Academic journal article Journal of Financial Management & Analysis

Consolidated Tax System Induces Foreign Investment in Hungary

Academic journal article Journal of Financial Management & Analysis

Consolidated Tax System Induces Foreign Investment in Hungary

Article excerpt


The sweeping political changes ofthe eighties and nineties have been as welcome as they were unexpected. This is true not only for the man on the street, but also for scholars. In the past two decades, the tiieoretical foundations of the understanding of centrally planned economies has developed to a sophisticated level in the West as well as in Eastern Europe.

The former management has left a legacy of structural damage which will require at least a generation to repair. A stable market economy can only be the result of organic development. Because of the lack of capital in this region the problem of the disproportionately high amount of state-owned property can only be resolved slowly. In spite of this fact, there is no apparent shortage of interest in new ventures. This can be explained by the fact that for the last two decades, hidden behind the State economy, a number of second and tiiird economies have developed and become indispensable. This is true especially in agriculture and the service industries. In tins process, the black market economies have turned grey. Prohibition has turned into toleration, and in some cases even legalization. Because of die newly available political freedom, a wide range of new ventures is now possible.

Tax Reforms in Hungary

The reforms which radially changed die Hungarian tax system began in 1 987. They constituted a part of die overall economic reforms, in that mey were created in accordance with the abolition ofthe monolithic banking system (the founding of commercial banks). Partly because these reforms were based on antecedents, and partly because tiiey themselves were only relatively minor events which preceded later reforms, me changes of 1 987, although important, were not really decisive. Widi regard to the past, the Amendment of the Act on State-owned Enterprises, passed in 1 984, should not go unmentioned. This act embodies the idea that by means of separating state enterprises from the central administrative bodies, it would be possible to manage economic organizations that are profit-oriented, and at the same time remain within die framework of State property. To reach this stage, a new category of so-called self-administered enterprises has been initiated. State enterprises were expected to be able to create a new capital market instated of simply a bureaucratic alalocation of resources. As for the monetary and fiscal background of the developing market, the banking and tax reforms of 1987 themselves are not responsible for the failure of the self-administered enterprises (to become participants in a real market). It has been proved that under self-administration, State enterprises cannot function as real owners. Their managers have a stake in adapting to the formal and informal requirements of the public administration, rather than to the requirements of the ventures.

In the eighties, the reserves of the last reform attempts were depleted. By 1 990 it was time to surrender any remaining illusions about a socialist planned economy including the greatest taboo, that is, the intangibility of State property. This development is characterized best by the Company Act (Act VTH of 1988 on Business Associations). New companies here have enjoyed advanced banking services, and a tax system which has gradually grown more modernized since 1 987. With regard to the above mentioned reform measures that preceded the changes in the political system which took place between 1 989 and 1 990, it is worth emphasizing that the changes in official policy have been preceded by the legal declaration of the freedom of ownership and entrepreneurship, and the establishment of its institutional prerequisites. This does not mean that all institutions of major importance were established before 1 990. It does mean, however, that the main deficiencies, that is the lack of a new Land Act, a Bill on the Bank of Issue and an Act on the Bank of Issue and an Act on the Performance Budget are, in 1993, three years after the changes in the political system, just as effective as before. …

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