So far, small businesses have benefited from a tax reform from 2013.
(Photo: AP)
Vienna In Hungary, small business owners are rebelling. For a week they have been demonstrating in Budapest against a change in the tax law. They fear higher taxes – and of all things in economically difficult times.
When the government of Prime Minister Viktor Orban pushed the corresponding law through parliament a week and a half ago, several thousand demonstrators blocked a Danube bridge in the capital Budapest. The demonstrations continued this week; on Monday, the demonstrators blocked another bridge during the morning rush hour.
Hungary’s small business owners still benefit from a special tax provision called Kata. Anyone who earns a maximum of twelve million forints a year (30,000 euros) pays a fixed 50,000 forints (124 euros) in taxes per month without much administrative work.
Professional groups such as hairdressers, writers, craftsmen or food suppliers should be relieved of the paper work. On the other hand, the government’s intention with the relatively low tax was to help small businesses to save more in old age.
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Hungary’s government was proud of the tax reform introduced in 2013, which currently benefits around 450,000 small business owners. It wasn’t long ago that the Ministry of Finance announced that nowhere else in Europe were small businesses taxed in such a simple way as in Hungary. The government also hoped to attract even larger numbers of small business owners to the electorate.
The Hungarian Prime Minister recently praised the tax regulation.
(Photo: Reuters)
Today, Orban and his ministers are no longer so euphoric. Erik Banki, a member of parliament for the ruling party Fidesz and chairman of the economic committee in parliament, accused the entrepreneurs of tax fraud during a debate. The government suspects small business owners of cheating on kata by no longer paying employees a fixed wage, but employing them as subcontractors. This saves them social security contributions, among other things.
Experts like business journalist Zoltan Farkas are also critical of the law. “Economically, it’s nonsense,” he said. Companies of very different sizes would be lumped together.
The change in the law is expected to come into effect in the fall
At the same time, he can understand the protesters’ protest on one point: he, too, is bothered by how quickly the government wants to abolish the law, which was once loudly praised. “The government knew the change would trigger protests,” says Farkas. That drove her to hurry.
The amendment to the law is scheduled to come into force on September 1st. After that, only small businesses that exclusively serve private individuals will benefit from kata.
For around 300,000 small companies, this will probably mean that they will have to pay higher taxes or at least do more administrative work again. The state could use more revenue. Because before the national elections on April 3, Orban distributed expensive election gifts to selected groups, such as middle-class families and retirees. That tore a hole in the state budget.
The tax change will affect hundreds of thousands of small businesses.
(Photo: AP)
There is also a risk in Hungary that inflation could spiral out of control. It was 11.7 percent in June, and it would be much higher if the government hadn’t put a price cap on six staples, including wheat flour and milk, and gasoline. Economist Janos Nagy from Bank Erste Group estimates that without these measures inflation would be 20 percent.
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The rise in prices is already obvious in everyday life. In Budapest’s small grocery stores, notices are posted at the checkout pointing out that the retail prices posted on the shelves are not necessarily the valid ones. The owners want to keep the option open to quickly adjust the prices.
Orban still has a strong majority
Inflation is being exacerbated by the weakness of the forint, which has been falling against the euro for months. This makes imported goods more expensive. In order to support the forint, the domestic central bank surprisingly announced a rate hike a week and a half ago.
Despite the difficult circumstances, Orban need not worry about the anger of the demonstrators for the time being. In parliament, Fidesz has a two-thirds majority and the protests are not a popular movement, but involve a few hundred or at most a few thousand participants.
The owner of a small grocery store in downtown Budapest only raises his hands when engaged in a conversation about the protests. The change in the tax law does not suit him either. But protest is pointless, he says and makes a resigned impression. Orban has corrupted rural Hungary, and the people there support the prime minister.
The economist Farkas also sees no signs that Orban could get into trouble. The population also sees the prime minister as a guarantee that Russian natural gas will continue to flow reliably into the country. Orban has long maintained a close relationship with Russian President Vladimir Putin.
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