Economy
What Hungary mulls is not a transaction tax but a new VAT
When Hungary’s Economy Minister György Matolcsy wrote in a column in local weekly Heti Válasz last week about the necessity to introduce a financial transaction tax, everyone thought he was referring to the so-called Tobin tax.The idea of imposing a levy on financial transactions was born in the 1970s, but the objective was not only to boost tax revenues but also to stabilise capital markets. The global economic crisis that started in 2007 accelerated the process of implementing such tax since several financial institutions had to be bailed out by the state over the past few years. And according to the logic of politicians, the financial institutions must now partake in the "rebuilding" of the economy.
The tax on foreign exchange transactions, now known as the Tobin tax, was designed to reduce speculation in the international currency markets, which the American economist saw as dangerous and unproductive. The tax was originally to tame high volatility and cushion exchange rate fluctuations. Since then a number of ideas have been put forward to expand the base of the tax, but the core notion remained the same: “causing financial pain" to the players of the financial sector.
But as fiscal woes mounted the imagination of politicians started to run wild and revenue aspects were brought to the forefront. One of the most extreme examples of these is the leaked Hungarian plan that has virtually nothing to do with the original idea.
If the press reports are true and the cabinet does plan to impose the tax mostly on retail services then it goes against the social interests Tobin hoped the levy would serve. We believe the idea of the financial transaction tax is but pretence to introduce something completely different.
So what is this other thing? If the levy is slapped on the transfer of the monthly pay to a bank account then it’s a personal income tax. If the tax is imposed on cash withdrawals from ATMs or money transfer via the so-called “sárga csekk", transfer slips used mostly to pay utilities, then it is a new sales tax. This new sales tax or VAT if you like would hit the poorest the most severely since they generally spend whatever they earn to the last penny. In this regard we need to clarify one thing: the question does not even come up whether the financial intermediary sector will pass the burdens onto the public. These extra costs would be placed directly on the consumers and not the banking sector.
Let’s put the issue aside for a moment that such an extra burden is not pleasant for anyone and is painful per se. Instead we should ponder what message such a plan is sending about the professionalism of Hungary’s economic policy; the mere fact that this idea could get this far.
It does not take a Nobel Prize that was awarded to James Tobin to admit, the introduction of this tax would have immense costs; it would have a distorting impact on the behaviour of economic players and would damage the efficiency of the financial intermediary system. And all that only to collect HUF 100 billion worth of tax revenues. All that only to avoid having to raise the PIT rates or cut state spending. There’s no doubt about it: imposing an indirect tax is less painful in the short term than a direct tax or curbing benefits. But is this a sound enough argument to let the Hungarian tax regime decay further?
The primary task of economic policy is providing incentives. To shepherd the players towards an economic behaviour that is important for the society. It is a grim experience that in many areas economic policy can be called successful in this respect if it is neutral on decisions at least. But it is probably a unique Hungarian feature that sometimes economic policy seems to be designed to give all the wrong incentives.
So what should be expected from this tax? Firstly, it will provide an incentive to use cash more, to pay under the table, which comes at very high social costs even if we disregard the inevitable impact, i.e. the economy turning even greyer. A part of households and businesses will suddenly seek information how they could open bank accounts in Austria and Slovakia, and so on. It does not take a prophet to see that if the government expects HUF 100 bn to be collected from this tax, it does not simply place a much greater social burden on the people’s shoulder but the net “profit" of the budget would be a lot smaller than that.
And then we have not even considered what the European Union would have to say about this tax. Presumably, the new levy would infringe EU law on multiple levels, but it’s not big deal. Experience tells us that Budapest can create big enough confusion to have a debate about the issue for a couple of years. Not to mention that the Hungarian plan contradicts every single idea of the EU (a real Tobin tax, financial services subject to VAT) and the switchover would force economic players to reach into their pockets once again.
If the Hungarian government plans to convince Brussels to take the country out of the Excessive Deficit Procedure (EDP) by including this plan in the Convergence Programme (which is to be sent to Brussels between April 15 and 30), we do not believe it will have much of a success.
Details from the new fiscal measures due to be presented in the convergence program in the second half of April are “unlikely to impress investors and may not make future negotiations about fiscal conditions much smoother," commented Eszter Gárgyán, analyst at Citi in Budapets, in a research note on Thursday.
According to local media sources, the introduction of a new financial transaction tax of about 0.3% of GDP may be on the table to offset the reduction of the special banking tax from 2013.
“We believe a transaction-based tax may weaken the Hungarian banking sector’s capital position further by leading to a flight from liquid private sector savings. Additionally, reported expenditure cuts imposed on ministries without restructuring suggest high implementation risks," Gárgyán added.
Although at first sight it may seem the financial intermediary sector is not affected by the tax, it is not true. As the indirect tax would be paid into state coffers by them, they could face massive infrastructural and IT-related expenses to make their systems ready to impose, record and pay the tax. Ebbing deposits and inactive accounts deteriorates the efficiency of financial intermediation. And all this would come to pass in a situation when the country’s growth problems are - as everyone acknowledges by now - related to inadequate lending, which is the consequence of past economic policy measures.
So what is the message economic policy is sending the world? Is it that proficiency has left the building? Is it that the growth sacrifices of a new levy are not important? We can only hope that an official rebuttal is on the way and we can think back on this whole issue as if it was a bad joke.
The tax on foreign exchange transactions, now known as the Tobin tax, was designed to reduce speculation in the international currency markets, which the American economist saw as dangerous and unproductive. The tax was originally to tame high volatility and cushion exchange rate fluctuations. Since then a number of ideas have been put forward to expand the base of the tax, but the core notion remained the same: “causing financial pain" to the players of the financial sector.
But as fiscal woes mounted the imagination of politicians started to run wild and revenue aspects were brought to the forefront. One of the most extreme examples of these is the leaked Hungarian plan that has virtually nothing to do with the original idea.
If the press reports are true and the cabinet does plan to impose the tax mostly on retail services then it goes against the social interests Tobin hoped the levy would serve. We believe the idea of the financial transaction tax is but pretence to introduce something completely different.
So what is this other thing? If the levy is slapped on the transfer of the monthly pay to a bank account then it’s a personal income tax. If the tax is imposed on cash withdrawals from ATMs or money transfer via the so-called “sárga csekk", transfer slips used mostly to pay utilities, then it is a new sales tax. This new sales tax or VAT if you like would hit the poorest the most severely since they generally spend whatever they earn to the last penny. In this regard we need to clarify one thing: the question does not even come up whether the financial intermediary sector will pass the burdens onto the public. These extra costs would be placed directly on the consumers and not the banking sector.
Let’s put the issue aside for a moment that such an extra burden is not pleasant for anyone and is painful per se. Instead we should ponder what message such a plan is sending about the professionalism of Hungary’s economic policy; the mere fact that this idea could get this far.
It does not take a Nobel Prize that was awarded to James Tobin to admit, the introduction of this tax would have immense costs; it would have a distorting impact on the behaviour of economic players and would damage the efficiency of the financial intermediary system. And all that only to collect HUF 100 billion worth of tax revenues. All that only to avoid having to raise the PIT rates or cut state spending. There’s no doubt about it: imposing an indirect tax is less painful in the short term than a direct tax or curbing benefits. But is this a sound enough argument to let the Hungarian tax regime decay further?
The primary task of economic policy is providing incentives. To shepherd the players towards an economic behaviour that is important for the society. It is a grim experience that in many areas economic policy can be called successful in this respect if it is neutral on decisions at least. But it is probably a unique Hungarian feature that sometimes economic policy seems to be designed to give all the wrong incentives.
So what should be expected from this tax? Firstly, it will provide an incentive to use cash more, to pay under the table, which comes at very high social costs even if we disregard the inevitable impact, i.e. the economy turning even greyer. A part of households and businesses will suddenly seek information how they could open bank accounts in Austria and Slovakia, and so on. It does not take a prophet to see that if the government expects HUF 100 bn to be collected from this tax, it does not simply place a much greater social burden on the people’s shoulder but the net “profit" of the budget would be a lot smaller than that.
And then we have not even considered what the European Union would have to say about this tax. Presumably, the new levy would infringe EU law on multiple levels, but it’s not big deal. Experience tells us that Budapest can create big enough confusion to have a debate about the issue for a couple of years. Not to mention that the Hungarian plan contradicts every single idea of the EU (a real Tobin tax, financial services subject to VAT) and the switchover would force economic players to reach into their pockets once again.
If the Hungarian government plans to convince Brussels to take the country out of the Excessive Deficit Procedure (EDP) by including this plan in the Convergence Programme (which is to be sent to Brussels between April 15 and 30), we do not believe it will have much of a success.
Details from the new fiscal measures due to be presented in the convergence program in the second half of April are “unlikely to impress investors and may not make future negotiations about fiscal conditions much smoother," commented Eszter Gárgyán, analyst at Citi in Budapets, in a research note on Thursday.
According to local media sources, the introduction of a new financial transaction tax of about 0.3% of GDP may be on the table to offset the reduction of the special banking tax from 2013.
“We believe a transaction-based tax may weaken the Hungarian banking sector’s capital position further by leading to a flight from liquid private sector savings. Additionally, reported expenditure cuts imposed on ministries without restructuring suggest high implementation risks," Gárgyán added.
Although at first sight it may seem the financial intermediary sector is not affected by the tax, it is not true. As the indirect tax would be paid into state coffers by them, they could face massive infrastructural and IT-related expenses to make their systems ready to impose, record and pay the tax. Ebbing deposits and inactive accounts deteriorates the efficiency of financial intermediation. And all this would come to pass in a situation when the country’s growth problems are - as everyone acknowledges by now - related to inadequate lending, which is the consequence of past economic policy measures.
So what is the message economic policy is sending the world? Is it that proficiency has left the building? Is it that the growth sacrifices of a new levy are not important? We can only hope that an official rebuttal is on the way and we can think back on this whole issue as if it was a bad joke.
