A recent paper by Daniel Deák, a professor in the Corvinus University of Budapest, is titled ‘ Pioneering Decision of the Constitutional Court of Hungary to Invoke the Protection of Human Dignity in Tax Matters ' ( www.ssrn.com ). The paper discusses the court's decision repealing the provisions of an amending legislation that was introduced in the end of 2010 tax liability, retroactively with effect from January 1, 2005.

Interestingly, an amendment to the Constitution had provided that the liability to pay tax on the income granted in breach of the good morals from public funds or from the funds of State-owned organisations or businesses operating under State control could be introduced with a retroactive effect; and the tax in question was a 98 per cent special income tax.

Good morals

While ‘good morals' was not defined, an obvious example for the payment made out of public funds in breach of the good morals could be the grant of remuneration, which could be manipulated by the beneficiary, which was specified at an unusually high level, and which was applied in exchange for the performance of work, the quality of which could not be clarified, the author explains.

The paper informs that the income granted as severance payment upon the termination of employment (excluding the termination of employment resulting in retirement) with central or local budgetary organs, or with State-owned organisations or businesses operating under State control, the amount of which exceeds HUF 2 million in case of the executive officers of public administration and businesses (ministers, State secretaries, mayors, town clerks) and HUF 3.5 million in case of any other employee, is taxable at a rate of 98 per cent.

Also taking into account the 27 per cent health-care contribution, the overall tax burden clearly exceeds 100 per cent, adds Deák. The Parliament's justification for the introduction of confiscatory tax was the assumption that severance payments were given in the previous parliamentary cycle by the earlier Government out of public funds abusively. Reassuringly, however, the court identified in the legislation ‘undue interference with human dignity, not consistent with the Constitution,' as the author highlights in the paper.

Recommended read for lawmakers.

Optimal tax rate

While it can be tempting to think that lower marginal tax rates lead to prosperity, the evidence from historical data is otherwise, argues Nicholas A. Paleveda of the Northeastern University, Boston, in a paper titled ‘ When Higher Tax Rates Help the Economy - Professor Paleveda's Paradox .' Going back to 1951 when the highest marginal tax rate was 92 per cent, and wrapping up with the present when the highest marginal tax rate is 35 per cent in the US, the study compares the returns of the S+P 500 and their relationship to the highest marginal tax rates during that time period.

Reviewing the data, Paleveda notes that the optimal tax rates to keep the economy moving forward falls between 39.6 and 50 per cent. The call for lower marginal rates or the benighted “tea party” movement appears only to hurt the people who are supporting the movement, and the pledge not to raise taxes appears also as a pledge not to help the economy, he adds.

Better off

To those who wonder how higher marginal tax rates can help the economy, the author's answer is that money is taken out of circulation when tax rates are lowered as wealthy individuals are able to save more money, money that is not being spent on goods and services. Another answer he comes up with is that when tax rates fall and the government borrows money to fund the deficit, this creates an economic climate that exists today in the US.

The paper concedes that it is difficult to conclude why higher marginal rates actually help the economy; but reiterates that historically it appears the optimal rate is between 39.6 and 50 per cent. “In fact, wealthy people may be better off with a higher marginal tax rate as the GNP appears to increase which actually will increase their wealth as much of their wealth is tied to the S+P 500. If marginal tax rates go up 5 per cent but the stock portfolio increases 15 per cent, perhaps that is a tax increase that makes sense.”

A paper that we should keep away from the North Block!

Size effect

Among the recent research papers from the World Bank is Mohammad Amin's ‘ Quality of Tax Administration - How Relevant Is Country Size? ' It opens by stating that a striking feature of the limited literature that exists on country size is that size does not seem to matter much for various social and economic variables. The author cites, for example, a study by Rose (2006) which uses panel data for 200 countries and for over 40 years for a large number of socio-economic variables. “However, the study fails to find any significant impact of country size on for example, income level, inflation, material wellbeing, health, education, quality of a country's institutions and a number of different indices and rankings.”

Amin informs that his paper takes a novel approach towards uncovering the relevance of country size by using micro or firm-level data on firms' experience with tax administration, an important but neglected aspect of the business environment. And he speaks of results showing that country size matters and in a robust way for the quality of tax administration.

Variables defined

Of interest to students of tax research should be a table in the paper describing variables used in the study. For instance, ‘tax time,' recorded in hours per year, measures the time taken to prepare, file and pay three major types of taxes and contributions, viz. the corporate income tax, value added or sales tax, and labour taxes, including payroll taxes and social contributions, explains Amin. “Preparation time includes the time to collect all information necessary to compute the tax payable and to calculate the amount payable. If separate accounting books must be kept for tax purposes – or separate calculations made – the time associated with these processes is included.”

And the ‘corruption' variable is defined as “average level of the ‘freedom from corruption' score as measured by the Heritage Foundation's Index of Economic Freedom, where the average is taken over 2001-2005 values.”

Insights of import.

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