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Posts Tagged ‘Hungary’

In 2016, I toured the Tuol Sleng Genocide Museum in Cambodia, which memorializes the victims of communist butchery in that nation.

Earlier today, I was lucky enough to get a tour through the House of Terror, a museum in Budapest that commemorates the horrors that Hungary endured during both Nazi occupation and Soviet occupation

Some of the exhibits are uplifting, such as the photo from the 1956 uprising that shows a toppled statue of Stalin.

Other parts are downright depressing.

Or, in the case of these torture instruments, certain exhibits are utterly horrifying (you can use your imagination to figure out what the communists did with the glass tubes).

If you go to Hungary, the House of Terror should be on your list of things to do.

I was particularly gratified to learn that it’s the most-visited museum in Budapest. Not simply because it’s filled with interesting material, but because it helps people understand that all forms of statism are wrong.

The House of Terror has exhibits on the brutality of Nazi rule and the brutality of Marxist rule.

Which is a good excuse for me to share excerpts from a couple of columns on the common thread between fascism and socialism.

In a column last November for the Foundation for Economic Education, Brittany Hunter shared some of Friedrich Hayek’s analysis of the philosophical link between national socialism and international socialism.

F.A. Hayek’s The Road to Serfdom, …in chapter twelve, …Hayek highlights the very important connection between the socialist and Nazi intellectuals by profiling a handful of prominent German Marxist supporters… Hayek points out that contrary to what many think, Nazism did not simply appear out of thin air and infect the minds of docile German people. There were academic roots that, while grown in the soil of socialist thought, grew into a philosophy that praised German superiority, ultimate war, and the degradation of the individual. …Beginning his list of influential thinkers prior to WWII, Hayek begins with the dedicated Marxist who later embraced nationalism and dictatorship, Werner Sombart (1863-1941). …He seethed with criticism for the English people, who, in his mind, had lost their warlike instincts. …His other main criticism of English culture was the emphasis placed on the individual. For Sombart, individual happiness was hampering societies from being truly great. …Professor Johann Plenge (1874-1963) was another leading intellectual authority on Marxist thought during this time. He also saw war with England as a necessary struggle between two opposite principles: emphasis on the individual and organization and socialism. …Interestingly enough, many…socialist philosophers eventually abandoned Marxism in favor of National Socialism… while Prussian militarism was seen to be the enemy of socialism, Spengler helped bridge that gap. Both schools of thought require an abandonment of the individual identity. …This hatred and fear of the individual is the worldview espoused by these thinkers and it continues on with those who claim to be socialists today. Unless the concept of individualism is completely eradicated, the glorified state cannot come into existence.

Earlier this year, Byron Chiado echoed this analysis of Hayek’s Road to Serfdom in another FEE column, pointing out that all forms of socialism reject classical liberalism.

The bulk of the book makes the argument that central planning and interventionism inevitably lead to authoritarianism… Towards the end of the book, he deals with the undeniable authoritarians of his time and casts the national-socialist movement as one built on disgust with liberalism. …Sombart, like many Germans in the early 20th century, was compelled by a case for war between the British and Germany on the grounds that the British…pursuit of individual happiness, which he saw as a disease contracted from a society built on commercialism. Laissez-faire was an unnatural anarchic order giving rise to parasites and dishonest merchants… another Marxist, Sociologist Johann Plenge…moved into the shamelessly totalitarian realm that attracted so many Marxist leaders… Hayek gives…a warning to England; that the “conservative socialism” en vogue at the time was a German export, which for reasons he details throughout the book, will inevitably become totalitarian. …This was not a sensationalist attempt to prove his point. Hayek was rather calmly pointing out an example of the type of government one could expect in a society that has discarded liberalism for planning.

Amen. Big government is coercive government, regardless of what label is applied.

Which is why libertarianism (what Hayek would have called liberalism, meaning classical liberalism) is the proper philosophy of government. Assuming, of course, one values individual rights and civil society.

P.S. I also visited the Solidarity Museum in Poland a few years ago. Maybe I could put together a guide-book on the horrors of totalitarianism.

 

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February 5 Addendum: For my left-wing friends and others who are bending over backwards to misread this column, saying nice things about Russia’s flat tax doesn’t mean (as noted below) that Russia’s overall economic policy is admirable. And it obviously doesn’t imply anything favorable about Russia’s dismal political system or Putin himself. I like the Russia flat tax for the same reason that I like trade liberalization in China and Social Security reform in Chile. Every so often, bad governments stumble upon a good policy and I think that’s laudable because I want people to have better lives. Sadly, I don’t think the Putin-Trump “bromance” will lead to a flat tax in the US, but that would be an unexpected and nice silver lining to that dark cloud.

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I’m obviously a big fan of a simple and fair flat tax.

In part, my support for fundamental reform is driven by my desire for a low rate, for no double taxation, and for the elimination of loopholes. Those are the economic reasons for reform.

But I also am very much motivated by the moral case for tax reform. It offends me that we have 70,000-plus pages of special favors for the friends and contributors of politicians. I value the rule of law, so I want everyone in America to play by the same rules.

And I confess that I’m jealous that other nations have adopted this common-sense reform while we’re still stuck with a punitive and unfair internal revenue code.

But the silver lining to this dark cloud is that we can learn from the experiences of other nations.

A recent report looks at what’s happened in Russia following the introduction of the flat tax.

On December 23, 2016, in his annual end-of-year press conference, Russian President Vladimir Putin said that despite his “many doubts” at the initial stage of introducing a flat 13-percent personal income tax in 2001, tax reform in Russia has been a major success. …Putin claimed that in 2001, when the tax reform was introduced, he was “concerned that the budget would lose revenue, because those who earn more would have to pay less.” He said he was also concerned “whether social justice would be ensured and so on.” However, as the reform gained traction, “personal-income tax collection has increased – pay attention – seven times,” Putin said. …Daniel Mitchell, a senior fellow at the Cato Institute, told Polygraph.info that two factors contributed to a significant increase in personal income tax revenue: “the low rate made tax evasion and avoidance much less attractive, and increased incentives to earn income.”

I appreciated the chance to talk to the reporter and get quoted in the story, but I am naturally suspicious about the claims of government officials. So I wondered about Putin’s claim about a seven-fold increase in income tax receipts.

I know there were good results in the first few years after reform. I authored a study for the Center for Freedom and Prosperity last decade, and there was data at the time showing an impressive increase in revenues from the personal income tax. That data certainly bolstered the argument for tax reform.

But we now have almost another full decade of data. Has the Russian flat tax continued to produce good results? Is the low tax rate continuing to encourage both the earning of income and reporting of income?

To answer these questions, I had my intern cull through various IMF Article IV consultation reports on Russia to get up-to-date data on personal income tax receipts in Russia. And what did I learn? Was Putin wrong?

Yes, Putin’s claim of a seven-fold increase in tax receipts was completely misleading. There was actually a 10-fold jump in personal income tax revenue.

In other words, the flat tax is a success. In today’s Washington, you would say the Russian government is winning bigly.

But there are caveats.

  • Russia has experienced significant inflation, at least compared to the United States. So if you factor out increases in the price level, personal income tax revenues are “only” about three times higher today than they were before the flat tax was implemented.
  • Moreover, a flat tax is not a panacea. Notwithstanding the good results it has delivered, Russia has an unimpressive ranking of #102 from Economic Freedom of the World. In other words, there’s still a long way to go if Russia wants to become a rich nation.

But these caveats don’t change the main conclusion, which is that the Russian flat tax works. Just as it works in Hong Kong. And just as it works in Jersey. It works wherever it is tried.

Let’s look at another example. Writing for Forbes, Fahim Mostafa explains that the Hungarian flat tax also has been a big success.

A fair number of Eastern European nations have…chosen this system of taxation over its progressive counterpart. Among the latest to join this club is Hungary, replacing progressive rates from 17% to 32% with a flat tax of 16% on income effective from 2012 onward… There is reason to believe that the implementation of this system has largely benefited the Eastern European nation. …The results from the following years have been remarkable. Total government revenue in 2015 (the last year for which OECD data is available at this time) stood at 23.8% higher than the maximum prior to the flat tax reform… According to the OECD, public debt in Hungary has been decreasing steadily since 2011. Increased revenues allow for this debt to be paid. …The flat tax has boosted consumption in Hungary, greatly increasing taxes collected from sales. Total tax revenue has shot up despite the massive cuts made to income tax. Politicians seeking to implement this policy in their own nation would do well to point out the example of Hungary.

I’ll add two comments.

First, the same caveats I applied to Russia apply to Hungary. The country is ranked #57 from Economic Freedom of the World, so it’s great that there’s a successful flat tax, but a lot more reform is needed for Hungary to become a role model for overall market-friendly reform.

Second, the author should probably make a change to the column. Instead of writing that “tax revenue has shot up despite the massive cuts,” it might be more accurate to write that “tax revenue has shot up because of the massive cuts.”

Yes, every so often you can find examples of nations being on the downward-sloping portion of the Laffer Curve, either because tax rates are ridiculously high (the U.S. before Reagan) or because a nation is developing or transitioning and needs low tax burdens to boost growth and encourage compliance.

It’s never my goal to boost revenue for governments, of course, but there’s surely a lesson to be learned about the benefits of low tax rates when both taxpayers and the government wind up with more money.

P.S. If we really want to learn from other places about the ideal tax system, we should check out Bermuda, Monaco, and the Cayman Islands.

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Every since the current government won a landslide election, there’s been a widespread assumption that Hungary would be the next nation in Europe to hop on the flat tax bandwagon. Well, the assumption has become reality. Here’s a report from Tax-news.com.

The Hungarian parliament has approved the government’s 2011 tax bill, which introduces a flat rate personal income tax of 16%, and grants a 10% corporate tax rate to certain companies from next year. The bill also contains a highly controversial amendment to the country’s original bank tax legislation. Hungary’s 2011 tax bill, which was adopted by 259 votes to 104, provides for a 16% flat rate of personal income tax in a bid to boost domestic demand. It also reduces the corporate tax rate from 19% to 10% for all companies from January 1, 2013.

It’s a bit disturbing to see that Keynesian theory (“boost domestic demand”) was part of the rationale for this tax reform, but I’m not going to quibble. Any port in a storm, as the saying goes.

So it’s time to cue up the flat tax theme song and celebrate the growing list of flat tax nations. More than 30 nations now have the morally and economically superior tax regime, a remarkable increase since I narrated a video two years ago and there were only 25 countries on the list.

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I gave a speech in Hungary about two weeks ago and now the government has announced a big step in the direction of better fiscal policy. According to Reuters, “Hungary’s new government plans to introduce a flat personal income tax of 16 percent from 2011, as well as a 15 percent cut in public sector wages.” Those are the headline initiatives, but the fiscal reform package includes other good policies. Here’s a blurb from The Economist.

After a three-day emergency cabinet meeting over the weekend, Viktor Orban, the prime minister, announced the government’s new economic programme this afternoon. The battered forint quickly jumped almost 2% in response. …The introduction of a 16% flat personal income tax is a daring move, and could have important repercussions beyond balancing the state’s books. Unemployment, or at least that element of it which is declared, is nudging 12%, and one reason is Hungary’s cumbersome bureacracy and heavy tax burden. Now Mr Orban has announced that corporation tax for companies with annual profits of less than 500m forints will be reduced from 19% to 10%. Ten more small and bothersome taxes are set to be abolished altogether.

A few years ago, when several nations each year were adopting the flat tax, I arbitrarily decided that this rock classic would be the theme song of the tax reform movement. Any better suggestions?

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A conference in Hungary was the most recent event on the Free Market Road Show. I tried to do something different at this event, focusing mostly on the Laffer Curve as I explained how European governments will fail if they try to fix the over-spending problem by raising taxes.

But regular readers of this blog have been exposed to plenty of Laffer Curve analysis, so allow me instead speculate on the meaning of the recent Hungarian elections, which resulted in a landslide victory for the supposedly right-wing party. With more than two-thirds of seats in Parliament, there is no obstacle to economic reform, and the party campaigned on smaller government and lower tax rates.

But here’s the issues. Is the Fidesz Party a bunch of Bush clones, politicians who talk a good game but then make government bigger once they get in power? Or will the new Prime Minister (who also ruled from 1998-2002) be a principled advocate of freedom who uses his overwhelming mandate to implement a flat tax and reduce the horrific burden of government spending in his country (more than 50 percent of GDP)? I’m not overflowing with optimism, but I hope I’m wrong.

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