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Hungary’s new government plans to introduce a flat personal income tax of 16 percent from 2011, as well as a 15 percent cut in public sector wages.

After a three-day emergency cabinet meeting over the weekend, Viktor Orban, the prime minister, announced the government’s new economic programme this afternoon. The battered forint quickly jumped almost 2% in response.

The key measures are substantial cuts in income and corporation tax, a proposed tax on banking profits and wage cuts at state institutions. The government also plans to ban mortages denominated in foreign currencies, which have proved extremely costly for Hungarian wage-earners paid in forints. The government confirmed that it plans to meet the 3.8% budget deficit limit agreed under the terms of the country’s 2008 bail-out by the IMF and the EU.

The introduction of a 16% flat personal income tax is a daring move, and could have important repercussions beyond balancing the state’s books. Unemployment, or at least that element of it which is declared, is nudging 12%, and one reason is Hungary’s cumbersome bureacracy and heavy tax burden. Now Mr Orban has announced that corporation tax for companies with annual profits of less than 500m forints will be reduced from 19% to 10%. Ten more small and bothersome taxes are set to be abolished altogether.

The government’s aim is to make it easier, and cheaper, to pay taxes than to game the system. The most popular scam is for companies to pay their employees the monthly minimum wage of 73,500 forints, or slightly more, above board, and to slip them the rest under the table.

Source: The Economist

Hat tip to Dan Mitchell.

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