2. PERSONAL INCOME TAXATION
(Személyi jövedelemadózás)
Progressive taxation (Progressziv adórendszer)
USA and Germany PIT methodology
Short history and methodologies
Wars influence
Flat taxation (egykulcsos adórendszer)
Main tax policy issues and personal income tax of New
Member States/former socialist countries
Romania, Hungary and Slovakia and Romania
3. Progressive taxation
(mostly of Western democracies)
Progressziv adórendszer
Historically, progressive taxation has been supported by
economists and political scientists ranging from Karl Marx
to Adam Smith.
A tax that takes a larger percentage from the income
of high-income earners than it does from low-income
individuals. Individuals who earn more pay higher taxes.
in US: During the Civil War Congress passed the Revenue
Act of 1861 which included a tax on personal incomes to
help pay war expenses.
Germany introduced progressive income tax in 1891.
The emergence of progressive income taxation in the
twentieth century is a product of the Wars and not of
democracy. (Juliana Londono Velez report)
4. Flat taxation
Transition forms of taxation in the former socialist countries
After the first years of transition to a market economy and excluding the
period of Russian crisis around 1997, new member states’ rates of growth
have been enough satisfactory.
The transition countries can be considered as successful examples of tax
reform implementation.
In centrally planned economies, taxes were not collected on the basis of
codified tax laws and rules, they were collected mostly on the basis of
negotiations between government and enterprises.
Modern personal income taxes have been introduced in Hungary 1988,
Poland in 1991, the Czech Republic in 1993.
Concl: a wave of flat-tax legislation swept across Central and Eastern
Europe after the fall of communism, as more than a dozen countries across
the region adopted single income-tax rates--to the delight of free
marketers who have long championed flat taxes as an economic stimulant.
5. Personal income tax systems in
Romania, Hungary and Slovakia
From the presentation of these 3 former communist
countries I would highlight Slovakia’s case which took an
interesting turn in the history of their tax system reforms.
In May 2004, Slovakia was the first Central European
country to introduce a flat tax and was considered as one of
the role-models for the movement towards lower, flatter
tax structures. However, in January 2013, Slovakia’s left-
wing government reintroduced a directly progressive
income tax (PIT) as part of an austerity package.
Romania and Hungary use the flat taxation system.
6. PROGRESSIVE TAX
Advantages Disadvantages
Income Equality
Social Justice
More Government
Revenue
Protection during
recession times
Prevents taking high
paying jobs
Encourages
immigrations
Discrimination
7. FLAT TAX
Advantages Disadvantages
Reduced avoidance & evasion:
Fairness
Global competition brings
economic growth
Reduced disincentives:
Reduced compliance costs
Instant Wealth Creation.
inherently regressive, (the poor
pay proportionately more than
the rich)
Flat taxes are too simple, losing
necessary flexibility
conducts to an unhealthy fiscal
competition among different
states. (This phenomenon
amplifies the migration of the
capital and work force.)
9. Conclusion
The economies that have introduced a statutory flat personal rate in
Eastern Europe over the last decade or so have generally done so as part
of reform packages designed to deal with issues such as tax
compliance. Personal income tax is generally not the most significant
form of taxation in many of these economies, making a comparatively
small contribution to overall government tax revenues. Overall, the
personal income tax systems adopted in Eastern Europe in recent
years have not been ‘pure’ flat tax systems, given the utilization of tax
free thresholds and tax credits, which add an element of progressivity,
especially at lower income levels. These economies also tend to have
high levels of social security contributions and indirect taxation.
The progressivity of the U.S. federal tax system and its evolution since
more than five decades, compared with other countries it would be a
very complex but useful analyses, which could represent a useful guide
for economists, students and anyone interested in this field.
Hinweis der Redaktion
A nyugati vezető demokráciák személyi jövedelemadózási módozatai, valamint ezek hatásai a középosztályra az új demokráciákban, különös tekintettel az Egyesült Államokra , Németország vs. KKE (a Visegrádi 4-ekre is gondoltam a kezdetekben)
According to publicly available statistics, approximately three fourth of the 200 nations globally use progressive income tax while only one fourth apply the flat income tax. Based on this it can be deduced that the progressive income tax has been a more popular technique in building a strong middle class in most democracies. I chose to write about these important issues because it would be interesting to compare and analyze the two systems even so complex and different. First part of my work will start with the presentation of income taxation systems of economically most developed western democratic countries which practice progressive taxation (especially in USA), emphasizing how wars influenced progressivity; on the second part I will present some of the Eastern European countries taxation system; then the third part will reflect some major taxation impacts of three of the new democratic countries (former socialist) Hungary, Romania and Slovakia users of flat or progressive taxation.
In US: During the Civil War Congress passed the Revenue Act of 1861 which included a tax on personal incomes to help pay war expenses. The tax was repealed ten years later.
Germany:The most obvious progressive taxation found in practice in Western countries was in Germany, where they introduced progressive income tax in 1891. I would mention as fathers of income concepts: Henry Simons (1938) and William Andrews breakthrough analyses A very interesting approach and proven report is highlighted by Juliana Londoño Vélez, her research demonstrates that progressive income taxation in the twentieth century is a product of the exigency of war and not of democracy. She obtained long-run series of the top marginal personal income tax rate for a large sample of OECD countries, using data on wars of mass mobilization and democracy from the Correlates of War data set and Scheve & Stasavage to test this hypothesis. Her results suggests that wars of mass mobilization cause substantial increases in tax progressivity.
In the United States taxation is quite a complex system consisting of four basic forms of taxes: corporate income tax, individual income tax, social security sax and some other taxes like estate tax, VAT, various customs and tariffs. Taxation includes payments to three different governments: the State government, local government, which includes more of municipal township, district and county governments and the federal government
The main purpose of taxes is to finance public spending. There has been argues on the topic that governments in transition economies, such as New Members of the European Union are too big relative to their tax capacity for interfering with economic development. It is quite obvious the lack of robustness that characterizes all empirically estimated relationships between tax or spending/GDP ratio and per capita income.
By better focusing attention on this issue it can be observed that economies in transition, large spreads in public spending are almost entirely due to the public sector’s engagement in the provision of welfare systems and services. After the first years of transition to a market economy and excluding the period of Russian crisis around 1997, new member states’ rates of growth have been enough satisfactory. Both statistical evidence and economic theory suggest that it exists a negative and weak link between the level of taxes and public spending on one side and growth rates on the other. For that reason, non-minimal and well targeted tax cuts could contribute to further improving growth, which indeed would help reducing the painful high unemployment.
The region's embrace of flat taxes was driven by politics as much as by economics. Many countries trumpeted their flat-tax regimes as a symbol of their transition to a market economy and their openness to investment.
In addition to the original flat tax rate of 19%, the PIT now has a second bracket of 25% for incomes above a multiple of 176.8 of an applicable subsistence minimum (currently amounting to approximately €34,400). In addition, the corporate tax rate was increased to 23%.
ADV. Income Equality - is one of the biggest pros that progressive tax advocates promote. A progressive tax system really acts as a tool for redistributing income from the upper class to the lower and middle class. Those individuals who earn more pay more into the federal government. This helps keeps the income gap from growing wider between the rich and the poor.
Social Justice - Some argue that it is morally right that those who can afford to pay more in taxes should do so. Those that have very little income should be helped out by those who can afford to help. A progressive tax allows governments to collect money from those who can afford to pay, and uses it to help create a society that is happier as a result. Those taxes are used to fund education, medical services, housing assistance and other welfare programs for those people who really need help. Because so many people need help with these things, society is better off as a whole.
More Government Revenue A progressive system allows governments to collect more money from higher income earners. This results in more money collected, rather than if everyone paid the same percentage. As a result, the government can provide more programs and services that benefit society.
DISATVANTAGES - Prevents taking high paying jobs because most of their income would be taken away as taxes. It also discourages individuals to work harder to gain higher incomes.
Encourages immigrations: encourages high earning workers to move overseas to escape the tax system.
Encouraging hiding of assets: the system can also encourage high income earners to opt for off shore banking by which they can hide their assets and save taxes.
Discrimination – one of the most common arguments against a progressive tax is that is doesn’t truly promote equality among individuals.
ADV.
Reduced avoidance & evasion: A simpler tax system reduces the scope for legal tax avoidance, by removing many of the deductions, thresholds and anomalies on which most avoidance is based, and makes enforcement of taxes easier, reducing the possibility of illegal tax evasion. In addition replacing a system of higher rate taxes with a single, low, flat rate reduces the motivation for avoidance.
Fairness: some may say fairness is the greatest virtue of the flat tax. It is based on the idea of fairness learned in grade school - everyone should be treated the same. Rather than have politicians and their favored interests decide - for their own reasons - who should get favored treatment and who should be penalized, the flat tax sets a single objective standard. No matter how much money you make, what kind of business you are in, you will be taxed at the same percentage as everyone else.
Global competition brings economic growth: in the increasingly integrated global economy, nations are waging a battle between governments to attract investment and skilled workers by overhauling their tax codes to create a more attractive business environment.
Reduced disincentives: Income tax is a great disincentive to investment (which has to be profitable enough to cover the tax as well as to give a return for the investor), to business startups or expansion (with few exceptions the tax system is usually more willing to tax profits than to give relief for losses), and for employment.
Reduced compliance costs The complexity is a hidden tax, because the costs of determining a global progressive tax are sometimes extremely high. The flat tax instead is simple and clear for everyone and the spending with taxation is lower.
According to Harvard economist Dale Jorgenson, tax reform would boost national wealth. It would do this in part because all income-producing assets would rise in value since the flat tax would increase the after-tax stream of income that they generate.
DISADVANATGES
Flat taxes are inherently regressive, meaning that the poor pay proportionately more than the rich, and so undermine the social democratic principle of richer helping poorer citizens for the public good. Such inequity is recognized and resented
FLAT taxes are too simple, losing necessary flexibility. Goods and services vary, so it would be wrong to tax luxury versions at the same rate as economy ones, or children’s textbooks at the same rate as adult novels. Income taxes, by contrast, may encourage more labor to make up any shortfall, whilst tax credits given to low earners can ensure marginal rates stay below 100%.
