Unreported Business In Hungary Spreads Budget's Red Ink

Staunching the flow of tax-evasion money is not easy

FOUR million Hungarians - nearly half the country's population of 10.5 million people - take part in the underground economy. The money generated from this activity makes up 24 percent of the country's gross national product (GNP).

That is the estimate of Ildiko Ekes, an economist for the Hungarian trade unions' research institute and an expert on Hungary's underground economy. She reckons that 550 billion forints ($5.8 billion) of the country's economic activity goes unreported for tax purposes. Dr. Ekes does not refer to this activity as the ``black'' economy since it includes legal (but unreported) business, as well as criminal activities.

Ekes's study, which focuses on business activity in 1991, ranges from undisclosed gratuities (a significant source of income for most physicians) to the sale of contraband coffee and cigarettes in subway stations.

``I made estimates in several categories,'' she says. ``First, the greatest amount [of money came from] simple tax evasion by people with mainstream occupations. About 160 [billion] or 170 billion forints [$1.7 billion] in income is earned without earners having paid any taxes.''

Since much of this income would normally be taxed at a 40-percent level, the loss to the government is enormous.

Ekes figures that 25 billion forints ($264 million) goes underground as a result of corruption. The central bank recently announced that 20 billion forints dropped out of the banking system over a three-year period. Privatization of government-owned companies also has created opportunities for company managers to line their pockets through side deals with investors.

Ekes says 60 billion forints is earned by plumbers, electricians, carpenters, and others who perform domestic services and do not report their income to tax authorities.

Blue-collar workers are not the only tax-avoiders, however. Teachers also pocket unreported fees, Ekes says. Physicians, underpaid by Western standards, often accept ``tips.''

``It makes me feel like a taxi driver or a waiter,'' says an internationally prominent specialist.

Another source of unreported income is ``off the books'' work for legitimate enterprises. This accounts for about 50 billion forints, Ekes says. Still another source, worth about 29 billion forints, comes from overcharging customers.

A total of 550 billion forints that passes through the underground economy could generate as much as 220 billion forints ($2.3 billion) in taxes. This would more than eliminate the government's budget deficit, Ekes says. This hidden income represents 23 to 25 percent of Hungary's GNP, she says.

Compared with other countries, Hungary's hidden economy is extraordinarily large, Ekes says. Even Italy's underground economy amounts to only 20 percent of GNP. Undisclosed economic activity in other West European nations accounts for less than 10 percent of GNP. One estimate puts undisclosed activity in the United States at 17 percent of GNP.

The reason for Hungary's leading position, Ekes says, is the growing poverty of its population. The country's tax structure takes approximately 40 percent of an individual making the equivalent of $438 a month.

``The distribution of wealth in Hungary must be reformed,'' Ekes says. She says the government must change its priorities. Less money should be spent on the bureaucracy and the tax structure needs a drastic overhaul, she adds.

Staunching the flow of lost tax revenue will not be easy, Ekes says. ``Tax evasion is a tradition here that goes back to the times of the Turkish occupation.''

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