Tax and Expenditure Policies in Hungary

Tax and expenditure shares in Hungary are high compared with market economies, and tax revenues have been falling with tax reform, marketisation, and the collapse of CMEA trade. Western observers argue that cuts in taxes and expenditures are desirable. Optimum tax theory shows that a narrowing of the tax base provides the main case for tax reductions. Hungary's high foreign debt and the undesirability of cutting some expenditures make cuts in other expenditures even more urgent. The paper argues for broadening the tax basis, tightening compliance, and reducing the tax element in social security contributions.