The Hungarian Personal Income Tax Model

From 1988 on, Hungary introduced a modern tax system which is to respond to the need of a market economy. The personal income tax law was modified significantly every year; however, as far as its basic principles are concerned, the system has remained practically unchanged since 1988. The main characteristics of the Hungarian personal income taxation are as follows: Taxable incomes: incomes derived from work (not independent activity), from ventures (independent activity), from the sale and use of capital (compensation from the sale of immovable, interest, dividends, profits), as well as some social incomes (such as unemployment benefit). Social incomes are usually tax-free (non-pecuniary contributions to education, to health and social care, allowances for the blind, family allowance, orphans’ allowances, etc.). In some cases their taxability is limited (pensions, contributions given to students and to parents are taxable only if the person has other additional taxable incomes). Taxability usually does not depend on the nature of income (pecuniary or non-pecuniary). Taxable incomes from all sources are aggregated and tax is paid on this basis in accordance with a progressive tax table. In the interests of technical simplification and to make the tax more easily enforceable, some types of income are taxed at a flat rate. This flat rate is usually 20 per cent, but it may be 10 per cent, 40 per cent or 44 per cent. In these cases, tax is withheld when income is disbursed. If withholding does not take place, the tax is payable by the person receiving the income. Tax is paid on a proportional basis on dividend income, interest receipts, and on capital gains from variations in the exchange rate, and the sale of securities and other property (shares, bonds). Different tax preferences and personal deductions are give, for example: 1. for dependent children; 2. for physical and mental handicap; 3. for investments in joint ventures with foreign firms; 4. for charitable donations; 5. for housing.