Internet tax protests force Orbán U-turn

Viktor Orbán had a water charges moment this week. And – Dublin pols please note – lost. About 100,000 Hungarians rallied on Tuesday in Budapest against the world’s first tax on internet usage, the largest protest since Orbán’s centre-right government took power in 2010. That was after he had already drastically cut the tax by capping it – to no avail. By Friday, reckoning discretion to be the better part of valour, he abandoned the new tax altogether. People power.

Tuesday's demo, largely organised through Facebook, also expressed wider concerns about an authoritarian leader many compare to his pal Vladimir Putin, and whose curbs on NGOs – he claims foreign-funded NGOs act as foreign agents – and on the press have alarmed human rights groups and brought protests from the EU and US.

Orbán won a second term in April when his Fidesz party and a small conservative ally gained a two-thirds majority in parliament, a scale of democratic mandate that, ironically, has no peer in the EU, although Orbán shows less and less inclination to democratic values. Former US president Bill Clinton recently described Hungary's system as "authoritarian capitalism", while, in July, Orbán declared the western liberal model dead, citing the regimes of Russia, China, Turkey and Singapore as the templates to follow.

Illiberal state

“We are parting ways with western European dogmas, making ourselves independent from them,” he announced. “We have to abandon liberal methods and principles of organising a society. The new state that we are building is an illiberal state, a non-liberal state.”

Although promoted by the government as a simple tax-raising measure, many Hungarians saw the new internet tax, coming in the wake of a controversial media tax, as another attack on freedom of information – “an attempt to create a digital iron curtain around Hungary”, claimed Balazs Gulyas (27), a former Socialist Party member who set up the Facebook page that inspired the protests.

The rationale for the tax came from new levies imposed in 2012 on the telecommunications sector, which is dominated by foreign companies with whom Orbán has a particular axe to grind. The operators pay taxes for every minute of voice connections made and every text sent, with a monthly per-user cap.

The internet tax was set initially at a monthly 150 forints per gigabyte (50p) – one news agency estimated it the equivalent of 11 cents per hour on Facebook, €15 per movie stream, €250 for watching a full TV series. The resulting likely charge per household of four could easily have run to €50-€60 a month, no mean cost in a country where the monthly average per capita income is €725.

The cap initially imposed as a result of the popular backlash was an altogether more reasonable 700 forints (€2.50) a month per person, 5,000 forints per company.

The EU has objected in principle to the tax. “It’s part of a pattern . . . of actions which have limited freedoms or sought to take rents without achieving a wider economic or social interest,” said commission spokesman Ryan Heath.

Alarming precedent

The tax was also seen as an alarming precedent that might appeal to other ministers for finance in tapping into the revenue potential of the as-yet-virginal field of internet use, which its vocal defenders regard as untouchable, almost sacrosanct.

And yet, in principle, why not? Governments see all forms of economic activity as fair game for the taxman – remember when they even taxed windows (no pun intended) – and corporate profit tax avoidance in the sector is increasingly coming under the spotlight. As more economic activity moves online it will inevitably become a target for cash-strapped ministers. Whether others, like our own water charge campaigners, will take to the streets is another matter.

What matters to designers of new taxes is the likely knock-on effect on the activity being taxed and on growth more generally – likely to depend on the level of charges; how easy it is for its targets to shift beyond its grasp – not easy in the case of an internet usage tax; and whether it is an effective way to bring those outside the tax net within it.

In the latter respect, Orbán’s plans would have brought a whole new set of economic actors under the taxman’s wing – as well as the majority of taxpayers who are now online, a way of levying teenagers and young people (probably their put-upon parents).

But Orbán’s measure also has to be seen in the light of his own particular brand of right-wing, deeply regressive, consumption-focused taxation – Hungary’s VAT on goods and services is the highest in the EU at 27 per cent, while Hungarians pay a flat income tax of only 16 per cent. Corporate tax is levied at what many see as a generous 19 per cent. The internet tax was another consumption tax that would bear most heavily on the poor.