Flat rate personal income tax

Abstract

Among public finance revenues, personal income tax, the second largesest source of budgetary revenue, is a key factor. All changes concerning personal income tax and VAT need to be dealt with together as any change regarding one type of tax will affect the other. As a point of departure, we can state that revenues from personal income tax can be secured through different (i.e. linear and progressive) taxation regimes (the latter with increasing percentage rates). Here we have gathered arguments for and against linear and progressive taxation. Flat rate taxation is endorsed by some experts, and it has been introduced in several countries in Central and Eastern Europe; however, one cannot overlook the fact that it fails to meet the equity criterion laid down among the basic principles of taxation. We aim to demonstrate that the changes that have been implemented regarding this type of taxation in Hungary so far have failed to bring about serious positive changes regarding either the tax morale or the sums levied. The personal income tax system currently in effect needs a complete overhaul. The present study does not aim to outline a comprehensive and detailed proposal, firstly, as the necessary overhaul of the Hungarian personal income tax system ought to be linked to the overhaul of other tax types, and secondly, as tax reform had best be treated together with the structural overhaul of the expenditure side. The consequences that one can draw from our comparative examinations are worth keeping in mind when considering which direction to take to improve the efficiency of the Hungarian personal income tax system.