Who pays in the end? – the reality of wealth tax in Hungary according to the expert

There are many different taxes known around the world, we could even say that the range of taxes is inexhaustible – in Hungary alone there are 54 types of taxes in force – however, the individual types of taxes can be classified into three clearly distinguishable categories in terms of their operation: some tax income (e.g. personal income tax or corporate tax), others tax turnover (e.g. VAT), and there are also property-type taxes (e.g. building tax). According to the recently published program of the TISZA Party, it plans to introduce a tax belonging to the latter category, but the proposal shows a currently unusual tax solution: a general wealth tax for billionaires would be introduced, which would be a new, 1% annual tax on assets over 1 billion forints.

Current wealth-type taxes in the Hungarian legal system

It is worth briefly mentioning in advance that wealth-type taxes have existed in the Hungarian legal system for a long time: they tax either real estate or some more valuable asset. In our current tax system, local governments can tax real estate by imposing a building or land tax, and they can also introduce a settlement tax on tax objects that are not covered by other public charges specified by law. Car owners may also be familiar with the vehicle tax, which by its nature can also be considered a property-type public charge. However, these taxes cannot be compared in amount with a general wealth tax levied on the wealth of billionaires over one billion forints. For example, a private wealth of two billion forints would be subject to a direct tax obligation of ten million forints per year under the proposal – for comparison, in Budapest’s first district, approximately 4,500 square meters of real estate (or 45 100 square meter apartments) would be subject to a similar amount of building tax.

Regulatory attempts to introduce domestic wealth taxation

Special types of taxes targeting wealthy individuals have been introduced in our tax system on several occasions, taxing “luxury properties” and other assets (aircraft, boats, high-value cars). “These tax laws were adopted by the legislator and applied for a short time, but the Constitutional Court (AC) decided to annul them in its decisions. However, it is worth paying attention to the principles developed by the AC in the area of ​​property taxation, as the constitutional limitations formulated therein generally bind the legislature.” – points out international tax expert Balázs Békés.

For example, in the area of ​​determining the tax base, the AC found it problematic that the competent local government where the property is located could determine the market value considered as the tax base between minimum and maximum values, divorced from the actual market prices, while taxpayers were not provided with the possibility of legal recourse. It is therefore important to avoid that the tax base is determined arbitrarily, and that taxpayers have the opportunity to provide counter-evidence.

Another challenge in determining the tax base was that taxpayers did not have the necessary expertise to determine the market value of their property, while under the previous tax law, the difference between the values ​​determined by the taxpayer and the tax authority could have served as the basis for imposing a tax penalty. The Constitutional Court qualified this circumstance as contrary to the principle of the rule of law.

The Constitutional Court also established in the area of ​​the building tax that it is unlawful to introduce a tax that is of a confiscatory nature, i.e. one that consumes the value of the property within a foreseeable period. The tax introduced must therefore not be grossly disproportionate to the amount of property that is its subject. What constitutes grossly disproportionate cannot be defined in general terms, but a tax liability that reaches the value of the property within the tax limitation period, i.e. within a five-year cycle, would presumably be considered grossly disproportionate.

Determination of market value – or the Achilles heel of wealth tax

If we want to determine the wealth tax base based on the real market value of the taxable object, the precise determination of this market value may indeed raise many questions. As we have seen from the decisions of the Supreme Administrative Court, such an additional obligation cannot be imposed on taxpayers, since a wide range of private individuals cannot be expected to have the expertise of specialized valuers (whether for goodwill or real estate).