Central European tax systems – a comparative approach to the experience of tax changes over the past decades

Introduction

The main goal of the study is to present how the governments of four Central European countries (Austria, Romania, Slovak Republic and Hungary) have responded to the economic and political challenges of recent decades. The focus will be on analysing and comparing the tax systems of the before mentioned countries. To achieve this, the effects of the tax reform measures will be examined with regards to the improvement in the standard of living of their populations and the performance of their economies. The research did not rigidly adhere to the two-decade period suggested above; in some cases, earlier and later periods had been covered as well. At the end of the article the author wishes to draw useful conclusions, that could be helpful in both practice and the theory. The main conclusion is that Central European countries – except Austria – are lacking of a comprehensive consultation between state and citizens about the economic decisions.

Changes in the Austrian tax system from 1995 to 2015

Austria, which has been a member state of the European Union since 1995, is considered to be role model, due to its welfare system and the quality of its public services, not only in its smaller region, but on a worldwide scale as well. Its Gross Domestic Product per capita at the beginning of the period under review was $ 27,500 / capita, which was above the average of $ 23,600 in the 18 old EU Member States and surpassed those of the French and British. A characteristic feature of its tax system is that Austrian legislation has refrained from implementing major tax reforms. Tax laws being in force for forty, fifty, sometimes seventy years, despite some minor changes from time to time, have been effective in assisting compliance. In the Austrian tax system, few new types of tax have been introduced or eliminated during the period under review, and Austrian tax policy followed the Anglo-Saxon point of view: ‘An old tax is a good tax’. It is also noteworthy that the detailed arrangements, i.e. the tax rates and tax reliefs are constant, too. The method of calculating the personal income tax has hardly changed during the period under review. In Austria, since 1988, there has been a tax-exempt bracket for low-income earners, a “tax-reducing item” according to Austrian methodology. Throughout the period under review, personal income tax in Austria has remained of progressive nature, with changes only in the maintenance of the bracket limits and some minor tax rate adjustments. The personal income tax burden on taxpayers has not changed substantially. The purpose of the state was not to increase the tax revenue from PIT, but to adjust the tax brackets taking social aspects and inflation into consideration. This is illustrated by the drastic increase in the tax-free bracket between 2003 and 2011. Personal income tax has traditionally accounted for 30% of tax revenue in the government budget, and this has not changed in recent decades. The Austrian tax system, like the Western European models, did not introduce flat-rate taxation in this area either. The same applies to corporate tax. While the general tax rate was 34% before 2003, it fell to 25% in 2005 and has not changed ever since. As far as value added tax is concerned, it has had two brackets since 1995, that is, since the accession of Austria to the European Union, where the standard rate has always been 20% and the reduced rate has been 14%. A very old type of income of the Austrian government budget is property tax, which includes the Land Tax Act of 1955, which goes to local councils’ budget and its rate has been at 2% for decades. In addition, there are land value, agricultural and forestry contributions which goes to the federal government under the Act of 14 July 1960 and motor vehicle tax has been in place since 1990.

Economic results of the Austrian tax changes

The slight tax reforms over the period under review did not affect the continued expansion of GDP and personal consumption. Neither the effects of the 1995 accession to the European Union nor the tax changes of 2005 can be seen in the growth trends of consumption, wages and GDP. Accession to the European Union has brought about major changes in excise tax and value added tax (VAT), but their effects have also softened in the coming years.

If one takes a closer look at the typical macro data for the Austrian economy, it can be seen that the tax burden, or the proportion (of tax + social security) to GDP, increased from 39.6% in 1990 to 43% in 2015. Austria is thus one of the countries of the European Union with a high level of tax withdrawal. Austrian GDP rose from $ 27,500 in 1995 to $ 36,000 in 2015, while the average growth rate in the last ten years was 10%. The state withdrew a large part of the income generated by means of high tax burden, but it did not affect the high consumption potential, and in fact the growth rate of consumption of employees and economic agents exceeded the rate of GDP growth. The Austrian tax system withdrew 41.8% of GDP in 2017. In Austria, the tax burden-to-GDP ratio has not decreased in the 20 years under review, on the contrary: it has increased slightly, which is unique in the region.

The level of Austrian welfare has been steadily improving over the period under study, despite the use of more sophisticated economic stimulus instruments not focusing on tax reforms. Even in the absence of tax reforms, the state budget was able to operate in a stable and predictable manner, and rising GDP brought about increased with household consumption and rising employee income. These figures also suggest a constantly developing, stable and prosperous state. In 2013, the level of individual consumption in Austria was 20% higher than the EU-28 average. Interestingly, in spite of the positive economic and social situation, in 2016 Austria, following the example of less successful neighbouring countries, started the biggest tax reform of all time, on the grounds of the need for improving competitiveness. The necessity and aims of this were doubted by many experts.

Tax changes in Slovakia over the last two decades

Established on January 1, 1993, Slovakia has pursued an interesting economic policy, with a constantly evolving economy and several significant tax reforms. Among the countries surveyed, it achieved the highest GDP growth, from $ 6,600 / person / year in 1995 it managed to reach $ 14,100 / person / year by 2015. Some professionals attribute the secret of their economic success to the comprehensive tax reform carried out in 2003 and 2013, while others attribute the results to cheap and skilled labour and the involvement of foreign capital. At the time of its creation, the Slovak tax system was, according to many professionals, chaotic and complex, characterized by low levels of consumption and high unemployment rate of close to 30%. Prior to the 2003 tax reform, the unemployment rate was 17.5%, and real wages fell by 2% in 2002. The small tax reforms carried out till that point had not yielded significant results and most of the income generated has been withdrawn by the state. In the year before the tax reform, in 2002 personal income tax had five tax-brackets (10-20-28-35-38%), but significant personal benefits were also available, e.g. in case of having children. Recognizing the inefficiencies of small tax changes, Slovakian legislation made a radical change in 2003. The aim was to create an efficient tax system that allows few tax reliefs. The core of the changes introduced in 2003 was flat-rate taxation and the elimination of so-called “small” taxes. The tax reform introduced by Law 595/2003 resulted in one of the largest post-regime-change tax system transformations in Central Europe. Flat-rate system was introduced not only in personal income taxation, but also in the case of all other central taxes (corporate tax, VAT, interest tax). The number of central taxes was reduced from 10 to 6, thus eliminating dividend tax, and taxes used to be due after inheritance or gifts received. Under the new rules, up to 60% of the already raised average wage belonged to a tax-free income tax bracket. The standard VAT rate was reduced by 1% from 20% to 19%, but the priviledged tax rate of 14% was abolished, thus broadening the scope of products exposed to standard VAT and thereby significantly increasing tax revenues. As a result of these steps, the income redistribution ratio has fallen from 36.3% in 2003 to 19% in 2004. The financial data of Slovakia’s government budget show that despite the tax cuts implemented, tax revenues has increased and reduced tax rates has been able to meet the needs of the government budget. In the first year after the reform, the government budget revenue increased by 7.7%, which is a slight increase in real terms against inflation of 7.5%. Thus, the tax reform did not affect the realized rate of tax revenue, but it had an impact on its structure. It must also be seen that these changes coincided with Slovakia’s accession to the European Union on 1 May 2004. The unification of the customs area and legislation has clearly had a stimulating effect on the economy. The biggest professional controversy was triggered by the flat-rate personal income tax. Budget figures for 2004 confirmed the optimistic view as the amount of personal income tax revenue increased by more than 20% compared to 2003 figures. Similar positive trends can be observed in corporate taxation, where revenues increased by more than 10% compared to the previous year. However, other considerations must also be taken into account when the data are assessed realistically. PIT income was positively impacted by a 2.5% increase in real wages, while in case of corporate tax the tax base was broadened as a part of the changes, which allowed tax revenues to rise despite declining tax rates and companies became more interested in recognizing profits because they could get their income without having to pay dividend tax. These steps directly increased the level of compliance and reduced the size of the black economy. When the structure of tax revenues is analysed, it reveals that Slovakia’s share of fiscal revenues from indirect taxes has increased and, similarly to the system of other post-socialist countries in the region, government revenue has shifted towards the taxation of consumption. According to Tibor Erdõs from Hungary, flat-rate taxation of major taxes will result in higher revenue in VAT tax and a decrease in revenue in direct taxes, and that the Slovak flat-rate tax system is designed to avoid drastic reductions in tax revenue.

Results and experience of Slovakian tax changes

Looking at the results of the tax reform, one can conclude that, until the emergence of the 2008 global economic downturn, Slovakian government budget has been successfully transformed and became dynamic. The average rate of GDP growth was 3.9% between 2000 and 2004, then, following the reform, it increased to 7.8% between 2004 and 2009. A typical indicator is that the output of mechanical engineering sector doubled between 2006 and 2007, and exports also increased significantly. However, not even the Slovak authors claim that the sole reason for these positive developments was the introduction of a flat-rate tax. Consideration should be given to cheap and skilled labour, advanced infrastructure and the positive global economic climate for investment. The favourable economic processes lasted until the end of 2008, as in 2010 the Slovak GDP was already decreasing in nominal terms and consumption, which was growing dynamically between 2005 and 2010, stagnated between 2010 and 2013. In 2013, the Slovak government was forced to reshape the clear tax system established in 2003 and return to the typical situation of the Central European states, i.e. to permanent tax reforms. In 2011, Iveta Radicova’s government reintroduced dividend tax. The next head of government, Robert Fico, announced in 2012 that they would abandon the flat-rate tax scheme and increase the tax rate as of January 1, 2013. Corporate tax rate was raised from 19 to 23% and a 25% tax-rate bracket on higher income was introduced in the field of personal income tax. At the same time, the standard rate of VAT was also increased by 1%. It is evident that in these years Slovakia has reverted to the Central European trend of frequent tax changes. The trend of tax changes did not end: corporate tax rate was reduced from 23% to 22% in 2014, and in 2017 to 21%. Thus, the Slovak tax system, breaking the 7-year stability after the major tax reform of 2003, returned to a state of continuous reform from 2012. Nevertheless, taking a closer look at the macroeconomic figures of the Slovak economy and society, one can see that there is no significant decline in the annual consumption, the gross domestic product or the income of employees. Slovakia’s GDP increased continuously and steadily between 2004 and 2015. In terms of quantifiable results of tax reforms, Slovakia showed the most dynamic changes. Among the countries under review, Slovakia’s GDP grew the most during the period concerned, i.e. between 1995 and 2014. From a baseline of $ 6600 / person / year to the end of the period under review, it reached $ 14.100 / person / year, which means that their gross national product was more than doubled. At the same time, the income of Slovak workers rose by 120% between 2005 and 2015, which is unique in the region, and so did their consumption. This latter increased from € 22,245.6 in 2005 to € 44,314.0 in 2015. All this processes, which are favourable for the population, took place with an exemplary decline in tax centralization, as this rate fell from 39.6% in 2005 to 32.4% in 2015. The Slovak economy has caught up with the European average in terms of personal consumption over the past decades, introducing the euro and being able to reduce the tax burden. Economic data indicate that neither the major tax reform in 2003 nor the small-scale tax changes in subsequent years have made a significant impact on macro indicators. It is evident, that only the 2008 economic downturn seems to have broken the development trend. This finding makes it probable that one of the largest tax reforms in Central Europe was able to impact standard of living only temporarily able. It can be established that between 1995 and 2015, Slovakia’s government budget and the financial situation of businesses and households improved dramatically, but this was due to tax reforms only to a small extent. The influx of foreign capital, the favourable global economic climate and the economic policy stimulating investment to develop industry could bear at least the same importance.

Changes in the Romanian tax system over the past two decades

Of the countries under review, Romania started from the worst economic situation at the moment of the change of regime. Even by Central European standards, it was characterized by poor quality infrastructure, low wages and low influx of foreign capital. At the same time, Romania was in a favourable situation in terms of the low level of public debt, the size of the country’s market and a significant amount of skilled workforce. In 1995, Romanian GDP reached 15% of Austrian GDP and 60% of Hungarian GDP. From the beginning in the early 2000s, the influx of foreign working capital began, taking advantage of cheap labour, a relatively large amount of natural resources (oil, soil, mineral ores, hydro and wood energy) and a series of infrastructure-development projects were launched. In the mid-1990s, similarly to other Central European countries, the Romanian tax system suffered from the low-efficiency of tax administration and a high share of the black economy. Until the 2005 tax reform, all major forms of central taxation used in other European countries had already been introduced and low tax rates had been applied, but the efficiency of tax administration had been lacking. For this reason, and in preparation for the accession of Romania to the European Union, the Romanian Legislation adopted Act 571/2003 on taxation, which regulated the entire Romanian tax system in an unusual manner. The flat rate system was introduced on 1 January 2005 and the previous 25% corporate tax rate was reduced to 16%, similar to the 16% personal income tax rate. The two rates of value added tax (19 and 9%) were not changed and the dividend tax nor the social security contribution system were not modified either. As a result, the tax revenue to GDP ratio did not decrease but, on the contrary, increased after tax reforms. This rate of 27% in 2004, rose to 28.3% as early as in 2005. As a result of the reforms, personal income tax revenues decreased by 7% and corporate tax revenues by 3% in the next fiscal year, but they were offset by rising VAT revenues. After 2005, Romanian GDP showed steady annual growth until 2008. In some years, e.g. in 2006 and 2007, the rate of growth was close to 9%. Romania has managed to increase its GDP significantly in recent decades. From $ 3,700 / person / year in 1991 they could get to $ 7,100 / person / year in 2015, achieving an increase of nearly 90%. All this was accomplished at a hectic tax / GDP ratio. This ratio shows the largest year-by-year fluctuation in Romania. This indicator was 40.3% in 1996, before rising to 128.9% in 1997, then fell back to 59.4% in 1998 and was 59.6% in 1999. The extremely high values, at European Union standard, show that significant changes were implemented in the tax system in Romania every year. After the economic downturn of 2008, GDP per capita fell sharply. While in 2008 it had been $ 6,700 per capita, by 2010 it fell to $ 6,300 / capita. In response, the Romanian government raised the VAT rate to 24% in 2010 and then, in inconsistent manner, reduced it to 20% in 2016 and 19% in 2017. The corporate tax rate was further reduced in 2017 to a low rate of 16% to 14%. Gross domestic product increased significantly by 90% between 1995 and 2015, but despite the tax reforms, the share of black economy did not fall significantly in Romania. At that time, the state had no revenue after 29.6% of gross domestic product. The situation was similarly grave in the field of employment. According to the Romanian Bureau of Statistics, in the second half of the period under review, only an average of 6.2 million workers were officially registered year, and only four million three hundred and twenty thousand of them paid social security contributions, out of a population of nearly 20 million.

From the early 2000s onwards, the population could feel the benefits of good economic performance. Employee incomes increased by 60% between 2005 and 2015 and household consumption almost doubled. However, this development did not result in reaching the Western European levels of consumption and worker income. Until the end of the period under review, Romanian households’ consumption exceeded only that of their immediate neighbours (i.e. Serbia, Bulgaria, Ukraine). Romania is still one of the poorest countries in the European Union. In 2016, it reached 59% of the European Union average in terms of actual per capita consumption (AIC).

Results of Romanian tax changes

Summarizing the lessons learned from the past two decades of the Romanian tax system, it can be established that Romanian economic politicians have tried to introduce the legal institutions that have already been successfully applied in other countries through mosaic-like tax legislation. They created a system similar to the Hungarian one in terms of giving priority to consumption taxes, but it also adopted certain elements of the Slovak tax system, such as flat rate tax on personal income tax and corporation tax, while as regards to property tax, some elements of the Austrian example have emerged. The initial “ad hoc” and chaotic tax system has been completely reshaped by the 2003 Tax Code. The mixed system resulting from the 2004-2005 tax reform was made interesting by a single rate (flat rate) applied to several central taxes as well. The Romanian personal income tax system is still flat-rate but, the same way as the Slovakian, Serbian and Ukrainian systems, a tax-free bracket was maintained, thus preserving something of the progressive character of the original income tax system. In contrast, in VAT and corporate taxation a volatile system of opposite direction, directly serving the interests of the government budget has been created several times. Overall, Romanian tax revenues was characterized by a low ratio of total withdrawals to GDP until the end of the period under review.

Tax changes in Hungary between 1995 and 2015

Hungary was the first among the former socialist countries of Central Europe in the period of the change of regime, to introduce the important elements of the Western tax systems, i.e. VAT, personal income tax and corporate tax as early as in 1987. These steps provided the Hungarian economy with a 10 to 15-year advantage in receiving western capital and establishing a Western European legal framework. This was the first comprehensive tax reform, and perhaps the most significant one in Central and Eastern Europe to date. These changes posed significant challenges for Hungarian natural and legal persons. As early as that time, the Hungarian system placed a high tax burden in European comparison to low wages in European perspective. This situation has basically not changed ever since.

The Hungarian tax system during the period under review was characterized by both significant changes in terms of multi-tax tax reforms and small but continuous transformation of many tax types every year. Over the last twenty years of Hungarian economic policy, a number of public finance reforms have been identified, including the 1995 Bokros Package and the 2011 amendments implemented by the Second Orbán Administration. In addition to these measures, the Hungarian Parliament has adopted significant changes in the tax system every year. Hungary, like many other countries in the region, has been in a state of permanent reform since 1988. This is most noticeable in personal income taxation. Income tax brackets were reduced from an initial 11 to 8 in 1990 and then to 7, followed by a four-bracket system in 1991, which was again followed by three-bracket and two-bracket systems in 1999 and 2005 respectively. A flat rate of 16% tax was established in 2011, which was reduced to 15% in 2014. It must be seen that during this period only Ukraine and Russia had lower tax rates of 13%, as Slovakia applied 19%, Latvia 25%, Lithuania 33% and Estonia 26% tax rates. It should be noted here that of the neighbouring countries of Hungary, Romania, Slovakia, Austria, have all kept the tax-free bracket for low-income earners, thus reinforcing the progressive nature of taxation. The Hungarian corporate tax rules also changed significantly during the period under review. This rate of this was still 40% in 1990, reduced to 16% between 2006 and 2009, and from 2010 a two-rate withdrawal of 10 and 19% were introduced, which has now dropped to 9%. In international comparison, these figures may already appear competitive, as the rate of corporate tax in Cyprus is 10%, in Bulgaria it is 10%, while Romania and the Czech Republic apply a corporate tax of 16% and 19% respectively. A distinctive feature of Hungarian corporate taxation is that it imposes a number of special corporate taxes (banking and sector-specific extra taxes for large businesses) and offer a number of reduced tax options for small and medium-sized enterprises (itemised tax on small businesses (KATA), tax of small businesses (KIVA), simplified enterpreneurial tax (EVA)).

Reviewing the Hungarian value added tax, it can be concluded that Hungary has also taken radical steps in this area of taxation. The VAT rate was raised to 27%, the highest in the world from the already high 25%. Significantly lower VAT rates can be seen in the period under review at its regional competitors. Estonia and Lithuania had 18%, Romania had 19% at certain times, Ukraine applied 19% and Slovakia imposed also 19% rate until 2013.

Results and experience of Hungarian tax changes

As far as the changes of the Hungarian tax system between 1995 and 2015 are concerned, the following essential correlations must be highlighted: The ratio of the total Hungarian tax burden to GDP did not change significantly during the period under review. Over the last 20 years, the rate of 40.4% in 1995 decreased to 36.8% in 2005, but then started to rise again and increased to 39.2% in 2015. This meant a tax burden reduction of just 1% over 20 years. It can be established that the level of tax centralization in Hungary is high compared to the countries of the region with similar levels of development.” It can also be seen that during the period under review the rate of increase in tax centralization was always higher than the rate of growth of employee income and household consumption. This means that the GDP growth did not result in a significant improvement in the income and consumption situation of Hungarian taxpayers. The rate of corporate tax was reduced more significantly than the tax burden on natural persons during the period under review, and thus it can be concluded that it was the that companies benefited from the changes. In could be seen in Hungary that between 1995 and 2015, Hungarian GDP increased more than that of the Austrian, by 60%, from $ 6,700/person/year to $ 11,000/person/year. In spite of GDP growth, the high level of public burden in Hungary compared to the EU average has not decreased. Tax + Social security contribution/GDP changed hectically from year to year, while the annual growth rate of change was around 19% in 1996 and 1997, before declining to 5.9% in 2005 and then to 4,3% in 2007. Tax + Social security contribution/GDP ratio was often higher than the growth rate of gross domestic product in the period under review. Between 2005 and 2015, the income of Hungarian workers increased by about 20%, while consumption increased by only 15%, at the same time, GDP increased by 16% in this decade. These figures show that while incomes have increased, the tax burden has increased even more and, as a result, the net income position of taxpayers has not improved either.

The Hungarian tax system as a whole was characterized not by a comprehensive tax reduction but by a reorganization of the tax burden. The changes did not mean a significant reduction in the tax burden, but a restructuring in order to improve efficiency. However, the surplus income from the reduction of the personal income tax rate has been taken back by the government budget through world-record-breaking Hungarian sales tax rates, a drastic increase in excise taxes, and the transfer of sector-specific extra taxes. The burden on the Hungarian population has not diminished during this period, and their consumption can still be considered low by EU standards.

Another characteristic of the Hungarian tax system is that the proportion of taxes and contributions on labour, i.e. the tax wedge, remains high. These values are higher only in Belgium and Germany than in Hungary. It also need to be added that in 2011, according to a study comparing all the countries in the world, Hungarian workers ranked 5th in the statistics of most hours worked. On average, Hungarians spend an average of 1980 hours a year working, and people work more than that only in Mexico, Chile, Greece and Russia. According to the statistics of the European Union, Hungary has been the 4th poorest country in the European Union in 2012, 2013 and even according to the latest report in 2016. It is also a constant feature of the Hungarian system that taxes on capital gains, wealth and assets are low by international standards.

It can be stated that during the period under review the Hungarian tax system, despite the several tax reforms, did not become either of better quality or more efficient, nor did it impose less burden on taxpayers. It has preserved its essential character of imposing burden on basic consumption, being heavily centralizing and unpredictable. There are only a few elements indicating a shift towards social justice, partly due to the 2011 reforms, which have significantly improved the financial situation of taxpayers with children in an exemplary manner. The government helped small businesses by introducing beneficial special taxes. For the large-business sector, Hungarian economic policy has also provided significant direct subsidies over the past decades in order to encourage capital investment and the creation of new jobs. In 2015, the value generated by the 11 largest companies in Hungary accounted for 25% of GDP, but related to this, only 2% of the total corporate tax revenue was paid into the budget by these companies. Given the direct state subsidies to the large-business sector and the significant reduction in corporate tax rates and labour contributions, and the gradual reduction in special taxes, it is evident that large corporations have been the real winners in tax policy decisions over the last twenty years. It can be considered a positive process that the administrative steps of tax administration introduced after 2016 aiming to whitewash the economy have been successful (Electronic Trade and Transport Control System (EKÁER), Electronic Toll Collection System (HU-GO), online cash register system, digital billing) and significantly increased the revenue of the general government budget.

Tax management models in the countries under review

The development of the Central European countries, which started from the same legal background and similar economic situation did not have much in common in the last hundred years, and significant differences were seen by the early 1990s. Between 1995 and 2015, i.e. in the period under review, legal and economic convergence accelerated in a number of areas in the post-socialist countries, initially due to their efforts to comply with the expectations of the European Union and, following their accession, to economic and legal integration. However, there is still a significant difference in taxation, which is a national competence, between Austria and the post-socialist states. The change management strategy for the Austrian tax system between 1995 and 2015 was that it did not carry out changes of comprehensive tax reform nature. They sought to ensure the predictability and stability of the tax system all along. The Austrian example shows that high levels of tax withdrawals can also be effective if the tax conditions are shaped in a way that is comprehensible and clear to all. This predictability facilitates compliance, reduces the rate of black economy and tax fraud, increases the country’s ability to attract capital by maintaining tax conditions in the long term, taking into account the principle of neutrality and saving economic players from ongoing reforms. The Austrian tax system has shown that even a model that keeps direct taxes (corporate tax, progressive personal income tax) at relatively high level and does not overload consumption taxes (VAT, excise tax) can be effective. The Austrian tax system, in contrast to other Central European countries, has aimed at having low consumption and turnover taxation. VAT was operating at the standard rate of 20% all along. This supported not only domestic consumption but also shopping tourism and tourism in general and thus indirectly increased gross domestic product. A further characteristic feature of the system was the continued valorisation of the personal income tax system, which remained progressive but also maintained tax-free income bracket during the period under review. It should be pointed out that, in Austria, direct taxes and the costs added to wages in the form of contributions are traditionally high compared to other actors in the region. In Austria, a salary of one hundred euros requires an employer cost of 186 euros. However, the other countries surveyed also caught up in this respect, with the figure being 187 in Hungary, 185 in Slovakia and 183 in Romania. A characteristic feature of Austrian tax management was that it was able to provide the tax revenues needed to achieve the high levels of well-being and public services with a conservative, non-reformist and predictable tax system.

In contrast to the above, the ex-socialist countries under review have trying to meet the challenges of international tax competition and the European Union, as well as their budgetary and social needs with constant changes. However, these expectations were tried to meet by each countries through different emphases and different tax-technology measures. New elements of taxation appeared to be effective (flat-rate taxation, increase in consumption taxes, reduction of capital taxation) have often been introduced. “Direct taxes were reduced to increase their ability to attract capital, and the missing revenues were provided by raising indirect taxes and reducing government spending.” Continuous changes took place at different times and in different ways in each country, but rarely reached the level of a tax reform. The tax conditions were significantly changed in Hungary in 1987/88 and in 2011, in Romania in 2005, in Slovakia in 2003 and 2013. It can be concluded that Austria and the four post-socialist countries wanted to comply with the Lisbon principles of the European Union and the improvement of competitiveness and the attraction of capital, following different models. The problem was due to the fact that these tax changes were not implemented consistently in any of the above Central European countries. The sometimes increasing and decreasing tax burden and the ever-changing tax liabilities made these national tax systems unpredictable for economic operators and deteriorated compliance. States were aware of the importance of stability, but this was primarily enforced through corporate taxation.

In contrast, the former socialist countries did not follow this principle in personal income taxation during this period.

Neither the tax rates nor the tax incentives or tax-related legal institutions were stable in the three countries reviewed. In several of the countries concerned, special taxes were levied on certain groups of economic operators (special tax on retail chains, bank tax). They also shared a practice of offering significant reliefs in all three countries in order to encourage the establishment of businesses. This type of solutions was only exceptionally used by the Austrian system. It can be concluded that due to the advantages granted to large businesses in the tax system of the former communist countries, it was the natural persons who had to bear higher public burdens. According to OECD comparisons, in these member states the corporate sector pays less tax than private taxpayers. One reason for this is the high taxation of consumption. This tax represents an administrative burden for economic operators, as the actual tax burden will be borne by the final consumer, who will not be able to pass it on. This was also established by the European Union’s 2013 report. The budget share of indirect tax revenues in Hungary was around 45.8% in the 2000s. Of the EU Member States, only Romania has a higher share. It is exactly the newly acceded Central European countries that caused the significant increase of consumption taxation in the European Union. Another common feature of these countries is that the taxation of capital and property in their tax systems does not provide significant revenue for the state budget. The countries of the region do not apply uniformly levied property tax, in accordance with the western approach, on all items of property.

The data justify that only the Slovak reform of 2003 resulted in a noticeable reduction in the tax burden. During the whole period under review, i.e. in a period of 20 years, the tax burden in Slovakia decreased by 20%. It is exceptional that, contrary to the significant decline in the level of government withdrawal, consumption of households and gross domestic product could increase. By contrast, in Hungary, as a result of the 2011 reforms, the state of government budget improved, but the income and consumption of the population did not increase significantly.

Impact of tax changes on GDP

The relationship between tax reforms and GDP growth, taken it out of the economic data, is worth examining that is, the direct effect of tax reforms on the gross domestic product. First and foremost, it has to be pointed out that expecting significant GDP growth from tax reforms would be excessive. The evolution of gross domestic product can be influenced by a number of factors together, such as the proportion of the black economy, the level of legal compliance, the extent of corruption, the quality of government work, or global economic activity. It must be seen that the causal link between tax reforms and GDP is widely debated. Tibor Erdõs, referring to the personal income tax reform implemented by the Slovak and Baltic states, stated: “Expectations are too high; it cannot be proved that flat-rate taxation leads to faster economic growth.” This is an important statement because the correlation between the efficiency of the tax system that is the social, community costs of revenue collection and macroeconomic indicators is widely overestimated. According to a study by István Hetényi: “Taxation in itself does not play a decisive role in the competitiveness of a country.” According to others, the tax system itself has no direct impact on labour supply. This is confirmed by S. Bozsik’s research, which states: “It is not tax rates that bear importance in terms of tax competition.” According to Stiglitz, taxation affects all elements of the economy, but its exact mechanism of action is difficult to determine. In his opinion, the proportion of the black economy or the system of tax incentives may be equally important. Saavedra came to similar conclusions when examining the experience of flat-rate personal income tax cuts. He concluded that reforms could improve tax morale but had no significant impact on revenues. The same was formulated by Ivanova in her 2005 study, where she, examining the results of a tax reform, she found that, contrary to expectations, there was no significant change in tax payments for income groups where lower marginal rates had been decreased, but where tax rates had been hardly changed, tax payments increased significantly.

It can be concluded that the most frequent targets of tax reforms in the countries under reviewed were the tax rates, the method of calculating a tax element and the scope of tax reliefs. However, according to professional analyses, these techniques are not suitable for achieving the most frequently declared economic-policy goals. The solutions used quite frequently fail to meet the criteria of tax reforms; they can only be called tax reorganization. Of the countries reviewed, only Romania and Slovakia had actual tax reforms which led to a change of at least 20% regarding a number of central tax reforms and the loss of revenue were not fully compensated for by raising other tax types.

It is no coincidence that these two countries have been able to make their economies more dynamic the most and to improve the standard of living of their citizens, i.e. the taxpaying natural persons. If the actual impact of tax reforms on gross domestic product is reviewed, GDP growth should be seen in the case of a successful tax reform, since no reforms is aiming to reduce GDP or to undermine economic efficiency. Consequently, the impact of tax reforms on the gross domestic product produced can be really valuable tool for assessment. Analysing GDP growth in Romania before and after the reform, it can be concluded that even after the changes the Romanian gross domestic product did not grow at a higher rate. Therefore, if this were the direct objective of the measures, it would have been achieved without reforms. Looking at the effects of the Slovak tax reforms, it can be seen that there are no ground-breaking changes in the GDP growth trend either in the years after 2003 or in the ones following 2013. Slovakian GDP has grown significantly every year; only the global economic downturn had a major impact on this trend.

Taking a closer look at the GDP growth rates of the four countries in parallel, it can be seen that the annual trend in gross domestic product displays some national peculiarities (for example, in terms of dynamics), however, they are not necessarily the result of tax reforms, but are due to the combined effect of other economic and political factors. Only the impact of the 2008-2010 economic downturn can be clearly seen in the countries’ GDP trends. Here, too, it can be observed that the countries under review were able to deal with this crisis in different ways: Austria suffered the slightest shock, as it had already been stable. A similar impression is obtained when looking at the combined ratio of the countries’ tax burden to their gross national product. The trend lines are the same here too, regardless of the actual tax reforms in the countries concerned, the increase of the tax burden has been synchronized with the growth of the GDP. However, this is also true for Austria, where no actual tax reforms have taken place. It can be concluded that tax reforms or the changes in tax-to-GDP ratio resulted in noticeable economic changes in terms of standard of living standards or economic performance only in two of the four reform countries: in Slovakia and Romania, and even there that changes were only temporary.

The most important findings of this research include the following:

The Austrian system, while refraining from tax reforms, has also performed better than the post-socialist countries presented in terms of realizing tax revenues. Based on the Austrian example, it seems more efficient to focus on a slight improvement in the performance of the tax administration and modernizing its technical conditions, rather than introducing new taxes and continuously reforming the tax system. A tax system that is predictable and understandable, even if it has some mistakes, can work better than a seemingly more efficient but constantly changing model. Business and natural persons prefer stability. However, the quality of tax legislation is important as even good quality tax law standards become out-dated over time due to the changes in both the economic-political and legal environment. Change is therefore necessary, but its pace and extent are important factors. Too fast and frequent reforms devalue the tax standard, and make compliance more difficult and give a headache to the tax office, and turn tax law into a set of technical requirements. It is unfortunate if what previous taxpayers were allowed to do is prohibited in the new tax year, or on the contrary, they can do something that was prohibited last year. Regular application of tax amnesties has the same negative impact.

A balanced tax system which is proportional in terms of the tax burden on different types of taxes, and does not only focus on consumption seems to be an effective solution. It must be seen that the reforms in the former socialist countries have kept the level of VAT high to provide budgetary security for tax cuts in other types of taxation. In order to achieve and maintain this, Central European countries have been forced to raise VAT rates significantly since 2003.

It is also important that, when politics make a decision on a tax reform, the transformation should reach a critical mass of the tax system, as it is a prerequisite for efficiency. There is a tax stimulus threshold for both the general public and businesses, which has been very high in the last twenty years and the reforms must reach this level. These changes need to cover several types, several tax rates, the way the tax base is calculated, or even the system of tax reliefs, and a wide range of rules of equitable burden sharing. Taxpayers must perceive not only legal changes, but also the benefits they bring to their consumption and realized income. Without them, tax reform will only become a factor complicating their situation. The main experience of studying the tax reforms in Central Europe is that these measure have not been able to have a long-term and significant positive effect on the growth of gross domestic product and social welfare in the countries executing them. It must be seen that “many countries are capable of achieving rapid growth for a few years or even a decade, but hardly any countries have shown progress and economic convergence over decades.”

As far as the welfare impact of tax changes in Central European countries are concerned, Austria was also the most successful in this respect. During the period under review, it was able to maintain its welfare results considered outstanding worldwide. The other three countries were on a different track in terms of catching up. Hungary was a less successful country in terms of convergence, as it could not get closer either to the European Union average or to the level of Austria. Despite being an enthusiastic follower of international tax trends, it was not able to make significant progress in terms of Hungarian GDP or individual standard of living.

Romania has become a relatively successful country in the region in terms of catching up. During the period under review, the Romanian GDP expanded steadily, but the growth rate of consumption was even higher. As a result, Romania has managed to make its economy more dynamic in some periods. Between 2005 and 2016, income and consumption levels in the country almost doubled. Slovakia has proved to be the most successful in the region in terms of convergence. This is where the most significant tax cuts including most of the tax types, took place in the shortest time, while the country manage to improve its macroeconomic indicators and the situation of individuals. Slovak household consumption reached 73% of the EU average in 2012 and 77% in 2016. This brought them the closest to the Austrian level among the countries reviewed.

At the end of this review it must be noted that based on the data and expert opinions, two successful models, namely the Austrian and the Slovakian one, can be highlighted. The single element they have in common is their thoughtful and consistent implementation of their tax management measures. Their example shows that any path can be successful if it is compatible with other tools of the country’s economic policy and conveys a clearly recognizable message to taxpayers and can sustain its system for at least 8 to 10 years. It is important to note that in the post-socialist countries of the region, during the period of almost thirty years since the change of regime, there has been no social consensus on the realization of sharing public burdens. The permanent and constant change in the tax rules cause uncertainty in law. Some of the modifications in tax policy are inconsistent, as it can be seen above. The tax legislation should be more transparent and articulate. Small and medium sized enterprises should be given more incentives to compete with the multinational corporations. The rule of law requires an optimal and equitable tax system, in which the subsistence must be excempted from taxes. This paper outlined only a few of the unresolved issues of the post-socialist countries tax systems. Resolving the problems just mentioned would go a long way towards enforcing the law and could be seen as a step towards fairness in the tax system.

Summary: This study reviews the recent tax systems of four Central European countries. One hundred years before, these countries were part of a single economic-political unit, the Austro-Hungarian Monarchy. (Austria, Hungary, and Slovakia entirety, and significant and advanced parts of Romania: Transylvania, Banat and Partium) Even then, different regions had different economic strengths, but their legal and cultural conditions were the same. By the end of the 20th century, despite their different historical development models, these four countries became once again part of a legal, economic and cultural entity, i.e. the system of the European Union, then during the first decade of the 21^st century, they became full- members. In this context,
I have been researching the tax changes these countries have implemented in recent decades and reviewed how successful they have been in catching up with the welfare level of the EU.

Dr. Csaba Szilovics
University of Pécs, Faculty of Law professor