DP696 | Taxes and Subsidies in the Transforming Hungarian Economy

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One of the important neglected issues in discussions of East European transition to the market is the structure of the government's budget, especially the roles played by taxes and subsidies. This paper reviews the Hungarian fiscal situation in 1990, the most recent year for which reasonably complete data could be found, and classifies the data in a manner which accords with economic principles. The authors explain how the `state' should be defined in Hungary, discuss the main forms of taxation and the various forms of subsidy and social welfare provision. Despite the removal of many former subsidies, the paper finds that many implicit and unjustified subsidies remain, and they continue to distort resource allocation in undesirable ways. What is required to improve the situation is better information (so that a paper like this would no longer be a major research exercise!), further reform of the tax and public expenditure system, and extensive training of Hungary's public officials.