In a command economy, the state collects taxes and other charges from enterprises, collectives, cooperatives, and individuals and redistributes the revenue to fund public consumption, new investment, and subsidies for enterprises unable to cover costs. In the late 1980s, Hungary's tax system was very complex. Few tax rules applied uniformly to all enterprises; some tax scales were custom-fit for individual enterprises, sometimes even within the same branch, and the government often granted one-time tax exemptions to financially strapped enterprises. In 1988 Hungary became the first communist country to introduce value-added and personal-income taxes. The government originally intended to use these new taxes to supplant capital, accumulation, wage, and local taxes on enterprises, but it did not abolish all of the existing taxes.
The 1988 tax law for the first time required state enterprises, private businesses, and individuals to account for all business transactions. The government introduced the value-added tax in order to switch its revenue source from the enterprises to consumers; to increase labor expenses in order to improve labor efficiency; to increase prices and enable the government to reduce state subsidies; to raise import, raw-material, and energy prices to encourage their efficient utilization; and to enhance incentives for export production. The government levied the personal income tax in order minimize net income differentials in the state, cooperative, and private sectors; to stifle the growth of the underground economy; to tap previously unreported private income; and to create a means to adjust taxes for inflation. The levying of a personal-income tax was also intended to help eliminate other kinds of taxes that impeded productivity.
Data as of September 1989