Friday, October 31, 2014

"Hungary" for Tax Revenue

After days of mass protests, Hungarian Prime Minister Viktor Orban announced today that he was putting the proposed tax on internet usage aside for the time being. Ever the populist, Orban said on the radio "if the people not only dislike something but also consider it unreasonable then it should not be done...", and said that the Hungarian government would work to revise the tax code and the internet tax proposal specifically in order to tailor it to the constituency's liking. Contrary to basic democratic principles, Prime Minister Orban is wrong to trust the sentiment of the people in this case. Populism is a slippery slope that has led numerous countries to ruin in the past, and in this particular case, the proposed tax would provide much-needed revenue to a nation that could be doing better financially.

A tax on internet usage has never been carried out in any country before. The one proposed in Hungary would have cost internet users roughly $0.60 per gigabyte of data traffic. Activists were quick to point out that this tax would end up costing 9 cents per hour of Spotify usage; 14 cents per hour of Facebook usage; $19 per movie stream, and a whopping $323 to stream an entire TV series. Those numbers are staggering - especially in a country where, according to the OECD the median household income is less than $16,000 a year (in the U.S., that figure is just under $45,000) and the average monthly income is $680 - and looking at them point blank it's perfectly understandable that people would protest such a tax.

Last Sunday, after the proposal was announced, protestors took to the streets in anger, even going so far as to hurl computer equipment at the headquarters of Prime Minister Orban's Fidesz party. Many accused the Prime Minister of continuing a series of "anti-democratic" measures that would bring down the middle and working classes. Bowing to reaction, Orban even proposed a cap of less than $3 per month for private users and about $20 for corporations. Despite this outrageously reasonable cap, protests continued. And while the protests did not reach the magnitude of those elsewhere (looking at you, Hong Kong) and did not really turn violent, they were enough to sway the Prime Minister, who has struggled to maintain popularity and cannot afford the bad publicity.

Unfortunately, Hungary can't afford to miss out on new tax revenue streams. After the global financial collapse in 2008, Hungary was forced to take a $25 billion loan from the IMF to help service its short-term debt. Its GDP per capita ranks Hungary at 71, which is not terrible but should be better. And with 14% of the population below the poverty line and a 10% unemployment rate, consumer spending is not what it should be and families are struggling. In fact, this financial malaise led the government to implement "crisis taxes" in 2010, which were imposed on the energy, retail, and telecommunications sectors. Sadly, like today, Prime Minister Orban gave way to his populist tendencies and vowed to end the taxes, which concluded in January of 2013.

All of this is beside the point, however. The fact is, the vast majority of countries already tax consumption. In the U.S., for example, we are taxed on retail sales and food service - many countries have similar taxes. The debate over taxing the internet has raged for decades. In the U.S., a moratorium on taxing internet usage was put in place in 1998, and although it is set to expire tomorrow (November 1st), it will likely be extended. The common argument is that unrestricted access to the internet has virtually infinite benefits that are far more wide-reaching and universal than a tax on that access could ever provide. This argument has teeth, and truthfully, it's hard to disagree. But the fact is, internet traffic is facilitated by physical infrastructure, the same way phone usage is, the same way vehicular traffic over roads and bridges is, and the same way most goods and services are provided. Those entities are all taxed, so why can't internet usage?

Protestors' arguments that Prime Minster Orban is implementing "anti-democratic" tax policies are unfounded: he was democratically elected and there is an entire government in place working on behalf of constituents. It is impossible to argue that new tax revenue streams are not needed. Without the sort of innovation that allowed for the internet tax proposal, the Hungarian economy may continue to flounder. Citizens pay a flat 16% income tax, and corporations just 19% - this revenue accounts for less than half of the annual budget, and will not pull Hungary out of their slump. Prime Minister Orban should implement this tax, and continue to propose new taxes that help bring up the middle and working classes and facilitate the government spending that will propel Hungary forward.

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