distort the behavior of the economic players. It will provide an incentive to use cash when the aim of the government should be just the opposite–to encourage the use of checks and credit cards to make financial transactions among individuals more transparent. The economy that is pretty gray right now will get even grayer. Some people might open bank accounts in the neighboring countries, Slovakia or Austria.
Money under the mattress
It is also not at all clear what the European Union will say about this new tax. Hungarian analysts can’t make up their minds whether the introduction of such a tax would be unacceptable under European Union rules or not. Some Hungarian tax experts think that Brussels will not object. Although the new tax could be considered to be a kind of VAT, others think it escapes that categorization. However, Hungarian experts are often wrong when it comes to interpreting European Union regulations. One must wait until the European Commission decides.
This new so-called financial transaction tax has the blessing of Viktor Orbán. This morning on Magyar Rádió he said that his government wants to reduce payroll taxes and increase taxes on sales. He is convinced that this is “a radically new direction that is being watched by more and more countries.” Part of this new direction is “the financial transactional tax.” Again, he emphasized that the “old economic model that took root in the European Union is not working anymore. Hungary believes it needs to be renewed.” And naturally Hungary will the lead the way.
Orbán tried to calm nerves by pointing out that the new tax burden will be light, no more than 0.1%, but he declined to say more about the details. In any case, the projected increase in government revenues assumes compliance on the part of the population, and since when have Hungarians (or anyone else) willingly paid taxes when there was a way around them? The plumber fixed a toilet, was paid in cash, and didn’t give a receipt. In this transaction he was the only one who dodged the tax collector. Now, if the person whose toilet needs repair will be penalized if he pays in a way that’s traceable, he also has an incentive to pay in cash and not get a receipt. The plumber and his customer can collude to cheat the tax collector.
So, let’s hear it for an rise in the black and gray economy and a trip down memory lane to the days of Kádárism. If Viktor Orbán were ready to scrap the building of a couple of soccer stadiums the introduction of such a tax wouldn’t be necessary. But for the Hungarian prime minister these stadiums seem a great deal more important than the Hungarian economy or the well being of the country’s citizens.