To Comply or Evade? Direct Taxes, Private Entrepreneurship and the Institutionalisation of Informal Practices in Hungary, 1945–1956

Abstract Direct taxes are often considered to have had a lesser role in the economic development of communist countries when compared to their equivalents in market economies. This article challenges this view by arguing that direct taxes were critical in influencing the socio-economic transformation of Hungary between the end of World War II and the installation of the pro-Moscow regime of János Kádár after the failed 1956 revolution. Taxes levied on private businesses conditioned individuals’ economic prospects and simultaneously gave rise to various creative practices in economic self-management. Taxation under socialism not only shaped the lives of self-employed people but also had a lasting impact on society more broadly and the communist state itself.

taxes of private businesses and that there were no grounds for councils to override individual tax assessment decisions. However, the secretary of the Pest County Council's Executive Committee did not accept this ruling. Instead of dismissing the case, he instructed his council's Finance Department as well as Patay's local council in Nagykőrös to carry out a thorough investigation of the complaint. The investigation established that Patay not only repaired but manufactured and sold hats directly from his workshop. Moreover, the investigators asserted that Patay's declared income could not possibly provide for his family of three, including private piano lessons for his daughter. The assessors concluded that Patay was liable for direct taxes; however, they decided to deduct 700 forints from his income tax bill. Despite the investigators' conclusion that Patay had substantially under-declared his income, the council took no further legal action against the complainant. 1 This episode provides an intriguing example of the Hungarian communist state's haphazard taxation policy towards the private sector as well as local councils' instrumentality in putting central directives into practice during the 1950s. Patay's letter caused uneasiness among officials within local councils on various levels. Although the field assessors made several accusations against Patay and his family's petit-bourgeois traits and seemingly made him admit to their accusations of tax evasion and illegal manufacturing, the investigators still decided to favour the complainant's appeal by deducting 700 forints from his income tax. This decision reflected the Hungarian government's new direction in economic policy following the removal of Mátyás Rákosi from his position as prime minister after Stalin's death. This was only a partial demotion, ordered by Moscow, as Rákosi was a diehard Stalinist. He continued to exert influence as First Secretary to stymie Nagy's reform efforts (Rainer 1996, pp. 9-21;Gyarmati 2011, pp. 329-42). Evidently, the finance department's bureaucrat at the county level who first rejected Patay's appeal had failed to notice this change of times.
During Mátyás Rákosi's Stalinist dictatorship (1948)(1949)(1950)(1951)(1952)(1953), the state's social categorisation of individual tax subjects (for example, 'kulak' or 'petit bourgeois capitalist') had provided the basis for applying punitive tax obligations through unlawful coercive and administrational practices. However, worsening economic indicators, induced by the Rákosi regime's poor judgements about Hungary's maximum industrial output and its increase of production targets within the first five-year plan in 1951, clearly signalled to the post-Stalinist Soviet leadership that their Hungarian ally had to revise its economic policy to avoid social unrest (T. Varga 1992;Pittaway 2004). Consequently, the Communist Party's Central Committee's decree of 28 June 1953 had condemned the previous regime's errors in economic policy including the state's attempt to eliminate private business activities. 2 On 4 July 1953, the succeeding government under Imre Nagy  52. cs. 24. ő. e., 1953 június 27-28, pp. 216-34. (1953-1955) therefore decided to lay more emphasis on improving the standard of living and increasing the availability of consumer goods and services. 3 In order to achieve these ends, the government's newly permissive strategy set out to grant social and legal space for the private sector to function effectively. This was particularly significant in the countryside where the first five-year plan's emphasis on heavy industry at the expense of the agricultural sector and local industry had failed to provide for people's everyday needs (Csikós-Nagy 1953). As in Patay's case, however, local council bureaucrats frequently continued to classify and treat tax subjects by ideological categories. Under the Nagy government, from being an instrument of state coercion, direct taxation evolved into a distorted regulatory mechanism which influenced the profitability of private-sector undertakings, inflation levels through the availability of goods and services, and individuals' sense of lawfulness and fairness in state policy in terms of economic selfmanagement. Although the discussion of generic economic notions such as 'profitability' and 'inflation' continued to be taboo in official documents, the story of Patay's income tax shows the ways in which central government's, local councils' and society's conceptions of the socialist economy was changing on macro-, meso-and micro-levels respectively, even before the beginning of widespread discussions about economic reforms in intellectual circles in the 1960s.
Economists have hitherto paid limited attention to direct taxes because of their presumed lesser fiscal significance in the economic management of socialist states. János Kornai, for instance, argued in his account of mechanisms of centrally planned economies in the early 1990s that 'direct taxes paid by the general public [were] tiny compared with the other sources of budgetary revenue' in socialist economies (Kornai 1992, p. 138). His argument, similar to other scholars (Holzman 1955, pp. 177-214;Hutchings 1983, p. 36;Nove 1987, pp. 236-37), took mainstream economics as their point of departure and suggested that the importance of taxes is generally proportionate to their quantity on the revenue side of the government budget. While a quantitative outlook is important, direct taxes were also essential to centrally planned economies in other ways than economists have conventionally considered. These can be discerned when we approach taxes from a qualitative standpoint, focusing on their social implications. Through taxes, states can influence the stability of the currency, express public policy by advantaging or disadvantaging certain social strata, subsidise or eliminate certain industries, and isolate and assess the costs of certain presumed social benefits or harms (Ruml 1946, p. 36;Mitchell et al. 2019, pp. 323-25). From this standpoint, taxes are political constructs, and decisions on the ways citizens should be taxed are essentially political acts. Through a closer qualitative analysis of taxes, a fuller picture can be drawn of the character of fiscally structured relationships among individuals, and between citizens and political regimes as well as of the economy that they together constitute (cf. Kotsonis 2016). 4 Direct taxes were primarily levied on the self-employed in communist states, yet no studies have explored the implications of taxes on private economic activities, informality and the general development of the second economic sphere. 5 Studies of Hungarian socialist small businesses suggest that it was the state which mostly allowed private property and private economic initiatives to become more important as a result of the legalisation of various mixed ownership forms and the introduction of other economic reforms in Hungary under János Kádár's term as First Secretary of the Communist Party after the failed revolution of 1956. This sociological literature focuses mainly on the study of the second economy and the development of informal economic practices (for example, in the forms of general corruption, tips, gratuity payments to doctors and health care workers (hálapénz), and so forth) within general society as a result of reforms. 6 In a similar vein, Róna-Tas (1997) also argued that the private sphere became gradually more prominent in influencing socio-economic and political change in Hungary after the disintegration of universal state employment from the 1960s onwards. These interpretations, however, are overwhelmingly state-focused accounts of historical change and limited in their scope to the 1960s, and especially, the post-1968 period under the New Economic Mechanism. These studies overlook continuities in the evolution of Hungarian communism and neglect to pay serious attention to private-sector production, informality and the negotiating powers of individuals working in the private sector, already prevalent prior to the reform socialist period from 1956 onwards.
This article will explore questions of socio-economic change, development and continuity in Hungary's postwar and 'classical socialist' periods between 1945 and 1956: during the short-lived democratic interlude of 1945-1948, Mátyás Rákosi's Stalinist dictatorship of 1948-1953, Imre Nagy's 'New Course politics' of 1953-1955 and the Muscovite-clique's return to power in the 1955-1956 period. It will look at taxation policy, tax assessment methods and practice, and the broader social consequences of taxes and their effect on the transformation of socio-economic structures from the vantage point of private business. I argue that direct taxes were crucial fiscal devices levied on the population by the communist regime to influence the socio-economic transformation of the country. Coercive taxes on independent businesses conditioned individuals' economic prospects to a high degree both under Rákosi's Stalinist dictatorship and after, while simultaneously giving rise to various creative practices in economic self-management for those who attempted to retain their autonomy in the face of a centralising state. Artisans who wanted to remain independent in the new economic environment were not merely vestiges of the previous order as communists imagined at the time. Rather they were social products of communism with distinctive features illustrating continuity between the capitalist and the reform socialist regimes.
I develop my argument as follows. I first assess how economic turmoil in the postwar period provided the Communist Party with an opportunity to reinterpret the purpose of taxes on both public and scientific platforms to lay the socio-economic foundations of 5 Throughout the study I use 'informality' to denote various-illicit, tolerated or simply 'off-the-record'economic practices that did not conform with the 'formal' codified requirements of the Hungarian communist regime or its institutions. On the concept of the 'second economy', see Gábor and Galasi (1981). 6 For a review of this literature, see Sík (1996) and Germuska (2008). their proletarian dictatorship. Second, I show the ways in which the communist state utilised various administrative and coercive techniques to appropriate wealth remaining in the private sector in the 1949-1953 period. Here, I also show how, despite the communists' short-term successes in drastically reducing the number of private businesses, especially from the Second Party Congress in February 1951 to the beginning of Nagy's premiership in July 1953, their policy caused a backlash and began to provide a stimulus for individuals to circumvent administrational controls over their business activities, in particular, to evade their arbitrarily assessed tax obligations. Third, I show how political changes, namely the introduction of the Nagy government's reform programme in July 1953, resulted in a temporary imbalance between the central government, local councils and other public bodies which gave further space to individuals to resort to informal practices to maintain their private enterprise.

Postwar recovery and the Communist Party's rethinking of taxes
Between 1930 and 1945, under the regime of Miklós Horthy, the opposition kept the country's social inequalities and premodern economic structures on their agenda. With the end of World War II and the fall of the Horthy regime, these parties, ranging from the most popular centre-right-conservative Independent Smallholders, Agrarian Workers and Civic Party (Független Kisgazda-, Földmunkás-és Polgári Párt-FKgP) to the Communist Party, were ready to take control of Hungary and implement reforms in the new political climate provided by the Soviet Red Army. Although the political programmes of these parties crucially differed on the extent of nationalisation and the market economy, they generally agreed that reforming Hungary could not be delayed any longer. The land question, the reform of authoritarian political structures and the need to address unequal wealth distribution through a new progressive taxation policy were central themes in the programmes of all political parties. 7 Against the backdrop of hyperinflation between July 1945 and July 1946 (Bomberger & Makinen 1983;Siklos 1991;Botos 2016), the subject of taxation gained more importance in postwar politics. At a time when consumer prices doubled every 15 hours (Liping 2018, p. 107), the communists seized the opportunity to reconsider the general purpose of taxes. In the communists' view, indirect taxes, especially those levied on consumption, were 'anti-social', while direct taxes were considered 'just' in the reallocation of wealth (Antos 1946, p. 183). There was also wide agreement among party ideologists on the pages of 7 See the Communist Party's political programme (accepted as the joint programme of the Hungarian National Independence Front (Magyar Nemzeti Függetlenségi Front) in December 1944): 'Magyarország demokratikus újjáépítésének és felemelkedésének programja', Néplap, 30 November 1944, pp. 1-2. Later the next year, in preparation for the parliamentary elections of 4 November 1945, the Communist Party, the Social Democratic Party (Szociáldemokrata Párt) and the National Peasant Party (Nemzeti Parasztpárt) all proposed progressive taxation in their political programmes; see, respectively, 'Magyarország újjáépítésének hároméves terve ', Szabad nép, 23 September 1945, pp. 1-2;SZdP (1945) and A Nemzeti Parasztpárt programja (2004). The FKgP, on the other hand, decided not to publish a detailed proposal as it considered Hungarian society to have already agreed on remedying economic issues. It deemed instead that the election would be about the public's decision on the ideology of Hungary's future administration (Vida 1976, pp. 89-90). the Communist Party's social-scientific journal, Társadalmi szemle (Social Review) that taxes should not be levied mainly on sales of manufactured products but rather on capital goods and conspicuously luxurious individual lifestyles (Gerő 1946;Hajmási 1946;Mód 1946Mód , 1947. Instead of being seen as a means to rechannel a proportion of money to the government through a balanced combination of direct and indirect taxes, communists argued that the state should actively shape society by using direct taxes to either favour or disadvantage certain social strata through a political assessment of individuals' observable wealth. 8 The communists used their redistributive tax programme to gain popular support. At a time when government revenue barely covered 10% of expenditure (Bomberger & Makinen 1983, pp. 804-5), communist rhetoric emphasised socio-economic inequality, contrasting the lifestyles of the 'wealthy' with those of 'the working people', and claimed that the increased hardships of hyperinflation were exacerbated by 'hoarding', 'black marketing' and 'speculation'. 9 To make a case for their policy to levy special taxes on the 'rich', the communists argued that the currency's depreciation was, in practical terms, a form of taxation which had the gravest consequences for the livelihoods of stateemployed workers and other salaried personnel (Varga 1946, pp. 484-85). 'Fizessenek a gazdagok' ('Make the Rich Pay') was the communists' main slogan in 1947, appearing almost daily between May and September on the pages of the communist paper Szabad nép (Free People). The question of who was considered rich was answered, among others, by the then 19-year-old János Kornai, later a renowned economist, who listed the most conspicuous characteristics of the wealthy, when compared to labourers, in an article in Szabad nép in October 1947 (Kornai 1947, p. 5). The article appeared under an illustration in which 'speculators' and 'black marketeers' were presented as rats, wearing top hats and smoking cigars.
Generally, the communists treated artisans and merchants, together with small and middle peasants, in sharp contrast to the 'wealthy' in communist propaganda at the time. Both the surtax (illetménytöbbletadó) of July 1946 and the one-time capital levy (vagyondézsma) on gross wealth exceeding 75,000 forints per capita, introduced in August 1947, were intended to address the top-earning segments of Hungarian society. 10 These special taxes generally left small-scale businesses intact. In order to win the support of small business owners, communists claimed that the progressiveness of their new taxation policy shielded the independent low-income population in the private sector from the unfavourable effects of direct taxes. 11 Statistics show that direct tax payments per head in the capital in May 1947 on average totalled 46.61 forints, almost nine and a half times higher than the countryside's 4.96 forints (Szőnyi 1947, p. 261). These significant variations in individuals' average tax payments between capital and countryside suggest that the higher-income population, which was mostly concentrated in Budapest after the land reform of 1945 in which large land holdings were expropriated and redistributed, was successfully targeted through the tax system, and that the communists were only gradually moving to address self-employed members of society through direct taxes as the nationalisation of the economy was reaching its peak after 1949. 12 In reconstructing the economy, the strict collection of direct taxes was used consistently to balance the government budget and to maintain the new currency's stability (Bomberger & Makinen 1983, p. 816). During the postwar period, however, the range of tax subjects liable to direct taxes in the private sector continued to shrink as the nationalisation of the economy proceeded. Collective contracts between trade unions, enterprises and the state legally bound these parties to pay their workers and civil servants within given wage ranges and gave employers the responsibility of handling payment of income tax on behalf of their workforce from as early as April 1945. 13 Thus, in the 1945-1948 period, the communists predominantly relied on their large-scale nationalisation policy to expand their power over the private economic sphere, while new direct taxes were used to force Hungary's wealthier population to contribute to the country's reconstruction. After their takeover in 1948, the communists began to use direct taxes to fine-tune their envisaged ideal society in which private capital was to cease to exist. István Antos, one of the Communist Party's chief economists, for instance, argued in 1948 that it was unfeasible to shift the tax burden towards large estates in the three-year reconstruction plan (1947)(1948)(1949) because of the communists' land reform of March 1945. He also argued that a significant proportion of industry had already been nationalised by 1948, which implied the reduction of wealthier strata who had already been levied extra taxes by this time. Indicative of the party's future policy, he noted that small-scale industry remained almost intact in places where a significant proportion of revenue was generated in 'private capitalist workshops' (Antos 1948, pp. 107-8). The political leadership accepted, out of necessity between 1945 and 1946, and decided willingly, for political reasons, after June 1947, to rely on the country's own productive base for reconstruction as the Soviet Union forbade Hungary to participate in the Marshall Plan and no equivalent was available to fund postwar reconstruction and development. 14 Hungary's approach to reconstruction was not atypical in postwar Europe up to 1947 as other nations in the West similarly used special taxes levied on the wealthy, economic planning and the nationalisation of various industries to redistribute national income and improve the general standard of living (Berend 2006, p. 216;Scheve & Stasavage 2016, pp. 89-92). Fiscal policy (Cairncross 1985, pp. 17-20;Daunton 2002, pp. 194-228) and reform of the taxation system (Lynch 1997, pp. 79-85;D'Attoma 2018, p. 119) were similarly used to fight inflation and to fund the rebuilding of their economies. In the Hungarian case, there was a general agreement within the Magyar Nemzeti Függetlenségi Front from the end of the war until at least the parliamentary elections of 4 November 1945 to remedy socio-economic inequalities through direct taxes. 15 While in the 1945-1948 period an individual's wealth determined their tax burden, after 1949 the 12 On the composition of Hungary's interwar society, see Gyáni and Kövér (2006). On the socio-economic effects of the land reform, see Donáth (1969, pp. 390-93).
communists began to articulate that private property was a source of inequality for 'reinforcing capitalism' and had to be sanctioned accordingly. 16 Although a relatively high level of social engineering through the tax system was already exercised by the Hungarian state in the immediate postwar period, radical changes were only made to the tax collection system after the introduction of the first council law in May 1950 which established the Sovietstyle local governance system and became a vehicle of eliminating small private businesses in Hungary. 17 Since the communists had assigned taxing powers exclusively to the state already in 1948 (Feitl 2009, p. 44), the first council law of 1950 only sealed councils' fiscal subjection to the central government by degrading them to be 'local organs of state power' (Hungarian Constitution 1949, ch. 5) according to the Leninist principle of 'democratic centralism'. The first council law abolished local governments' fiscal autonomy and subordinated councils to the Ministry of Interior opening the way for the communist state to impose unrestricted fiscal control over small businesses.
Direct taxes, the sanctioning of private entrepreneurship and the breakdown of (over)centralised planning After the nationalisation of large enterprises (employing more than 100 workers) had been completed by 1948, the communists shifted their attention to privately owned small and mid-sized businesses. Artisans' and merchants' private ownership of capital goods became an often-discussed question in leading party circles; however, the party wanted to avoid direct confrontation with small business owners at the time. 18 The communists saw the artisanry in 1949 within their schematic class model based on a unity of workers, peasants and the intelligentsia. One part of the artisanry was seen as 'exploiters' who employed others and the other as 'workers' who exclusively used their own capacity to labour. While the Communist Party considered the elimination of the former group necessary, it imagined the latter to form a separate unit that could be persuaded to support the building of communism. 19 Although the party publicly deemed the application of coercive measures unnecessary until 1949, to nationalise 'non-exploitative' small private businesses, in the succeeding years, and especially after the Communist Party's Second Congress in February 1951, the party took a harder line in pursuing its economic objectives. 20 In the months following the 1951 congress, several revisions were made to the first fiveyear plan (1950)(1951)(1952)(1953)(1954) that resulted in increased investment in heavy industry and military production at the expense of the agricultural sector and small-scale industry (Germuska 2012, pp. 50-3). 21 In order to fund Hungary's heavy industrialisation and militarisation, the Ministry of Finance and the People's Economic Council began to increase tax revenue targets in their quarterly taxation plans from 1951 to increase pressure on councils to fulfil their directives. From this time on, the employment of workers or the ownership of capital goods were not the only relevant factors in the taxation of small businesses; whether private economic activity was considered by local authorities to be 'complementary to the state sector from the perspective of the people's democracy' was also key. 22 The Soviet-style council system was essential for the implementation of the communists' taxation policy. While in the 1948-1950 period self-governments preceding the Soviet-style council system mainly targeted larger private businesses in a haphazard fashion, in the 1951-1953 period, the new local councils were more focused in their application of the tax policy (Csikós-Nagy 1954, p. 53). The introduction of the adórészesedési rendszer (tax-share system) in January 1951 in the countryside and in July 1951 in Budapest incentivised councils to use taxation as a means of compelling private workers to join collectives, in return for a share from taxes collected. 23 While the central government subsidised individual councils' budgetary expenses until January 1951, the introduction of the tax-share system changed this practice by compelling councils to fund their budgets exclusively from the taxes they collected. Apart from motivating councils to develop a collective interest in meeting their plans, the new system gave a crucial fiscal stimulus to council authorities on an individual basis as well. For instance, councils received monetary bonuses from the central government when they fulfilled their tax collection targets. While three-quarters of this sum could be put towards sports and cultural initiatives, 25% had to be spent on cash rewards to persons who provided significant assistance to their councils to meet their fiscal targets. 24 This administrative mechanism not only attempted to motivate councils and their staff in their daily work but to exceed their already high taxation targets-with great success, as concluded by a Ministry of Finance report in 1952. 25 By early 1952 both the chairman of Budapest City Council's Executive Committee and representatives of the Ministry of Finance openly admitted that taxes were to serve a political purpose, that is, to eliminate those private businesses which local councils deemed unnecessary. 26 In September 1952 the head of the Budapest City 21 For a more comprehensive account of the building of the command economy in Hungary, see Pető and Szakács (1985). 22  Council's Finance Department reported that the number of small-scale businesses subject to income taxes decreased by 40,000 people, yet authorities increased the city council's assessment target from 144 million forints in the fiscal year of 1951 to 175 million forints in 1952. As the executive explained in his report, this decision intended to restrict private activities to an even further degree than had already been achieved by this time. 27 It proved to be a successful strategy: a former tax official who emigrated to the West later admitted to his interviewer in 1956 that it was widely known that unbearably high taxes -paired with tax inspectors' 'constant harassment through confiscation, house searches and execution [of court orders]'-had a significant role in forcing people out of the private sector and into collectives at this time. 28 Taxation, similarly to other fiscal measures at the time, was used to support Hungary's industrialisation in order to control demand and prevent inflation, thus maintaining currency stability. In order to finance Hungary's ambitious militarisation plan, the tax burden on kulaks and other private-sector workers was raised throughout 1952. 29 Broadening the definition of kulak served this purpose. In the case of Budapest, for instance, when district councils could not find satisfactory numbers of kulaks to meet the interior minister's order of drawing up new kulak registers, the city council's revision committee intervened to 'realise the decree's political significance' and added new names to the list. 30 The definition of 'kulak' was thus swiftly transformed, from private farmers whose land ownership exceeded 25 kataszteri hold (kh) in 1949, to include almost anyone who gained an income in the private sector by 1953. 31 Even after July 1953 when the moderate Nagy took over as prime minister from the hardline Rákosi, authorities considered the removal of individuals from the kulak register as a legitimate compensation for their confiscated working equipment, as discussed later in this article. The number of private businesses fell sharply from 180,087 in December 1948 to 46,199 in February 1953 through the gradual linkage of ideologically grounded economic policy and institutional reforms in local government (KSH 1956, p. 80).
A report investigating physical violence and threats during the assessment and collection of taxes reveals the social dynamics and institutional hierarchies in place between the communist state, state enterprises, the higher-ranking county councils, and district and village councils and their residents in Kecskemét District in 1951-1952 Szujovszki, a former accountant in the village of Lajosmizse, explained in January 1954 during his interrogation by Kecskemét District Council, ordered by the Imre Nagy Secretariat upon the complaint of István Szórád after the Nagy government had abolished kulak registers in summer 1953, that the arrival of a man named Faragó, a representative of the state-owned Wine Trade Enterprise, caused concern among authorities in his village in winter 1952. Faragó came with clear instructions from the Bács-Kiskun County Council's Finance Department to confiscate all available wine stock belonging to 'kulaks' in the area. When local authorities questioned him on how to proceed in cases when individuals had no outstanding dues or even a credit balance-in a particular case, a farmer was 1,806 forints in credit-Faragó reassured everyone that his instructions were explicit and that all taxes must be increased to assist his work of confiscating wine stock from kulaks. Szujovszki explained that he had even made a call to the district council to confirm Faragó's claim and had been warned not to hesitate in carrying out his orders, as the county council's directive had to be executed by all means. Szujovszki said that he knew that what he was being instructed to do was unlawful, so instead of adding punitive taxes, he credited the value of the wine stock to the abovementioned farmer's tax balance, making him 6,141 forints in credit as a compensation for the confiscation. He said that it was a standard procedure at the time and that hundreds of similar incidents had taken place in his area. 32 Meanwhile KIOSZ, the organisation nominally 'representing' artisans' interests, which had estimated its members' income taxes and submitted them for approval to county councils since 1948, also clashed with councils both during high Stalinism as well as in the period of Imre Nagy's premiership. According to KIOSZ's local organisation in Bács-Kiskun County in August 1953, Kecskemét District Council put the blame of estimating higher incomes taxes on KIOSZ in their communications with artisans. Moreover, according to the KIOSZ Bács-Kiskun County local organisation's report on the general mood of artisans following the announcement of the Imre Nagy government's reform programme, councils often overrode KIOSZ's recommended tax estimates and levied taxes arbitrarily during the summer of 1953. For instance, in the cases of the artisans Pál Szabó, István Halmi and József Péli, Lajozsmizse Council nearly tripled KIOSZ's official estimates from an average of 2,200 forints to 5,900 forints. In other cases, in Kecskemét and Kiskunhalas, local councils reduced the income tax levied on some of the higherearning artisans and moved the balance to the accounts of other artisans who should have contributed less according to KIOSZ. When a KIOSZ representative asked Kiskunhalas Council why this practice occurred all over the county, Krammer, a council accountant from Kiskunhalas City Council's Finance Department, explained that taxes had to flow in cumulatively and what had been deducted in one case had to be added to someone else's account. 33 In this way, councils not only excelled in fulfilling their centrally administrated planning directives but used fiscal planning to target individual artisans, often in a subjective manner.
Between June and early July 1953, Kecskemét City Council's Finance Department even advised their artisans not to pay their taxes to KIOSZ's tax community as they presumably expected the Rákosi government to dissolve the organisation; however, following the demotion of Rákosi on 4 July, this did not happen. 34 The above account of formal interactions among authorities shows the way in which the Soviet-style council system introduced a new and rather disorganised institutional hierarchy to Hungary's local governance system. In this new system, county councils, along with the Budapest City Council, ranked the highest and city-district and village councils the lowest, while KIOSZ was gradually marginalised in the assessment of taxes. Higher ranked councils exercised control over those below them and also served as courts of appeal. 35 As a result of these institutional reforms, between the establishment of the Soviet-style council system in May 1950 and the abolition of the Ministry of Interior's supervision over councils in July 1953, authorities could easily exert direct control over individuals and their businesses through taxation. For instance, Ambrus Szekeres, a tradesman from Farmos, was first warned in person by a tax inspector that he had accumulated 2,358 forints in arrears on his tax account in 1952. Although Szekeres explained that his local council had recently returned 400 forints of overpayment to him, he received a warrant in the following days stating that he now owed, on top of the 2,358 forints, an additional 7,300 forints of fines to the tax authorities. A local communist party member visited Szekeres again, suggesting that he offer his carbonated water plant to clear his debt. 36 Lacking the finances to settle his imposed debt towards the state, Szekeres signed a waiver of property rights. Shortly after this event the council cleared 719 forints of turnover tax and the 7,300-forint penalty from Szekeres' account, while 1,639 forints were paid out to him, leaving him now to repay precisely the remaining identical sum left in his arrears: 1,639 forints. The council's cunning tax calculation shows that direct taxes during Hungarian Stalinism between 1949 and 1953 served two purposes: to confiscate capital equipment and to compel individuals to join manufacturing cooperatives. Surtaxes were constructed in a way to reflect neither the real value of equipment nor a realistic penalty for non-payment of tax. Moreover, as the above case demonstrates, in most cases non-payment of taxes did not constitute a basis for surtax assessments. Instead, the condition of the private ownership of capital goods served more frequently as the basis for councils to assess punitive taxes during 34 MNL OL XXVII-F-3/135d., '33/10/1953. Jegyzőkönyv. Felvétetett 1953. július 2. a KIOSZ Megyei Titkársag irodahelyiségében'. 35 This was referred to as kettős alárendeltség (double subordination) in legal language, meaning that local councils were subordinate both to the central authorities and to the council immediately above them in rank. The system went through several changes throughout the socialist period after the introduction of the first council law in May 1950, first with the second council law in 1954, and subsequently, the third council law in 1971. In essence, councils' 'double subordination' meant very little independence from central authorities, especially in the early 1950s. See MNL OL XIX-L-1-aa/247d., 'A megyei, járási, városi és községi pénzügyi szervezet kiépítése tárgyában, 1950. március 27'. 36  Mátyás Rákosi's Stalinist dictatorship until 1953. Even in March 1954, nine months after the announcement of Imre Nagy's reform programme, the city council deemed Szekeres' transaction legal, as Szekeres had 'voluntarily offered his plant for purchase' and in exchange 'received 9,658 forints compensation' cumulatively to settle his 'overdue debt' to the state. 37 The state's extended authority over individuals' finances under Rákosi's tenure as party General Secretary remained porous. The arbitrariness of councils' tax assessments as well as the coercion and harassment of artisans and small business compelled many to find ways to contest state authority inflicted upon them. 38 Freedom in the use of one's labour was a key factor in earning a higher income in the private sphere than would have been possible in the state sector. 39 For instance, due to the lack of specialised employment opportunities in stateowned large scale industry, local state industry still represented the sole source of legal employment for those who were elderly or had a medical condition that could not be accommodated elsewhere (Csikós-Nagy 1954, p. 12). 40 Accordingly, many referenced their age and chronic conditions in formal communications with authorities to explain their reluctance to take up a job in large scale industry. 41 On this basis, artisans often requested outworker status to work exclusively from home for a homecraft cooperative and, through the 'tacit acknowledgement of councils', privately doing informal work at their clientele's homes in the case of service providers. 42 Working at a homecraft cooperative had the advantage of providing people with a 'pseudo occupation' which rendered them 'workers' on state records and helped them to show a validated employment to authorities. In this way, artisans could continue working from home and preserve their freedom over their labour-time. 43 Paradoxically, the state's increased authority over the finances of individuals played a part in facilitating second-economy activities as the private sector shrank. 44 A cosmetician explained that although her formal wage at a homecraft cooperative was 'desperately low', she was able to take advantage of the high demand for cosmetic products and services in Budapest even before reforms of the Imre Nagy government in July 1953. Her daughter sent her Western cosmetic products from Canada and she continued to work privately for her clientele in her apartment. To gain more time for private-sector work, 37 MNL PML XIII.3/b/3d., Case number: 772/1953. 38 According to a former tax inspector, it was widely known that authorities would assess taxes arbitrarily, 'only by looking at one's face'; see HU OSA 300-40-4:18/26, Item No. 9585/56, 'Tax Policy and Farmers', p. 3. 39 HU OSA 300-40-4:18/26, Item No. 1190/64, 'Problems of Private Business in Hungary', p. 3. 40 Local industry remained relatively disorganised throughout the 1950s. Enterprises under the supervision of local councils, manufacturing cooperatives and private small-scale industry, including independent artisans who owned a workshop, domestic artisans who worked in their homes and migrant artisans who travelled between villages for work, all fell under this category (Gervai 1960, pp. 113-14). 41  she 'subcontracted' ('albérletbe adta') her job informally to an elderly couple marginalised by the communist state. This way her norms were always fulfilled on time and she could present herself as committed to the cooperative while carrying out illegal work in the private sector. 45 Others seeking income in the private sphere were disadvantaged not only by the near non-existence of raw materials, but all aspects of the taxation system. 46 An independent hatter's family could only make 10 forints on each manufactured hat sold in their workshop in this period. Their raw materials quota in 1953 only covered one-tenth of their workshop's requirements. 47 In order to keep their business afloat, they purchased further fabrics through a dealer by paying 20-30% above official prices on the black market. Later they switched to another supplier to circumvent the middleman, thus managing to save between six and eight forints on each order of fabrics. 48 In communist legal parlance, selling goods at a higher rate than that established by the Planning Bureau was labelled a 'price-boosting activity', which entailed serious retribution when uncovered in the 1951-1953 period. Despite this risk, increased production costs were often reflected in prices of commodities sold in private workshops (Gervai 1960, p. 246). The hatter's family declared less income and evaded taxation to cover their black-market purchases of materials. 49 Even though both the income tax law of 1949 and its 1951 amendment allowed tax subjects to formally appeal tax assessment decisions, artisans had the common experience of councils routinely raising dues on receiving appeals in the 1951-1953 period. 50 A female dressmaker commented on this practice to her interviewer after fleeing to the West in the following way: The 400 forints profit per month that I declared, of course, did not reflect reality. The authorities knew this just as well as I did. It is common practice in Hungary that independent workers swindle wherever they can. Nobody would change this and nobody finds anything wrong with it. One of my acquaintances had a lingerie-sewing workshop on Fehérhajó Street. This poor woman had tried to be too honest and declared each of her earned fillérs [the subunit of the forint]. The tax levied on her business thus exceeded her gross income. It seems as if the authorities operated under the assumption that she already evaded her taxes so they levied more on her business than what she earned in total. The result was that she had to give up her artisans' licence and today she lives from renting out her workshop. 51 Artisans often contested the state's fiscal authority over their business by evading taxes. 52 Declaring a lower figure than the actual turnover of one's business allowed individuals to negotiate an equitable tax rate through formal channels: We declared 700-750 forints profit officially [a month]. Whether they believed that an artisan can make a living out of selling 240 hats, and repairing a few shabby hats for a whole year, I do not know. I presume that they did as they never initiated any inspections or proceedings against us. Had they looked at the post office, they would have certainly noticed that we often received packages in various sizes to our address; from this, they could have guessed that we received raw materials illegally. Luckily, however, they did not think of this. The reality is that our monthly income was approximately 2,500 forints per month. On average we sold 200 hats in a month. The rest came in from repairing them. 53 Both of the above cases indicate that artisans at the time generally lost their trust in local authorities and felt it necessary to evade taxation to survive. Social contract theory holds that taxation generally represents a social institution on an abstract level between a sovereign (a state, a government or a monarch) and its citizens (O'Neill & Orr 2018). This hypothetical contract supposedly assigns states the task of creating prosperity in exchange for which citizens willingly give up a proportional amount of their income to the state budget. Communism was built specifically on such an explicit promise to create a fairer and more just society than that offered by the bourgeois state (Kotkin 1995;Lebow 2013). Instead of the state collecting a proportional amount of a private property owner's financial income through the tax system, state-employed citizens in a socialist state contributed to the building of communism exclusively through their own labour, using 'socialised' capital equipment in exchange for centrally set wages. Increasing the direct tax burden of the so-called 'capitalist elements' was theoretically considered a source of funds for Hungary's industrialisation (Friss 1951, p. 31). As a punitive tax-burden regime was placed on the private sphere in the name of communism, direct taxes in practice became less important as government revenues than as an exercise in social engineering, with the ultimate goal of crushing private businesses and transforming Hungary's traditional employment structures. Taxes in this period were a means for the communist state to rethink forms of ownership on a larger scale than ever before and to subject private activities to strict state authority on collectivist grounds. This compelled people to question the social foundations of their taxes and prioritise their own material wellbeing, which was consistently precarious at this time. Although local councils practised various modes of persuasion, they used direct taxation most vigorously to manipulate people's sense of legitimacy about actions taken against them, as many of the complaints and petitions received after the introduction of partial reforms on private small business by the Nagy government from July 1953 attest. 54 The events described above, which took place between 1951 and 1953, shed light on two opposed yet parallel understandings of economic justice in Hungary. One was the communist state's collectivist conception; the other, the individualism of many of its citizens. Each was fundamentally linked to the two sides' differing views on property rights and ownership forms. 55 53 HU OSA 300-40-4:18/26, Item No. 10162/54, 'Troubles of an Independent Hatter in Kapuvár', p. 6. 54 See letters from individuals in the files of the Imre Nagy Secretariat: MNL OL XIX-A-2-v. 55 For a further theorisation on economic and distributive justice vis-à-vis property rights, see Murphy and Nagel (2002).

Political reforms, the revival of the private sphere and the spread of informality
Tax evasion continued to spread following the announcement of Imre Nagy's reform programme on 4 July 1953 in parliament. Although the report of a special committee investigating errors in the taxation system concluded that it was incapable of determining clear and just taxes, the new regime decided to leave the structural foundations of the tax system largely unchanged. 56 Accordingly, direct tax rates as well as tax estimates remained disproportionately high in the private sector relative to businesses' manufacturing and operating expenditures (Gervai 1960, p. 216).
While the new regime preserved the 1951 tax law with its steep progressivity, it also set out to foster private-sector activities through the gradual loosening of centrally administered constraints as part of its welfare agenda. For instance, from July 1953 the new government made it easier for artisans to obtain licences to work privately and increased private businesses' raw materials quota to revitalise small-scale production. 57 As a result of this policy, the number of artisans working privately more than doubled, from 46,199 in February 1953to 103,922 in December 1954(KSH 1956. In spite of the reforms proclaiming a more permissive strategy towards the private sector, local councils continued to obstruct people in obtaining licences on the grounds of the previous regime's policy which considered private business inferior to the state sector. 58 City, district and village councils, effectively continuing the policy of the Rákosi regime, often labelled small business owners 'kulaks' and threatened them with high tax assessments if they complained to higher authorities. 59 In one case, local functionaries threatened an artisan that if 'he complained to the national radio station, he would be taxed so heavily that he would not dare resume his trade'. 60 In another instance an artisan was accused of 'kulak speculation' for making a claim for his confiscated working equipment, as well as 'class exploitation' for attaching a petition written by his colleagues who wished to use his equipment in exchange for rent. 61 On another occasion the head of Kapuvár City Council's Finance Department threw a complainant out of his office, calling him a 'kulak' and telling him to 'go to hell' with his request for a reassessment of his tax bill. The official later admitted confidentially to his colleague that the complainant's claim was legitimate but meeting such demands would have made fulfilling the council's tax plan impossible. 62 At a higher level, county councils, which in July 1953 became directly supervised by the Council of Ministers instead of the Ministry of Interior as part of the Imre Nagy's government's institutional reforms, confirmed to complainants that the central government no longer considered them 'kulaks' with respect to taxation. 63 It became the norm for higher authorities to overrule city, district and village council decisions both in citizenry tax appeals and licence rejections. 64 It was rare, though, for successful complainants to receive adequate financial compensation or to secure the return of confiscated equipment. This would have entailed the rethinking of the primacy of state ownership within the economy and would have clashed with the interests of manufacturing cooperatives, the direct beneficiaries of purges in the private sector. Instead, artisans were encouraged to apply for short-term loans to fund their purchases of capital equipment to start their businesses. There was little uptake by artisans, however, of this state-sponsored loan scheme until early 1954 as they feared that a 'Sword of Damocles was hanging over their head' and the regime would revert to its policy of assault on private property (Gervai 1960, p. 93), a fear that was present at least until the 1970s (Valuch 2005, p. 179). 65 Additionally, shortages of raw materials meant that taking out a loan was pointless for many artisans. In one case, shortly after signing a loan contract in early 1954, a barber found himself chasing his supplier and his local KIOSZ office in Fejér County for months on end, only to find that his desired equipment and cosmetic ingredients were out of stock due to shortages. 66 The county council practice of overruling unfavourable verdicts by city, district and village councils on permit applications began to have an impact on artisans' strategy of tax decision appeals. Artisans realised that instead of turning to their local councils for support, they could petition higher ranking authorities directly with more success. The Ministry of Finance, for example, reported that more than 90% of the 22,157 complaints they received between January 1954 and December 1955 were actually tax appeals and that individuals had turned to them to circumvent their responsible authorities and gain legal redress. 67 Meanwhile, artisans continued to under-declare their incomes. One of the central issues in 1954 for the KIOSZ's local organisation in Csongrád County was that artisans did not declare income gained from their sales and a large number of them appealed their taxes. 68 Márton Laukó, the KIOSZ secretary in Csongrád County, went as far as to say that tax declarations by artisans were completely meaningless. 69 Authorities generally believed that declarations did not reflect actual incomes when compared to the material living standards of artisan families, which they continued to determine personally through formal visits. 70 In the period, however, they turned a blind eye to tax evasion as well as to widespread informality in the private sector, fearing that prosecutions would only cause political distress which the Nagy government aimed to avoid. 71 From July 1953, the Nagy administration's private business reforms and the simultaneous preservation of high tax rates came to contradict each other in terms of rational economic management and resulted in anomalies and growing informality on the micro-level. Artisans, however, realised that the inefficiencies of the tax system could be turned to their own advantage to maintain their businesses. An artisan who had a dyeing and dry-cleaning business in the 1954-1955 period in Budapest explained that even though he had abundant orders for his services, his business could not have been profitable for both him and his assistant due to the heavy tax burden which compelled him to evade paying tax. 72 Had he paid his income and employment taxes honestly, he would only have been left with a total net profit of 712 forints a month for both him and his assistant to pay out as wages. When asked by his interviewer after fleeing to the West whether it was normal for artisans to work for such slim profits, he replied that the tax system did not allow artisans to do private business by the book. Without evading taxes, in his view, private business owners simply would not have been able to make a living and that 'the tax authorities ought to know well [that those who persist in the private sector] are black marketeers who steal and lie'.
Upon the advice of fellow artisans, he had resorted to various-in his word 'trükkök' (tricks)-to manipulate his tax estimate. One was to pay his tax advances only after the payment deadline had passed, to give the impression that he was struggling to make ends meet. In 1955, before his semi-annual tax bill calculation was due in July, he decided to avoid paying his tax advance altogether for the tax month of May to show signs of material hardship to authorities. On this occasion, a tax inspector visited him and confiscated a radio from his apartment. Subsequently, he settled his balance, but he thought that the bluff at least 'served as tangible evidence to the authorities that I struggled to pay my taxes. Naturally, however, I always had a few thousand forints in my pocket so I could have paid my taxes comfortably, but it was much smarter to do it this way'. 73 As no one-often, according to the Ministry of Finance, not even authorities themselves -knew what councils actually based their estimates on, private businessmen and women thought that hiding as much income as possible was the best way to avoid unforeseen tax collections. 74 Artisans thus forged their cash books and manipulated their sales of goods and services to hide their real profits from the tax authorities. 75 Often working 12-14 hours a day-significantly more than the authorities based their estimates on-and procuring missing raw materials through the black market in one's remaining free time took effort and there was a sensible limit to the growth of wealth through private initiatives. 76 As artisans became more experienced with the communist bureaucracy, informal practices to work around administrative constraints and, crucially, the regime's overall taxation policy, became widespread among them. For instance, turnover tax could be avoided by using materials brought directly to the workshop by customers because there was no record of purchase. 77 Artisans also often relied on their professional networks to circumvent the steep progressivity of the tax system. To do this, artisans who had abundant orders informally carried out work under the name of colleagues who had fewer jobs at the time. Thus, no one lost money, as the person physically completing the job did not have to account for any increase in his already high income so he/she avoided being placed in a higher tax bracket by the tax authorities. 78 Artisans realised higher profit margins by manufacturing consumer goods rather than solely through the sale of services. They managed to do this in spite of the heavy and unpredictable taxes imposed on them by the state. 79 Against the communists' anticipation of gradually approaching a classless society devoid of private property, the pressing tax burden and anomalies of the tax system came to serve more frequently as a stimulus incentivising private production and increasing the appeal of private over public ownership in the period under study as well as in the years to come. Paradoxically, businesses facing higher taxes were encouraged to manufacture consumer goods and to increase the profitability of their production through alternative means, which often consisted of black market dealings, bribery and false accounting. 80 The more profit businesses made, the more opportunities and incentives they had to further evade their taxes to escape punitive measures targeting their private undertakings. 81 Artisans found themselves in a vicious circle: even if they did not intend to evade, tax authorities would have based their assessment on the assumption that artisans falsified their incomes, which in turn compelled them to evade. 82 Instead of using direct taxes to construct a more equal society, as has been often the case in contemporary market societies, the communists' taxation policy contributed to the development of fierce inequalities both among private entrepreneurs, and between private entrepreneurs and state-employed personnel. 83 While from the 1960s a new stratum of 'új gazdagok' (nouveau riche) 84 was emerging in the private sector whose primary concern was not knowing how to invest or consume their income by avoiding the unwelcome attention of tax authorities, another, larger group of artisans working in the private service industry and lacking cultural and social capital, was only just surviving under the tax burden imposed by the socialist state. 85 Instead of remedying these developing inequalities, the regime of János Kádár took a neutral stance after the 1956 revolution by preserving the flawed tax system for many years to come. From the late 1950s, state propaganda accommodated the new political climate. From vilifying the private sector as a hotbed of 'petit bourgeois sentiments', propaganda switched to portraying artisans as a homogeneous collective of specialised workers who rightfully deserved the public's support for their labour (Gervai 1960, pp. 352-59). 86

Conclusion
This article has shown that direct taxes were important fiscal tools of socio-economic policy in the period after World War II and before the 1956 revolution in Hungary. While during the coalition years (1945)(1946)(1947)(1948) the communists predominantly relied on their large-scale nationalisation policy to expand their power over the private economic sphere, after their takeover in 1948 they used direct taxes to fine-tune their envisaged ideal society. Even though the communist regime seemingly commanded full authority through the taxation system, there was an obvious limit to state power which artisans came to exploit in the period. Individuals exercised economic rationality and resisted state authority by using the inefficiencies of the tax system to their own advantage. '"Manipulation" towards the tax office', as one artisan referred to tax evasion in the 1960s, increasingly became the norm among private businesses as tax authorities assessed individuals' incomes and their corresponding taxes through their haphazard and arbitrary method of estimations. 87 On the one hand, tax authorities assumed that artisans declared unrealistically low profits and therefore routinely estimated higher income taxes. On the other hand, artisans declared lower profits than what they had actually realised, in response to their shared experience that, irrespective of what amount they declared, local authorities would always estimate greater dues, which could easily render their enterprises unprofitable. Tax bargaining turned into a vicious circle, in which process general distrust became the norm between the state and private small businesses, while the result was a tax amount which no one believed to be accurate, but which both parties deemed equitable from their own short-term interests. Taxes became points of contestation between individuals who attempted to earn an income in the private sector and the communist state. 85 On the stratification of private business owners by income as conceived by Hungarian interviewees in the West, see HU OSA 300-40-4:13/21, Item No. 2581/62, 'Situation of Maszek Tradesmen', pp. Informal economic practices continued to grow equally on the micro-level throughout Rákosi's high Stalinism of 1951-1953, Nagy's 'New Course politics' of 1953-1955 the Muscovite-clique's return in power in the 1955-1956 period. Although Moscow's reinforcement of the communist hardliner faction in power seemingly brought the Nagy government's reforms to a halt in 1955, the new regime did not attempt to eliminate private businesses this time. Instead, it even began to support artisans' exports to Western markets (Gervai 1960, pp. 254-58). As the taxation system largely remained unchanged, more and more artisans came to evade their taxes to the extent that tax evasion eventually became a crucial characteristic of socialist private business until the liberalisation of business laws in 1982 and the introduction of the personal income tax law (személyi jövedelemadó-SZJA) in 1987. Contrary to the regime's ambition of doing away with private property, the private sector became more important over time. Paradoxically, the distorted taxation system ultimately contributed to the development of private small enterprises, which gave individuals the opportunity to accumulate private wealth. Instead of reforming the tax system and regulating informal processes of private wealth accumulation, the Kádár regime consolidated its power by accepting these practices as a means to improve the material conditions of Hungarian society. It also gave an opportunity to state-employed workers to participate in private-sector production through various mixed-ownership forms and condoned the widespread existence of informality in economic life. Instead of regulating private economic activities and reducing socioeconomic inequalities, the Hungarian socialist taxation system came to encourage private wealth accumulation, informality and second-economy activities during the years of Hungarian socialism. SZINAN RADI, Doctoral Researcher, University of Nottingham, University Park, Nottingham NG7 2RD, UK. Email: szinan.radi@nottingham.ac.uk http://orcid.org/0000-0003-3096-7725