Should the Rich Pay More?
One of the speakers at the conference was Dr Kinga Pétervári, Associate Professor at the Department of Management and Business Law at our university. Dr Pétervári delivered her lecture Should the Rich Pay More on the second day of the conference, talking about Hungary’s introduction of the progressive personal income tax in 1987. In her presentation she gave a detailed analysis of the historical background and parliamentary plenary debates on the introduction of the personal income tax, and showed how Hungary tried to tackle the challenges of fiscal indebtedness resulting from over-consumption in an increasingly opening socialist economy, which was mainly struggling with productivity problems, in the midst of the crises of the 1980s.
What was the main aim of your research, and how did you come up with the idea of addressing this historically rooted topic?
I was originally looking for the arguments for progressive or flat rate personal income tax, and was very curious to see what reasonings were used by the otherwise laymen politicians, the members of the Parliament themselves. As I scrolled backwards through the history of Hungarian personal income tax after WW2, my attention was caught by the parliamentary debate on the original personal income tax introduced in 1987. This was a very interesting period for Hungary, because, as we now know, we were in the last years of socialism, and it was becoming increasingly clear that the processes set in motion by the new economic mechanism could not resolve the internal contradictions of the Hungarian socialist economy, so additional measures (resources) were needed, which ultimately also paved the way for regime change. The introduction of the personal income tax was an issue that aimed at a fundamental transformation of the economy. The aim of this research was, on the one hand, to analyse the arguments of the specific plenary parliamentary debate in a socialist country where such debates were unthinkable even a few years before, and, on the other hand, to examine how these arguments compared with the Western tax debates. Clearly the basic reasonings for progressive personal income taxation were the issue of fair redistribution in the West as well. Besides, the research question was to what extent these discussions in the parliament could be considered real parliamentary debates, given that they took place in a highly centralised socialist system where decisions were often predetermined, and not by the MPs.
How does your research relate to international tax policy debates? What academic literature did you draw upon to examine this issue?
One of the basic frameworks for my research was the work of Gisela Huerlimann, W. Elliot Brownlee and Eisaku Ide, which examines the political economy of post-World War II tax systems. These authors distinguish between two main models: one is the consensual policy-making model and the other is the crisis mobilization model. The former is typical of countries where there is a broad social consensus behind welfare systems and where tax systems are generally stable and based on a broad tax base. The crisis mobilisation model, on the other hand, emerges in countries where social conflicts are more intense and tax systems are often introduced suddenly to deal with crisis situations. The Hungarian case is special because, although the political system was apparently stable under socialism, the economic background showed increasingly serious problems, especially by the 1980s. My research shows that the Hungarian tax controversy was more akin to the crisis mobilization model, as the government was forced to address crisis situations and as part of this process introduced a personal income tax that was highly progressive. At the same time, this move also reflected the need for convergence with Western tax systems, as Hungary also wanted to adapt to international economic requirements, especially after joining the Bretton Woods system.
Finance Minister Mihály Kupa in 1987, Source: Fortepan / Katalin Erdei
Could you explain the content of your research? What arguments were used during the parliamentary debates, and how did they fit into the political and economic context of the time?
I have analysed in detail the course of the debates in the Hungarian Parliament and the arguments that have been heard among MPs. One of the most interesting observations was that, although the debates formally took place within the framework of the socialist system, the arguments were in many cases very similar to the tax debates in Western democracies. This is strange because the Hungarian parliament at the time was more symbolic, with real decisions being made at the level of the party leadership. The arguments can be divided into two main groups: procedural and substantive. The procedural arguments included, for example, the government's (and the party's) constant policy of procrastination and lack of accountability. Although the issue of delay was raised by almost all MPs, the lack of accountability was only very marginally mentioned. The majority pointed out that the implementation of tax reform had been delayed for years and that inconsistencies among the political elite often hampered reforms. In addition, the principle of "no taxation without representation" was raised and supported by several reformist socialists. This was particularly interesting in a political system where representative democracy was limited. Among the substantive arguments, I would highlight the issue of social inequality and justice. In the parliamentary debates, many MPs stressed that one of the main aims of personal income tax was to create social justice, particularly through progressive taxation. The real debate was not on progressivity, on which there was complete consensus, but on the level of the tax rate. And this rate was not really uniform, there were various exemptions or allowances. So the MPs agreed that we needed a tax because the public deficit was so large and the subsidies and interest on loans were so large. So it was clear that a rapid mobilisation of resources was needed, but who should pay the tax was another matter (pensioners, young people, single people, families...). The aim was, of course, to ensure that the tax burden was proportionate and that it was no longer borne by companies, which were at a competitive disadvantage on world markets, but by individuals. It is important to note that the government, in order to curb excessive consumption, which of course had taken place below world market prices, introduced VAT at the same time as personal income tax.
In your research, you paid special attention to the issue of progressive taxation. How can we interpret this concept in the context of socialist Hungary?
Progressive taxation means that higher earners are taxed proportionately more than lower earners. In that period, under gulyás-socialism, because of the moon-lighting, or the extra work, some groups were able to increase their incomes while others were not, so social inequalities became more and more apparent. The majority of MPs expected that a progressive personal income tax would finally make incomes transparent. Only with proper registration is it possible to introduce progressivity. Interestingly, few expressed doubts as to how this would actually be achieved. Some felt that tax rates were too high, while others argued that the system was not comprehensive enough to be truly fair. In the highest income brackets, tax rates could be as high as 60%, placing a heavy burden on higher income earners. At the same time, exemptions, allowances, and tax credits made the system so complicated that it could hardly be called fair.
The Hungarian Parliament in session in 1987, Photo by Fortepan / Zoltán Szalay
You also mentioned in your research that the parliamentary debates raised the issue of social justice and inequality. How did this debate manifest in socialist Hungary?
Indeed, the issue of social inequality and justice has been a key issue in the debate on personal income tax. Although the rhetoric of the socialist system emphasised equality and social justice, the reality was that economic reforms had led to growing inequalities in society. The indirect management model of the socialist economy allowed the managers of large state-owned enterprises and the higher income strata to operate in a kind of 'grey zone', where they could access substantial extra incomes through various loopholes.
During the parliamentary debates, several MPs highlighted that these inequalities undermine social cohesion and that urgent action is needed to address the problem. One of the most interesting observations was that several MPs pointed out that tax reform alone is not enough; there is also a need to support social justice through comprehensive economic policies. However, there was also strong opposition to reform, particularly from those who feared that the new tax system could lead to the disintegration of the socialist safety net. Many feared that the introduction of this tax would bring capitalism.
Table of Prime Minister Károly Grósz in the Parliament, 1988, Photo: Fortepan / Zoltán Szalay
How would you summarise the key findings of your research? What lessons does the Hungarian parliamentary tax debate offer for today's economic and political discourse, especially considering that the economy eventually collapsed and the regime change followed?
One of the most important lessons of the research is that the Hungarian parliamentary debates in 1987 reflected the last steps of an economic system in crisis. The introduction of personal income tax was an attempt to stabilise the socialist economy through a progressive tax system, but it was only a symptomatic treatment. The underlying structural problems of the economy - such as the outdated production system, the inefficiency of state enterprises and the huge public debt - were deeper-rooted, and reform of the tax system alone was not sufficient to address them. The arguments made in the parliamentary debates, which focused on addressing social justice and inequalities, were important, but in reality the lack of trust was also at issue. How could a secretive, sloppy administration, based on privilege loyalty and propaganda, be trusted to deliver a fair tax system based on transparent income relations. The intention may have been there. By the late 1980s, the government was forced to face the fact that the economic model it had tried to maintain for decades had become unsustainable. Under pressure from the growing public debt and international financial institutions (such as the IMF and the World Bank), Hungary was forced to open up to the Western market economy. The final conclusion is that the socialist parliamentary debate at that time was in fact comparable to any other parliamentary debate. The reason for this is that, in the final analysis, the parliament had no influence on either politics or the economy.
Cover: The Parliament in 1986, photo by Fortepan / Péter Záray