On July 19 2022 the Hungarian President Katalin Novák signed off a new bill that revises the country’s longstanding KATA tax, in an attempt to bring down abusive false self-employment. However, as the country’s most popular tax option for individual entrepreneurs, its redesign may make it harder especially for many new and young entrepreneurs to jumpstart and run their businesses, writes Róbert Szokolai, affiliate of CESI’s Hungarian member union MKKSz, in a guest commentary for CESI.

KATA refers to Itemized Tax for Small Businesses, which has been the country’s most favourable tax regime for individual entrepreneurs. Its revision will affect roughly 450.000 people using it, including thousands of young people working in the public service. KATA’s preferential tax was set up to help self-employed people, either at the start of their career or with little income, to have a reasonable level of taxation when selling goods and services to private individuals, with little administrative burden. Many hairdressers, electricians, painters and craftsmen fall into this category. According to the new rules, persons that have so far been subject to KATA taxation can no longer work for private individuals anymore, just for companies. Moreover, the level of taxation thresholds under KATA was raised – which means that many self-employed persons or people active in start-ups may hardly make a decent living anymore.

The Hungarian Government claims that changes to the KATA regime were necessary to combat fake self-employment, as many employers seem to have abused the system to hire workers as independent subcontractors under KATA while denying work contracts under registered regular employment. Instead of what the aims are, the abolished KATA will however not only target employers avoiding regular taxation but also impact adversely on actual self-employed persons who will no longer be able to sell their goods and services to individual persons anymore. As such, the revised law may threaten the livelihood of thousands of Hungarian persons, including talented and honest young people, from whom the Hungarian government is taking away their vision for the future. It may leave less opportunities for young people to find work, to make an honest living and become independent.

A regular employment relationship with stable work contracts and paid social contributions and an appropriate level of taxation for both for employers and employees is of course clearly preferable to self-employment. However, in the absence of a real possibility for such long-term arrangements, permanent work contracts, self-employment may be a valid option.

As such, the revision of the KATA law in Hungary may lead to many self-starting individuals to lose their clients and hence mean unemployment – a far worse situation than the present one. Or they may need to take on one or more new clients to make up for losses incurred through higher tax thresholds under KATA. What is worrying too: The bill was made within a mere three days, without social consultations. In the European Year of Youth, legislative steps like the KATA revision that are insensitive to the needs of young entrepreneurs are deplorable.

A better alternative approach would have been to tighten controls by labour inspectorates to detect bogus self-employment rather than making everyone pay for a few free-rides that want to avoid taxation. As unions, we should push for the Hungarian government to reconsider its policy.