Gyurcsány and Surányi: Similarly taxing names, similarly bad ideas about taxes

Renowned former Hungarian National Bank president György Surányi and not-so-renowned and likely soon-to-be-former Hungarian Prime Minister Ferenc Gyurcsány not only have family names that sound akin. They also seem to be regular family when it comes to offering bad ideas for dealing with Hungary’s dysfunctional and enterprise-destroying tax system. Since “G” comes before “S,” I might as well start with Gyurcsány’s latest wince-making plan, which also has the benefit of basically being nothing.

According to this report on fn.hu, Gyurcsány took the opportunity presented by a meeting with a visiting German provincial politician to say that Hungary is not interested in winning over foreign investors by offering low taxes or business costs, and would rather focus on its “performance.”

Whatever Gyurcsány meant by this – probably that he wants the country to be known for being a center of highly-skilled labor and high-quality infrastructure – it is, to be blunt, idiotic.

For one thing, the success Hungary has had in recent decades in attracting FDI has been mostly due to its cost advantages compared to places like Germany, not least the generous tax “holidays” granted to early investors (many of which are now expiring, leading some of the investors looking to get out).

Meanwhile, while making his “pitch,” Gyurcsány noted that Hungary is interested in promoting tourism, vehicle manufacturing, logistics and biotechnology, industries that are hardly immune to cost pressures. Indeed, Hungary’s crucial tourism and car-making sectors are both reeling from the loss of the cost advantages they enjoyed in previous years.

But what really takes the cake is the idea Gyurcsány really thinks Hungary is or can offer potential investors “performance” with its economy yoked to a state as greedy, inept and incentive-destroying as the one he runs. He isn’t offering a choice between performance and low-cost: he’s offering neither.

Unsure Surányi
Meanwhile, Surányi’s diagnoses and remedies are only barely less toxic.

In a television interview on Sunday, the man largely credited with giving early-1990s Hungary a degree of monetary stability denounced the arguments of some – including by sitting MNB chief András Simor – that tax reform should be paired with a major paring back of government spending, saying a significant cutting of social transfers would cause a “nightmare.”

While Surányi is unfortunately correct in saying that state spending cannot be quickly back from the current 48%-49% of GDP to the 32%-36% seen in Slovakia, by openly saying so he only serves to stoke the pipedreams of those like Gyurcsány believe there is some pleasant way out of the country’s current crisis. On the contrary, he should be saying it needs to happen immediately, so there is at least a chance it can happen someday before the economy simply dries up and blows away.

Worse, Surányi takes a good idea – shifting taxation from production to consumption – and turns it on its head by suggesting a rise in Hungary’s already high VAT rate, the manipulation of which is one of the largest drains on productivity in the country. Raise the rate 1%, and all you will get is Hungarians spending 2% more of their time trying to get that 1% back.

What Surányi – and Gyurcsány – need to be instead doing is loudly informing whoever will listen that the “nightmare” is in fact already upon Hungary, in the form of a state that somehow ended up paying large parts of the working-age population not to work – or to engage in otherwise non-productive, state-centered economic activities – while keeping the other part busy avoiding the taxes needed to pay for it. Without dealing with the former, nothing can be done about the latter. And without fixing the latter, no one will invest in this economy, whether or not they know how to pronounce “Surányi” or “Gyurcsány.”