Impact of taxation policy reforms on social systems Péter Pataky MSZOSZ president 01. September 2008

European trends and recommendations I 3 tendencies/ factors which giuded the taxation reforms of EU countries during last decade: –Lowering taxes on labour –Taxation competition resulting from globalisation –Simplification of taxation systems => Lowering taxation levels, widening taxation basis

European trends and recommendations II Lissabon goals => promoting employment => lowering taxataion burden on labour income Globalisation => increasing capital movement => lowerng taxation on enterprises Complicated taxation systems => simplification => by reducing prefernces tax base is being increased

Recommendation of the European Union Reducing taxes on labour income and on corporate profit Increase taxes on consumption Increase importance of green taxes

Recommendation of World Bank Widening of taxation basis is more important than tax rates Reducing and improving taxation related administration/ bureocracy Credible, long-term reform

Recommdeations for Hungary Stimulation of employment by reducing taxes on labour Increasing proportion of taxation on capital

Reforms in Eastern Europe Emphasis on introduction of flat tax systems Motivations: –Lower marginal tax rate => increasing labour supply => increasing tax base –Lower marginal tax rate => less stimulation for tax evasion => ameliorating of tax payment –More simple taxation system => reducing administration costs of taxation Drawback: –Increases disparity!

Reforms realised

Outcomes of reforms Few empirical analysis Reforms improved tax morality in case it was accompanied by simplification of tax- administration – it did not have significant impact on revenues No great changes in tax payment in those income groups, where marginal tax rate dropped significantly (where increase of job offer was expected) At groups without change of marginal tax rate (poorer stratas) tax payment rose significantly

Lessons of reforms The level of inland revenue can be maintained only through closing the „back-stairs” of the income tax system; if it is managed to radically reduce tax allowances and exceptions Increase of income tax base and higher level of readiness for income tax return can be expected only if reforms cover social security system Flat tax reforms significantly change incentives => change in behaviour of economic actors => such reforms are worthy ONLY in stable fiscal situation Decrease of tax obligation of higher incomes, tax payment of lower incomes increase => Increase of income differences and of poverty

Reforms in Western Europe In the EU 15 poverty indicators are good and as consequences of reforms economic efficiency was succesfully improved Justice (decrease of poverty) vs. Efficiency (sustainability) In terms of poverty reduction the scandinavian and the conservative models deliver well – but only the scandinavian model prooved to be sustainable = effective!

Some conrete examples I Denmark: Stimulating unqualified for work and the fiscal discipline –Compensation of low income families and those of special position resulting from tax increase or introduction of new tax forms – compensating in all cases! –Compensation mostly through social or pension system (due to nature of taxation system) Sweden: fall of tax evasion –Significant compensation, especially through occupancy subsidy and increase of family allowance –Lowered the progressivity of income absorption –Subsidization system to compensate negative effects of redistribution

Some conrete examples II Netherlands: incentive for work –The package decreased the tax burden by 0,8 % of the GDP –Income of employees has not increased despite higher demand – this did not stimulate employment Finland: stimulating investment –Those with capital income were subject to lower marginal tax rate on their lalbour income – accordingly part of their income was declared as capital income. –Increase of capital income proportion compared to taxable income Increased savings willingness

Summary Im most cases the goal was to widen the tax basis and decrease tax rates From Hungarian perspective relevant are the - Danish example of strict fiscal frames of the reforms, - Swedish solution of levelling decreasing progressivity of taxation system through subsidy system Improvement of competitiveness and employment can be achieved by abolition of numerous benefits and exceptions, by (partial) taxation of subsidies, by lowering of taxes on labour

Thanks for your attention