David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: summer travel, part 3.

We're wrapping up our summer of travel and the trips that we've been taking our listeners on. As with all things here at Tax Notes Talk, the tax angle is always on our minds. And for these trips, we've been talking about the tax systems and tax morale of countries we've "visited."

These trips are inspired by a series our international freelancers and reporters wrote a few months ago, where they considered the social, political, and historical factors that have shaped the public's perception of paying taxes.

In this episode, we'll be traveling to Poland and Hungary. And if you missed the past trips to Greece and Italy and the Netherlands and Brazil, you can find those episodes linked in the show notes.

Joining me now is Tax Notes freelance reporter Emilia Sroka. Emilia, welcome to the podcast.

Emilia Sroka: Nice to meet you, Dave.

David D. Stewart: To set things out, could you tell us a bit about yourself and where you're based?

Emilia Sroka: I'm based in Warsaw in Poland. I'm a licensed advocate and specialist in EU tax law. I've worked in both the private and the public sectors, including the Polish Ministry of Finance. And today, I combine legal practice with academic research and teaching at Lazarski University. I also represent the Polish academia as a member of a VAT expert group, which serves as an advisory body to the European Commission.

David D. Stewart: Now to turn to the topic of tax morale, could you tell us about the Polish tax system?

Emilia Sroka: The Polish tax system is relatively modern, and in many respects, it's not very different from those of other EU countries. I would say that it's based on the same main pillars. So there is value added tax, personal income tax, and corporate income tax. And because Poland is part of the European Union, many aspects of its tax system, especially VAT, is harmonized with the EU law. And Poland has a relatively centralized tax system with most major taxes collected by the central government.

However, local municipalities receive a share of personal income tax and corporate income revenues. And these transfers are crucial because municipalities are responsible for providing many everyday public services such as schools, local roads, public transport, and so on.

David D. Stewart: Could you tell me a bit about your personal experience of paying taxes in Poland? What is it like for you as a citizen to comply with your taxes?

Emilia Sroka: Obviously I pay some taxes, basically a personal income tax and obviously a lot of VAT. And I would say that paying taxes in Poland is not a bad experience because basically everything is nearly prepared for me as a private individual, because even my personal income tax is waiting for me in the system and I can just check my declaration and after, I can just click in the system and send it to the tax authority. Polish tax system in these terms is very modern and digitalized, so it makes my paying tax experience better.

David D. Stewart: In general, how do Polish citizens feel about paying taxes?

Emilia Sroka: I would say that tax morale in Poland is moderate. Survey data showed that only around 35 percent of Polish citizens are satisfied with paying taxes. It's not high. Also, more than 80 percent believe that taxes are too high. And here I would like to stress that this perception doesn't fully match the data. Overall, Poland's tax burden is moderate compared with other countries, and Poland's reliance on special income taxes [is] actually below the OECD average. What I find particularly interesting is that many Poles expect from one side, strong government involvement in social policies. They expect some welfare state, but they often fail to connect social spending with the taxes they themselves pay. As a result, taxes are frequently viewed as a one-sided burden rather than a shared investment.

And I would say that people naturally ask themselves, "Where does my money go?" And if they don't see tangible improvements in their daily lives as a renovated road or I don't know, better public services, they may feel that their contributions simply disappear into the system. And there's an interesting study conducted by the Polish Economic Institute in 2021 — showed that when people learned more about how public money is spent, their overall assessment of state efficiency significantly improved. So I would say that to some extent, this moderate tax morale is linked to limited knowledge about how the Polish tax system actually works.

David D. Stewart: It wasn't that long ago that Poland had a significantly different economic system in place. So with the fall of communism being well within living memory, how does that play into modern perceptions?

Emilia Sroka: Of course, limited tax knowledge is not only the factor behind moderate tax morale in Poland. I would argue that another also very important one is the legacy of communism. During that period, the state was often seen as corrupt, bureaucratic, authoritarian, and this created a strong "us versus them" mentality. "Us" represents ordinary vulnerable people subject to the regime, while "them" refers to those in power who were automatically perceived as adversaries rather than providers of public goods. And this "us versus them" mentality has weakened over time, especially since Poland has changed its political system and joined the European Union. But I think that some of its effects are still visible today. But fortunately, trust in institutions in Poland has been rising. For many years, only around 25 to 30 percent of Poles said that they trust the national government. According to OECD data, this figure has recently increased to nearly 33 percent.

So I think we are slowly moving away from the idea that "the government is taking my money" towards the idea that "I'm investing in my country." I hope that this positive trend will continue.

David D. Stewart: Tell me about the efforts of local governments to get their citizens more involved with paying taxes?

Emilia Sroka: This is a very good question. As I mentioned earlier, municipalities receive a share of residents' income taxes. And to capture these revenues, municipalities try to improve tax morale and encourage people to register and pay taxes where they actually live. How? Basically by making the benefits of taxation more visible. Some local governments have come up with really creative ideas. They run awareness campaigns and offer some incentives. For instance, Warsaw, where I'm based, has organized the lottery with prize such as electric car. I have to admit that I always take part in it, although I've never won. But even without winning, paying my personal income tax here gives me some benefits like a discount on public transport. So this is an important thing for me.

And another tool, and in my opinion, an even more interesting one is the participatory budgeting. Basically, it allows citizens to decide how part of the local budget should be spent. In Poland, it was pioneered in 2011 in the city support. And this initiative came from an informal group of residents and the city authorities agreed to allocate around 1 percent of the municipal budget to projects chosen directly by citizens. And this initiative proved popular and was gradually adopted by other municipalities. And finally, since 2018, participatory budgeting has been mandatory in the cities with county rights.

How does it work in practice? Residents can propose their own project or vote for initiatives submitted by others. The proposals are first subject to formal verification by civil servants and after which there is a final vote. And what are the effects of this tool? I think this tool has a strong educational value. When people can literally see that their taxes help create something tangible, they are more likely to think of taxes as an investment rather than just an abstract burden.

For example, not far from my home, there is a beautiful flower bed and this was created with a sign saying, "Project implemented under the participatory budget." And actually, I voted for this project myself. So that's the reason I know from my personal experience how this mechanism works in practice. And of course, this participatory budgeting is not a perfect solution, especially that this project has to be approved by local authorities it's not always clear why some are accepted and others are rejected. And sometimes there can be delays in implementing the winning projects, and this kind of negative experience can even weaken the people's trust and consequently their tax morale. But still, when participatory budget works well, it gives people a sense of agency and can strengthen trust in local authorities. And personally, I believe that the trust built at the local level can gradually spread to the national level as well.

David D. Stewart: Well, that certainly sounds like a fascinating approach. I really love the idea of paying your taxes and getting flowers and a chance for an electric car. Emilia, thank you so much for bringing the story to us.

Emilia Sroka: Thank you very much, Dave.

David D. Stewart: Joining me now is Roland Papp, a freelance reporter who writes for Tax Notes. Roland, welcome to the podcast.

Roland Papp: Hi, thank you very much. Welcome everyone.

David D. Stewart: To set the stage, could you tell us a bit about yourself and where you're based?

Roland Papp: Yeah, I'm Roland Papp. I'm originally from Budapest, Hungary, but I've been living in Brussels for eight years now. And I'm a journalist writing about Hungary, EU news, and these kinds of topics.

David D. Stewart: Turning to the topic at hand, tax morale, specifically in Hungary in your case. First of all, how does the tax system work there?

Roland Papp: Hungary is a member of the European Union. Hungary is member of OECD. And on that field, however, there are some peculiarities in the Hungarian tax system. So when you look in the big picture, VAT is the highest in the EU. We're at 27 percent for most things. In general, personal income tax is rather low, around 15 percent flat tax rate. And also the corporate income tax is the lowest in OECD with 9 percent. This Hungarian tax system, which is currently there, it's been set up by the previous government, which was in power for 16 years, and they really had this kind of mindset that taxes for companies should be lower and the VAT is rather high. So this is the rather general system in Hungary right now.

David D. Stewart: You're not there currently, but in the time that you were there, what was your personal experience of paying taxes?

Roland Papp: Hungarians don't like paying taxes in general. I think there is this very — and it's a historical thing, I would say, this attitude that there's a lot of mistrust in the state and so on, and people just don't like paying taxes. I mean, I guess I'm sure it's not special and only Hungarian thing, but because of historical reason, I think there is this general attitude that there are also research showing that in general, Hungarians have a really low understanding that the taxes they pay is actually what they get from the state as services. And they'd rather see it as like, "OK, some bad guys take away my taxes," and at the same time they expect that the state should function somehow magically.

There is this general attitude, and especially when I grew up in the '90s, it was even worse because then there was this huge mistrust towards the state, towards the institution. And in general, a lot of people just didn't pay their taxes.

David D. Stewart: Let's get into a bit of the history here. Could you tell us about where this sort of mistrust comes from, that period before the '90s?

Roland Papp: Yeah, so before the '90s, we had a socialist or communist country. It was an independent country from the Soviet Union, but it was under the influence of Soviet Union for sure. And before that, even during the Second World War and before, there were a lot of bad periods for Hungary. And really for centuries, it was a lot of occupation and foreign, let's say, power. So really a lot of Hungarians for generations didn't feel that they are empowered and it's their country, it's their state. During communism for a lot of people, it was really felt that it was really — I mean, we had a foreign occupation by the Soviets. And then the state was omnipresent. People were working for the state. There were state enterprises, state companies, but there was a lot of distrust. And also during the communism, there was this saying that we pretend to work and they pretend to pay us.

And that was the attitude towards the entire state and the Communist Party. I mean, Hungary in general, especially from '60s, '70s, '80s wasn't that crazy Stalinist period. So there were no black cars taking away people in the middle of the night, but still it was an authoritarian country. And yeah, many people didn't feel that their state is working for them.

David D. Stewart: OK. Then we get to the '90s, communism falls. Can you tell us about that transition into the capitalist economy?

Roland Papp: Yeah. Interestingly enough, a lot of parts of the more capitalist economy started in the late '80s. So when still the power was in the hands of the communist party and they introduced the tax system — which we might call a modern tax system with VAT and personal income taxes because the economy was crumbling. And when it finally collapsed and Soviet Union collapsed around '89, '90, we started this democratization and also the capitalist system. And then there was a lot of privatization.

And how it happened is usually these were huge, huge, huge industrial enterprises, which were really not competitive. So once they really should have competed on the market, they collapsed. So there were entire regions where the industry collapsed within days and months, seriously. And a lot of people became unemployed, even though during the communism for decades, it was impossible. It was actually illegal to be unemployed because the state would always find you a job. So then this kind of social turmoil also with the economic turmoil, inflation was really, really high for a number of years in the '90s. It was a hard time for a lot of people to adjust to the system.

Where at the same time, they also saw that the privatization was not really based on market economy as you would imagine, but really it was based on connections and who is a friend of whose. And they got enterprises for really nothing. And some people got super rich, but many people lost their income, everyone lost their security and their faith in the system. So I think that's very important to know that in '90s, there was this social and economic shock for everyone.

David D. Stewart: And what effect did that have on tax compliance?

Roland Papp: That actually was really much affected, because that meant that a lot of people started to do their private enterprises and try to do some business, but they didn't know how to do it. And then the new tax authorities started to being built up from scratch and the people didn't trust them. So what was very typical, there are some research showing that around 20 percent of the economy was not full legal and what was very typical, this rather gray and black economy. So maybe some people were officially registered as working in a company and paid legally a bit, so paid a little bit of taxes, but the majority of their income was in cash really without them paying taxes.

And so it goes also for the VAT system. I mean a lot of small shops, small enterprises, I mean, it's very exciting times from this kind of perspective. A lot of people try to do their fortunes quickly, but it also meant that there was not much trust. They didn't want to pay taxes. And at the same time, the authorities really didn't have the means and the capacity to enforce the existing rules, partly because also the economy was such a bad situation, that even the state authorities were reduced and it was very small without really a capacity and so on.

David D. Stewart: How did Hungary go about fixing this? How did they get more taxes to be paid?

Roland Papp: I think what really helped partly is really economic growth. And what happened throughout more in the 2000s, is that really people were able to pay and then really the more established system and there was established system and established companies. But on the other hand, it was also very much part of it was that the state could really enforce the rules. And a big boost came really when digitalization happened, and that changed a lot.

VAT noncompliance was record high in Hungary for a long time. And then once they really introduced this kind of system where every shop had to have this register directly linked to the tax authority — and that showed a lot of things, not just how much they paid, but they can really have even comparison immediately seeing that if there are a bunch of restaurants in one, I don't know, area and one restaurant suddenly doesn't have any income on that Saturday night, how is this possible that everyone else around them would have that? I think that also really helped how they could enforce these rules and really see more details. And then it worked really to improve the tax morale for the VAT.

And yeah, personal income taxes, I think it was part of it really it was a lot of gradual changes, a lot of changes, for example, for a long time the personal income tax for the minimum wage was tax-free. So on paper, everyone was on minimum wage. And then how this kind of change happened throughout many years, they really improved the morale, then boosted the morale. That was one angle. And the other one is really this kind of attitude towards the state. So there were some really interesting research on that attitude as well. So people don't trust the state. They don't trust others as well in Hungary, which is part of it is typical for our region, but part of it is really specific for Hungary. But at the same time, they also don't want to be judged by the others.

According to some experts, there's research showing that sure, they might not trust the state, but being seen as someone who is failing, who is not doing their obligations and who is punished by the state, that's also something they want to avoid. So that's why the research shows that that really contributes to the morale to boost the morale.

David D. Stewart: What sort of tax compliance are we seeing these days?

Roland Papp: The tax compliance is rather high now. Actually around COVID years, there was a record high compliance with VAT even within the EU. The VAT gap, which was estimated to be around 20 percent in the early 2000s. Then it decreased to 2.5 percent into 2022. So essentially, all the VAT which should have been paid was paid in, which really is a great success of the digitalization. And partly maybe also some experts suggested that also 2022, it was maybe COVID and how things shifted. A lot of more online commerce happening. And now it's a bit more higher, but it still remains below the EU's average, the VAT gap, which is really good success.

David D. Stewart: How does corruption factor into people's feelings about paying taxes?

Roland Papp: Also, when we go back to the past and how it worked, corruption was very rampant in Hungary also for more, let's say, lower level corruption. So really people bribing offices and for example, police officers and so on, in the '90s it was very common. Or if you wanted to get something done with your local authorities, this is how it worked. Now this is not the case anymore, and it was very much cracked down on.

However, there is a very significant part of corruption that people consider it's a serious problem in Hungary, but that's more of a higher-level corruption. According to some research, Hungary has been the most corrupt country in the EU for years now. And that's most likely because of the now previous government led by Viktor Orban, who himself calls himself an illiberal leader. He was in government for 16 years with a constitutional majority and he really reshuffled a lot of things in the state and how the state works. And also it was very important that his cronies, according to many experts, his friends and the family are now the richest people in Hungary. And that's a way of corruption. However, according to many, it was really rather a state capture than a different kind of corruption. So many of it was legal, because they control the state authorities and the state authorities didn't touch them and didn't touch the politically problematic cases and so on.

So when it comes to corruption, for example, taxes, it's very different when you talk about a small enterprise or normal individuals paying their taxes and how they work together with the authorities or what happens when, for example, the son-in-law of Viktor Orban, the previous prime minister — because it seems that when there were some potential corruption cases or questionable situations, then it seemed that the national authorities didn't touch those people who were close to the former prime minister or members of the former government.

This has changed since April. I mean, we now have a new government in Hungary whose pledge was to stop this corruption, stop this state capture. The new government calls it as a mafia-like state, how it was built up during Orban. And this was very much part of the election program and the manifesto. And now the new government has a record high number of seats, and their majority is very strong in the new parliament and they pledge to rebuild this corrupt system.

Some of it when it comes to, for example, taxation was a very problematic, according to many experts, was this kind of way how companies could decide to support a sports club. And that was basically a part of their taxes could be directed to a specific sports club. And what we saw, I mean it could have been some experts told me that it could have been a good idea, and it was a very interesting idea, and could have really helped some of the sports because they were of course under finance before. But what we've seen [is] that instead, €2.4 billion in total from corporate income tax has been redirected to sports clubs, mostly soccer clubs.

And that's specifically true for some of these soccer clubs which had good connections with the previous government. And we knew that most of the members of the previous government, some leading politicians of that political party, had their own sports clubs. For example, a very typical one is Viktor Orban, the previous prime minister, whose home village Felcsút has a huge soccer arena, which has literally the capacity of the soccer arena is larger than the entire village population. It's ridiculous if you see some photos of having a small range of a few thousand people and then you have this huge soccer arena and the sports club and all these hotels and events center and all of that. And many of that is coming from this redirected corporate tax funds.

And of course the question comes that what these enterprises and businessmen expected or what they wanted, were there some kind of favors? Were there some kind of deals in that for exchange that they paid the sports club? These really pet projects of some of these politicians and what did they get in exchange? Well, we have some guesses, whether there was anything illegal that remains to be seen. Hopefully if there were some illegal things and my personal expectation is yes, there must have been a lot of illegal things going on even maybe with these taxes or some other illegal dealings. Let's hope now that the state authorities will go after that and really bring justice to this.

David D. Stewart: I know it's early days, but have we seen moves by the new government to deal with these corruption issues?

Roland Papp: The new government promised very much to end this kind of corruption. One of the main promises was to set up a new national asset recovery office. And now they just introduced the bill to National Parliament about this. Of course, there's a lot of debate on that of how should it work? What kind of powers this new authority have? But they really pledged to go after this kind of corruption, what we've seen in the past 16, actually 20 years they say, because the government before Orban also had their fair share of corruption. So they very much want to end this and want to bring justice.

Now of course time will tell. And of course it's always a tough question how to organize this also to really keep the rule of law. So what exactly are you going to do? And a big problem is that many of these dealings were completely legal, because they made them legal. It remains to be seen.

Now what we've seen, for example, is that there were a couple of smaller case corruption scandals, which were known because of the press. And there were some investigations a couple of years ago, but then they were dormant cases, which involved some government lower-level politicians. Now suddenly, the prosecutors and the police started to do some things. Of course, we will see how it goes. And I don't want to prejudge. It's the courts who will need to deliver the final results, but there are some movements going on. And what is for sure that a lot of people really expect this to happen, and really expect that the new authorities or the existing ones would bring justice and really end this kind of corruption.

David D. Stewart: Well, it's definitely going to be fascinating to see how the new government does and what efforts against corruption might do for tax morale going forward. Roland, thank you so much for bringing this story to us.

Roland Papp: Thank you very much.

David D. Stewart: That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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