Income tax system in Slovakia and Hungary

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In Hungary, the personal income tax of a citizen had increased as of 2010. At that time, there was a tax rate increase of 18% and one of 36%. Before the tax liability is determined by the minimum wage, the non-taxable part of the base has to be deducted from the tax base (Suhanyi 59). After the above process was incorporated into the Hungarian taxing system, there was a tax rate decrease of 17% and one of 32% and the super gross tax base also increased to 27%. By 2011, a flat tax rate of 16% replaced the personal income tax system. However, the tax was still calculated on the super gross tax base such that real tax burden was at the level of 20%. In 2012, the tax-free allowance was abolished, but there are still other ways in which one can reduce the tax base, for instance when a family member of the taxpayer is disabled (Rogers, and Philippe 2). Determining the tax base using the super gross methodology applied only when one's level exceeded a certain level, and the method was abandoned in 2013.
In 2016, the tax rate reduced to 15% and parents with children in the preschool were allowed to commute by using their personal vehicles rather than public transport and they would receive a tax-free reimbursement of 9 HUF per kilometer and it is mandatory for the employees living without the boundaries of the workplace. A tax rate of 16% applies to the income from capital gains (Hungary Personal Income Tax Rate | 1995-2017 | Data | Chart | Calendar). The gross income paid to an employee is the base in which social security contribution is made. The employer contributes 27% while the employee contributes 10% to the pension contribution, 1.5% to unemployment contribution and 7% to the health insurance contribution. Personal income is also subject to other forms of taxes such as company car tax, health tax, property and land taxes, consumption taxes as well as inheritance, estate and gift taxes (Hungary Personal Income Tax Rate | 1995-2017 | Data | Chart | Calendar).

On the other hand, personal income tax of the people from Slovakia was progressive and ranged between 10% to 38% until 2004. However, following the country's accession to the European Union, the tax system experienced some significant reforms in 2004 I which a flat tax rate was applied to personal income tax (Rogers, and Philippe, 3). In 2013, the flat rate tax system was abandoned, and a personal income tax rate of 19% was applied to the portion of the tax base that did not exceed the amount of the existing subsistence minimum of 176.8 times. However, a tax rate of 25% applies to the portion of the tax base that exceeds the existing subsistence minimum of more than 176.8 times (Suhanyi, 60). The tax-free allowance adjusts the tax base. For instance, during the global crisis in 2009-2010, the government of Slovakia increased the tax-free allowance thus reducing the tax burden with the aim of mitigating the effects of the crisis. The tax-free allowance was changed to an amount equivalent to the subsistence minimum multiplied by 22.5. The same tax rate of personal income applies to date. 19% applies to the portion of the tax base of up to 176.8 times the existing subsistence level and 25% applies to the portion that exceeds the 176.8 times of the subsistence level (Suhanyi, 61). The income from capital gains is included in a specific tax base and is taxed at the rate of 19%. 13.4% of the employee's gross income goes to social security contributions, and the total contribution does not exceed EUR 574.86 per month (Outsourcing and Advisory Services – Accace). On the other hand, the employer’s contribution to the social security contributions is 34.4% of the employee’s gross salary and should not exceed EUR 1,475.76 per month. Besides, the employers pay 0.8% of the employee’s total salary cost as injury insurance contribution. Consumption taxes is the other form of tax imposed on an individual.

Value Added Tax

European Union members have used the value-added tax since 1970, and the EU has been making efforts to harmonize the legislation on the VAT to ensure proper functioning of the internal market. Both Slovakia and Hungary are members of the EU, and their central budget has a lot of weight when it comes to indirect tax and VAT is the most important tax among the indirect taxes (Rogers, and Philippe, 3). VAT was introduced in Hungary in 1988 and 1993 in Slovakia. Besides, VAT is a dominant tax since it is a major source of revenue for the central budget. In other words, VAT contributes the highest percentage of the tax burden of the household by reducing their disposable income (Randová, 7). Unlike other duties, VAT affects the final consumption thus it is highly versatile making it an important tax among the indirect tax.
In Hungary, the VAT rate applied is 18% to 5% on a reducing scale. In 2009, the standard VAT tax rate was increased from 20% to 25% and in 2012 the tax rate was increased to 27% (Suhanyi, 64). Hungary is the country with the highest tax rate for VAT amongst the member states of the European Union (Rogers, and Philippe, 5). A person is required to register for VAT if the annual turnover is 5 million Hungarian Forints which is equivalent to approximately €16,200. On the other hand, Slovakia had 3 VAT rates of 6%, 10% and 19% as at 2010. However, the number of the VAT rates were reduced in 2011 such that only two remained. Besides, the level of the basic rate increased by 1% to 20% (Suhanyi, 64). However, the government had announced that the increase of the level of the basic rate was only temporarily because it was intended to reduce the government deficit. The 10% VAT rate applied to the medical goods and books and remained the same over time. The taxpayer is required to register for VAT when the annual turnover exceeds €49, 790 (Suhanyi, 59).

Value Added Tax (€ million)

Year

2004

2005

2006

2007

2008

2009

2010

2011

2012

EU 28 countries

723,764.8

769,985.7

821,013.5

879,079.4

868,247.6

789,058.4

867,253.0

908,729.0

926,909.0

Hungary

7 278.3

7 484.6

6 812.8

8 009.8

8 224.1

7 820.2

8 442.0

8 516.5

9 084.1

Slovakia

2 639.8

3 028.1

3 320.3

3 699.0

4 453.5

4 221.3

4 182.1

4 710.9

4 327.7

Source: Suhanyi, Ladislav, et al. "Analysis of Tax Systems in Slovakia and Hungary." Ekonomski i socijalni razvoj.

Conclusion

It is evident from the above analysis that the difference between the development of two countries can be determined by analyzing some small aspects such as the differences that exist in the between the tax systems (Rogers 28). The amount of the tax burden among the EU member states as well as the number of tax rates each country has illustrates a great difference amongst the countries. It is evident that despite the high rates of VAT in Hungary, both countries generate almost similar revenues from the VAT.

Works Cited

"Hungary Personal Income Tax Rate | 1995-2017 | Data | Chart | Calendar." TRADING ECONOMICS | 300.000 INDICATORS FROM 196 COUNTRIES, Retrieved from: www.tradingeconomics.com/hungary/personal-income-tax-rate.
Outsourcing and Advisory Services - Accace, accace.com/file/142728/SK-2016-01-11-2016-Tax-Guideline-for-Slovak-Republic-EN.compressed.pdf. Retrieved from: http://accace.com/file/142728/SK-2016-01-11-2016-Tax-Guideline-for-Slovak-Republic-EN.compressed.pdf
Randová, Kateřina. "Analysis of Potential Impacts of Inclusion of Locally Supplied Services into Reduced VAT Rate on the Suppliers of these Services." Financial Assets and Investing 1.1 (2010): 6-14. http://is.muni.cz/do/econ/soubory/aktivity/fai/17809295/FAI_issue2010_01_randova.pdf?so=pa;objem=1
Rogers, James, and Cécile Philippe. "The Tax Burden of Typical Workers in the EU 28." Brussels: Retrieved from http://www.ey.com/Publication/vwLUAssets/The_Tax_Burden_of_Typical_Workers_in_the_EU_28_ed_2014/$FILE/New%20Direction%20-%202014%20Tax%20Burden%20of%20Typical%20Workers%20in%20the%20EU.pdf
Suhanyi, Ladislav, et al. "Analysis of Tax Systems in Slovakia And Hungary." Ekonomski i socijalni razvoj 2.1 (2015): 55-65. https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&cad=rja&uact=8&ved=0ahUKEwjt1LCA87rRAhVaO1AKHVFTCAYQFgg5MAU&url=http%3A%2F%2Fhrcak.srce.hr%2Ffile%2F200200&usg=AFQjCNHjquUhXiTDx4bLLBGplGJu0SuYdA&sig2=P-gHlv9aRMw1w8temSXwMw&bvm=bv.143423383,d.bGg

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