In Hungary, there has been increasing pressure from opposition parties, including the Hungarian Socialist Party, the Democratic Coalition, Jobbik, Momentum, and recently the Tisza Party, to reduce the value-added tax (VAT) imposed by the government.

The political motivation behind this proposal is evident; as opposition parties, they can easily advocate for tax reductions, appealing to public sentiment favoring lower taxes.

This demand gains traction as citizens generally prefer paying less tax, and a reduction in the government's revenue is advantageous for opposition parties.

Hungary has been implementing personal income tax (PIT) and VAT since January 1, 1988. VAT is a significant source of revenue for governments as it is one of the few effective ways to tax income generated in the grey and black economies.

Individuals receiving 'off-the-books' payments or accumulating wealth through fictitious invoicing still bear VAT liabilities when shopping.

Following the political transition in Hungary, lawmakers across various administrations recognized the importance of taxing these informal economic sectors, especially as illegal economic activities increased.

The current government, led by Prime Minister Viktor Orbán, has consistently emphasized a work-based society, considering personal income tax reductions while coupling this with high consumption taxes to enhance efficiency in the revenue system.

Historically, Hungary's VAT rate has been one of the highest in Europe, currently standing at 27%.

The article will explore the challenges associated with reducing VAT after efforts to 'whiten' the economy, which have rendered such reductions nearly impossible.

The Fidesz government has previously attempted to lower VAT without success.

Calls for a reduction in VAT are becoming more pronounced, with proponents advocating for alleviating the financial strain on the poor and strengthening the middle class.

However, these advocates face criticism from some economists, such as former central bank governor György Surányi, who argues that lowering VAT is fundamentally misguided, noting that it tends to disproportionately benefit higher earners who spend more and therefore pay more in VAT.

Looking back, the second Orbán government's tax policy aimed to shift the tax burden from income taxes to consumption taxes.

Between 2014 and 2018, there were numerous reductions in VAT on essential products, including live animals, poultry, milk, and eggs.

However, analyses from the State Audit Office (ÁSZ) indicate that these reductions have not translated into lower consumer prices uniformly across the board, as various factors, including supply and demand dynamics, have a substantial impact on pricing.

For instance, an examination of the meat market revealed that while VAT on pork was lowered in 2017, prices continued to rise significantly thereafter, indicating that VAT changes alone do not guarantee lower prices for consumers.

Furthermore, despite the reduction of VAT on poultry, prices had increased due to external factors such as avian influenza, while the VAT reduction did not result in a proportional decline in egg prices.

Several studies corroborate the audit office's findings that VAT reductions alone are insufficient for reducing consumer prices, as market dynamics play a more pivotal role.

This would suggest that any potential VAT cut might not yield the expected financial relief for lower-income households under current economic conditions.

Public sentiment appears to favor the notion of VAT cuts, as recent survey data indicate a significant majority of pensioners would prefer a general 5% VAT rate on food over a government-proposed full VAT rebate on certain items.

Despite the broad support for tax reductions among the populace, questions surrounding their feasibility and economic impact remain highly contentious.

The discourse around VAT regulations highlights a fundamental economic debate regarding tax policy and its implications on economic equity and government revenue.

This ongoing discussion is central to the political narrative as Hungary navigates economic challenges in the coming years.