What was only a quickly reversed idea a couple of weeks ago is now a reality: the flat tax will be suspended for at least a year. While the higher rate will be applied already at income levels that ideally should have been subject to the lower rate, this policy reversal is a move in the right direction. In Hungary, the flat tax has failed to deliver the growth that some believe it has brought other countries in the region. Yet the problem is by no means only the flat tax. In international comparison, Hungary relies too much on consumption taxes and collects too little from taxing wealth. A complete overhaul would be necessary, but the problem is that Fidesz would have to do all the things it has vowed it’d never do. Then again: it has began doing just that with the introduction of two income tax rates.

Fidesz felt seduced by the simplicity of the flat tax. Now it is gradually abandoning it as the government is running into the limitation of this system in terms of both, engendering growth and collecting sufficient revenue to maintain the fiscal balance and debt-reducing course that the government has committed itself to ever since the EU made clear that it would not tolerate any digression from previously agreed on deficit figures.

The flat tax had made a fulminant entry in the region, taking most of the emerging markets here by storm. Of the EU’s ten new Central and Eastern European members, only Poland and Slovenia have no flat tax. While the former is constantly toying with the idea, the Slovenian government apparently abandoned it precisely because it thought it would do little for growth and too much for inequality.

Policy Solutions' analysis on the government's changing tax policy can be downloaded from here.