Economy 25 August 2011, 10:59am

Hungarian lawmakers consider special levy on the wealthy - MP (2)

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The idea of launching a temporary solidarity tax on the wealthy has arisen in discussions among Fidesz and Christian Democrat (KDNP) MPs, said István Pálffy, member of the small ally of the governing Fidesz party, in an interview with Klubradio.

Pálffy said the tax could be levied on individuals with a certain annual income, but he did not specify a figure. He said the revenues lost because of the implementation of a flat-tax regime need to be offset somehow.

If the idea became an actual proposal and it was approved and then put into practice, the government would (temporarily) give up one of its emblematic economic policy measures, the 16% flat personal income tax for the stake of fiscal stability.Prime Minister Viktor Orbán said last week that the government would no give up its plan to complete setting up a “proportional tax regime", although he did not mention the future of the flat-tax system. The following day, his spokesman reaffirmed the cabinet’s commitment to creating a proportional tax regime.

Three weeks ago, the Socialist Party (MSZP) said there should be a 32% solidarity tax slapped on private individuals with annual income of over HUF 5 million instead of the current 16% PIT (on a super-grossed tax base).

The cabinet needs funds to plug a cc. HUF 100 billion hole in this year's budget hit by feeble economic growth (1.5% yr/yr and 0% q/q in Q2) and meet its deficit target (2.96% of GDP).

Besides implementing a solidarity tax on the wealthy there could be another means to improve the budget balance, namely if the government put off the halving the tax base for supergrossing.

Origo.hu reported already in May that the government was considering dropping the plan to end supergrossing - operating the tax base at 127% of gross salaries instead of 100% - by 2013. Under Hungary's supergrossing system, a 16% flat income tax is being levied on social taxes in addition to gross income. Under the current phase-out plan, budget revenues would decline by hundreds of billions of forints next year (when supergrossing is supposed to be halved) and even more so in 2013, when it should fully disappear.

While halving supergrossing would have a negative impact on budget revenues, the tightening of tax credit would offset it, according to the Convergence Programme. The two measures together translate: ‘tax hike’.Solidarity tax not new in Hungary

Slapping a special levy on the wealthy is not unprecedented in Hungary. Such a surcharge, the so-called solidarity tax on private individuals (4% on top of the 36% PIT) entered into effect on 1 January and was abolished only on 1 January 2010. The levy added HUF 20-25 bn to state coffers annually.

International examples

And we do no have to go far - either in time or place - to find a similar move. Two weeks ago the Italian government announced the implementation of a solidarity tax. The special levy on income above EUR 90,000 per year would be 5% and on income in excess of EUR 150,000 10%. The tax rate on financial income would also be hiked to 20% from the current level of 12.5% and the government also pledged to crack down on tax evasion.

The French government acknowledged on Wednesday the country's economy is slowing and announced USD 16 billion in new taxes to ensure it reaches its deficit-reduction targets. The measures, including higher income taxes on high-wage earners and stiffer levies on alcohol, tobacco and soda.

The government has announced that anybody earning more than EUR 500,000 a year will have to pay an additional 3% on their income tax bill. The measure would be lifted once the deficit target has been reached.

After a similar call in the United States by billionaire Warren Buffett, 16 of France's wealthiest people signed a petition urging the government to tax them more in a period of austerity. The group called for a "special contribution" in these difficult times but not a tax rate so high as to encourage the rich to quit France for overseas tax havens.