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Oct 24, 2017

America takes a leaf out of Hungary's book on tax reform

The Washington Examiner points out that the measures outlined in the Trump administration's tax reform are similar to those that pulled Hungary from the brink in recent years

It would seem the Trump administration has taken a leaf out of Hungary’s book when it comes to tax reform.

Trump recently submitted a tax reform package to Congress, the beginning of a longer process of simplifying not only the tax code by eliminating loopholes, handouts, and exemptions, but also making the United States a more competitive and productive nation.

In a column in the Washington Examiner, Eugene F. Megyesy points out that the measures outlined in the reform are similar to those that pulled Hungary from the brink in recent years.

The article compares the American struggle to those Hungary faced after converting from a communist planned economy to a free-market approach.

In 2008, Hungary found itself in a similar crisis to what now faces the US, teetering near the brink of bankruptcy. The country required a substantial IMF bailout. When it came into power in 2010, the current government inherited this loan and distressed financial condition.

“At that time, out of 4.2 million people employed, only 1.8 million paid taxes supporting a country of 10 million. This created an obviously unsustainable situation. Government debt had reached 85 percent of GDP and unemployment had risen to 11 percent. The budget deficit far exceeded the EU goal of 3 percent and growth had turned negative,” Megyesy writes.

Special taxes had to be imposed to repay the IMF loan. The new constitution, passed by parliament in 2011, contained a provision designed to control the government's deficit spending.

The Hungarian government instituted a number of programs designed to provide more incentives for people to work, in some cases on public works projects, as opposed to remaining inactive and receiving social benefits – a workfare system replaced a welfare mentality. Personal income tax was slashed to 16 percent and then to 15 percent last year.

“As a result of these measures, the number of taxpayers has more than doubled, to 4 million; unemployment has dropped to a record low of 4.5 percent; growth has risen to a respectable 3.5 percent; government debt has shrunk to 74 percent of GDP; and the rating agencies have upgraded Hungarian bonds from "junk" to investment grade,” the author adds.

So, as the tax debate begins in the United States, many have noticed the similarities between Trump’s revised tax refom and the benefits Hungary reaped from imposing similar measures several years ago.

Read the full article here.