About Miracles and Misperceptions: Lessons from the Percentage Mechanism in Hungary

For optimal readability, we highly recommend downloading the document PDF, which you can do below.

Document Information:

This document has been provided by the
International Center for Not-for-Profit Law (ICNL).

ICNL is the leading source for information on th e legal environment for civil society and public
participation. Since 1992, ICNL has served as a resource to civil society leaders, government
officials, and the donor community in over 90 countries.

Visit ICNL’s Online Library at
for further resources and research from countries all over the world.

Disclaimers Content. The information provided herein is for general informational and educational purposes only. It is not intended and should not be
construed to constitute legal advice. The information contai ned herein may not be applicable in all situations and may not, after the date of
its presentation, even reflect the most current authority. Noth ing contained herein should be relied or acted upon without the benefit of legal
advice based upon the particular facts and circumstances pres ented, and nothing herein should be construed otherwise.
Translations. Translations by ICNL of any materials into other languages are intended solely as a convenience. Translation accuracy is not
guaranteed nor implied. If any questions arise related to the accuracy of a translation, please refer to the original language official version of
the document. Any discrepancies or differences created in the tr anslation are not binding and have no legal effect for compliance or
enforcement purposes.
Warranty and Limitation of Liability. Although ICNL uses reasonable efforts to include ac curate and up-to-date information herein, ICNL
makes no warranties or representations of any kind as to its a ccuracy, currency or completeness. You agree that access to and u se of this
document and the content thereof is at your own risk. ICNL discl aims all warranties of any kind, express or implied. Neither ICNL nor any
party involved in creating, producing or delivering this document shall be liable for any damages whatsoever arising out of access to, use of
or inability to use this document, or any e rrors or omissions in the content thereof.


About Miracles and Misperceptions – Lessons from the “percentage
mechanism” in Hungary
By Nilda Bullain, Program Director, European Center for Not-for-Profit Law

There is an old Hungarian tale about the farmer girl who was very poor but very smart
and fulfilled even the most impossible demands of the king that he posed for his future
wife. The future wife would have had to bring a present to the king and not; she would
have had to wrap it up and not; she would have had to give the gift and not. The poor girl
took a white dove, put it in a wire cage, gave it to her little sister to carry and when the
king opened the cage, the dove flew away. And the king married her as a reward. This
tale presents the possibility that if you are smart you will be able to give and not give at
the same time. This principle is more or less what the “percentage philanthropy” solution
follows – no wonder it is a Hungarian “invention”.

The so called “one percent law” 1, adopted by the Hungarian Parliament in 1996
introduced a special mechanism in Hungary by which every taxpayer may designate one
percent of his or her paid personal income tax to a qualified beneficiary of his or her
choice. In this paper first we would like to describe the main characteristics of this
mechanism and then assess its impacts to date. Hopefully this analysis will help better
understand the nature of the percentage mechanism and therefore contribute to a more
effective implementation of such system in Poland.

I. The One Percent Law in Hungary

In this first part, we will examine the designation mechanism as prescribed by the law, as
well as how it works in practice and the results of its operation in the past seven years.
This part contains a description of legal provisions as well as facts and figures relating to
the implementation of the law, that serve as th e basis for a more in-depth impact analysis
provided in the second part.

I.1. Basic features of the system

In Hungary, individual taxpayers – natural persons – may designate one percent of their
income taxes paid to a qualifying nonprofit organization and another one percent to a
church. In addition to nonprofits, there is also a list of budgetary institutions; while as an
alternative to a church, a special budgetary priority objective is named each year. In this
way there are four categories of beneficiaries:
• The first one percent may be designated to associations, foundations and public
foundations 2 (hereinafter: NGOs) conducting publ ic benefit activities, or
• State institutions, such as museums, libraries or the National Opera.
1 Act CXXVI of 1996 on the Use of a Specified Portion of the Personal Income Tax 2 Foundations established by Parliament, government or local government


• The second one percent may be designated to a registered Hungarian church
denomination, or
• An issue of national significance, determined by Parliament annually – e.g. flood
relief or emergency medical services.

There are further requirements for the NGOs to be entitled to receive the one percent
designations. These relate to ensuring accountability and proper use of the taxpayer’s
funds and include the following:

• The beneficiary NGO has to be in existence for at least two years prior to the year
in which the designation was made (however, in the case of prominently public
benefit organizations
3 this is only one year).
• NGOs entitled to receive designations have to be carrying out at least one type of
public benefit activity (the Law on Public Benefit Organizations, hereinafter: the
PBO Law, determines 22 types of these activities
• NGOs also have to comply with the provision of the PBO Law that prohibits
conducting direct political activity to public benefit organizations. 5

However, NGOs in Hungary do not need to have a public benefit organization (PBO)
status to be entitled to receive the one percent designations. In fact, the designations reach
a much broader range of NGOs than those that are also PBOs. For example in 2003, 44%
of NGOs received designations, while only 36% of NGOs have had a public benefit

Furthermore, a beneficiary NGO must be “operating in the interest of domestic
population or cross-border Hungarians.” This clause may prohibit some NGOs from
collecting one percent designations, namely those that are working in the interest of
development in another country, e.g., in South Eastern Europe or Africa.

Finally, the beneficiary NGO may not have a public debt (for example, debt occurred in
tax arrears, payments of social security benefits or pension allowance). However, as of
2002, the NGO is actually permitted to have such debt, but must make a statement
authorizing the tax authority to pay the debt from the amount of the one percent
designations received by the organization.
I.2. Technical workings of the designation mechanism

Taxpayers make the designations on special forms enclosed in the tax return. In order to
fill the form they only need to know the tax identification number of the beneficiary (to
3 In Hungary there are two levels of public benefit status. The “prominently public benefit” status entails
higher benefits bu t also higher accountabilit y requirements for NGOs
4 Act CLVI of 1997 on public benefit organizations, Art. 26 (a) 5 Art. 26 (d) defines direct political activity as “political party activity and nomination of candidates for
Parliamentary and local governmental elections at the county level, including the city of Budapest”.
6 Based on the 2003 report of the Tax Authority on the use of percentage designations ( www.apeh.hu ) and
the 2001 report of the Statistical Office on the NGO sector , infra page 7.


provide the name is optional but may help in identifying the beneficiary in case of doubt).
Taxpayers slip the forms into a closed envelope and post it together with the tax return

In Hungary, about 50% of taxpayers submit a tax return sheet through their employers.
When the employer files a tax report for the employee, the employee has to hand a sealed
envelope containing the designation forms to the employer. This envelope has to bear the
signature of the employee over the seal. The employer sends the envelopes along with
the report to the tax authority.

The Tax Authority separates the envelopes and the designation forms, thereby ensuring
for data protection (the records of designations will not contain the data of the
7 The system in Hungary needs to be anonymous due to data protection
reasons. This has two aspects. Firstly, the designation is considered sensitive information
as part of the tax return form (e.g. the annual income of the taxpayer may be calculated
based on this information). Secondly, in Hungary the Law on Freedom of Religion
prescribes that the state may not keep a record of the religious affiliation of a citizen.
Designations made to churches are classified as such records and it is therefore prohibited
to keep the records of designators. The signifiance and effects of the anonymous system
is discussed in this paper ( see pages 18-20).

Taxpayers must submit the return forms and with them, the designations by March 20 of
each year. The tax authority processes the forms and sends a notice to the beneficiary
NGOs by September 30. NGOs have 30 days to prove their entitlement and if they are
successful, the tax authority transfers the amounts designated by November 30.

I.3. Facts and figures of the last seven years 10

Generally, 30-33% of taxpayers take advantage of this opportunity by making a
designation to at least one beneficiary. The majority of taxpayers makes a designation to
an NGO beneficiary as opposed to a public institution. The amount of designations
directed to public institutions is in fact considerably less than those supporting
nongovernmental organizations: the number of designations to public institutions was
20,000 in 2003, compared to 1,338 million designations for nongovernmental
organizations. The inclusion of public institutions into this scheme is widely debated.

Hungarians are also less likely to designate to churches: in 2003, churches received about
half the number of designations to NGOs (635,000). This reflects the trend of the past
years as well.
7 The envelopes and forms are coded and may be realigned only in case of a dispute or if the taxpayer
demands information regarding his or her own designation.
8 Act IV of 1990 on the Freedom of Religion, Freedom of Conscience and Churches, Art. 3(2) 9 In case the tax authority refuses entitlement to an NGO, there is room for appeal to the court and an
expedited procedure takes place. The court has to make a ruling in 15 days.
10 All data and figures in this and the next section (I.3. and I.4.) are either taken directly from or based on
the yearly reports of the Hungarian tax authority on the use of the designations, published on the Internet
www.apeh.hu . (unless referenced otherwise).


Number of beneficiaries and total amount of 1% designations in Hungary,

1997 – 2003

10000 15000 20000 25000
1997 1998 1999 2000 2001 2002 2003
total # of be ne ficiarie s total amount of de s ignations (million HUF)

As can be seen from the above table, despite the fact that the number of designating
taxpayers did not significantly increase, the number of recipient organizations as well as
the amount designated shows steady growth over the seven years.

Compared to 12,000 NGO recipients in 1996, over 20,000 NGO recipients were named
by the taxpayers in 2003, and thus 44% of NGOs became beneficiaries of the designation
scheme. (The table above reflects the over
all number of beneficiaries including public
institutions and churches as well. This aggregate number grew from 16,000 to 22,000
between 1997-2003.)

The total amount designated almost tripled between 1998 – 2003 (it also doubled from
1997 to 1998 because 1998 was the first year when churches were included). Taxpayers
designated a total of 3.7 billion HUF (18.5 million USD) in 1998, of which 1.8 billion
HUF (9 million USD) was directed to NGOs. In 2003, the total amount designated was
9.92 billion HUF (50 million USD) and NGOs received 6 billion HUF (30 million USD)
from this amount.

This shows two important factors:

• Taxpayers tend to designate to different organizations each year (hence the
increased number of beneficiaries).
• It is the higher income taxpayers who are more likely to make designations (hence
the increase in the amounts) 11.

I.4. Winners and losers?

Most of the funds from the one percent designations are disbursed in small amounts
among recipient organizations. In the year 2003, most NGOs (over 9000) received
designations of between 100,000 – 1 million HUF ($450 – 4500). At the same time only
800 NGOs received between 1 –5 million HUF ($4,500 – 22,000); 80 NGOs received
between 5 – 15 million HUF ($22,500 – 68,000); and a mere 18 organizations were
designated more than 20 million HUF ($90,000).

Therefore, the system provides small amounts of money to most organizations and only a
fraction of the NGOs can consider their income from the 1% designations to be
significant. However, for many small organizations, even the small amount of
designations constitutes a major part of their yearly budget.

It can also be seen that very few organizations manage to attract a high number of
designations. In 2003, there were only 95 organizations that received support from more
than one thousand taxpayers, and only 8 that were named by more than 10,000 people.
The NGO topping the list in this year was a child cancer organization, which received
151 million HUF ($686,300) from 39,000 taxpayers. On the other end of the spectrum are
hundreds of NGOs who received designations from only one or two taxpayers.

In terms of the areas of activity that taxpayer prefer, the most frequently supported issues
have been education, social care and health care. Specifically, foundations set up by
schools and hospitals receive a major part of the designations. At the same time, among
the organizations that repeatedly receive the largest amounts from the largest number of
people, we can find two recurrent areas of concern: child cancer and animal rights. (See
for example Table 2 ) Interestingly, foundations (as opposed to associations) continually
receive about 2/3 of the designations.

? Most frequently requested NGOs in the NIOK telephone hotline in the last 3 years* :
? Child Cancer Foundation ? Foundation of Heim Pál Children’s Hospital ? Foundation for Children with Leukemia (T űzoltó Street Hospital) ? Rex Dog Shelter Foundation ? Miskolc Special Rescue Team Foundation ? White Cross Animal Protection League ? Budapest Zoo ? Red Cross ? Pet ő Institute Public Foundation for Special Education ? Red Nose Clown Doctors Foundation
11 In fact, this finding is also supported by research made in 2000, see infra Page 10 Note 21.

*NIOK is a resource center that provides information on NGOs for taxpayers during the 1%
campaign period
Source: www.onepercent.hu

I.5. The context of NGO financing

A further piece of information that will help put the one percent scheme into perspective
is a short description of the larger context of government financing in Hungary.

Over the last ten years, government financing of the nonprofit sector has more than
doubled in volume. (See Table 3) This was in part due to the introduction and
establishment of a range of quasi-governmental organizations, such as the public
foundations and public benefit corporations. These nonprofit organizations are
autonomous but founded and financed for the most part by governmental agencies.
These, as well as other nonprofit organizations, especially those that have a “prominently
public benefit” status have been playing an increasing role in the provision of public
services, such as education or social care.

The Hungarian government indeed recognized the role and importance of these
organizations and of the nonprofit sector in meeting the needs of Hungarian society
during this transition period. Unfortunately, increased support and interest on the
government’s part also meant an increased influence of it on the nonprofit sector.

In terms of its structure, state oriented quasi NGOs (public foundations, public benefit
corporations) gained a greater proportion than before. Numbers of associations, sports
and hobby NGOs, interest representation and advocacy organizations diminished, while
the number of institutions of NGOs and those engaged in regional and economic
development increased. “We are witnessing not simply a change in proportions but the
actual contraction of the part of the sector that can be considered really ‘civil’, voluntary
and nongovernmental” states the Statistical Yearbook of 2000

State financing for NGOs today is available through a range of central and local channels
and it amounts to 150 billion HUF ($750 million) a year, constituting more than 1/3 of
sector income. (See Table 4) However, the revenues from the one percent designations
account for only 0.8% of the total income of the nonprofit sector in Hungary. This equals
3.3% of total governmental support for the sector.

The significance of the 1% scheme in this context is that it represents a small portion of
public funds that are provided to NGOs without the political strings attached. In the case
of the one percent mechansim, access to public funding depends not on the ability of the
NGO to write “winning” proposals and lobby decision-makers in the Parliament or
ministries; but on their ability to reach out to their constiuencies and communicate about
12 Kuti Éva, Bocz János, Mészáros Geyza, Sebestény István, Emri Istvánné: Nonprofit Organizations in
Hungary (Nonprofit Szervezetek Magyarországon), 2000, KSH (Report of the Central Statistical Office),
page 25.

themselves convincingly to the average citizen in Hungary. These charachteristics have
differing impacts on the development of NGOs and on the effectiveness of public
spending (see Analysis of potential impacts below).



Source: Kuti Éva, Bocz János, Mészáros Geyza, Sebestény István, Emri Istvánné: Nonprofit Organizations
in Hungary (Nonprofit Szervezetek Magyarországon), 1993 and 2001, KSH (Reports of the Central
Statistical Office)

Financing of the nonprofit
11% 32%
16% 14%
Government support Statutory activities Other
Business activities Private support

Channels of Support for Public Financing of Nonprofit Sector in Hungary Total financing in 2001: 150 billion HUF ($750 million)*
Centrally (77%) Locally (20%)
Parliament ? Government ? Local Council ? Local Council Committees ? Ministries ? Mayor ? Public Foundations ? Public Foundations ? Central Funds ? Local tax designation of companies*** ? Normative Support**

*VAT refunds account for 2.2% and the one percent designations for 0.8% of government
**Per capita support to nongovernmental social service providers ***In some localities companies may designate 1% of their local business tax to an NGO based
on the laws of the local government
Source: Kuti Éva, Bocz János, Mészáros Geyza, Sebestény István, Emri Istvánné: Nonprofit Organizations in Hungary
(Nonprofit Szervezetek Magyarországon), 2001, KSH (Report of the Central Statistical Office)


II. Role and impact the One Percent Law in Hungary 13

The percentage designation system is a “special animal”. This designation is not a
donation, a tax benefit or a tax incentive in the strict sense of these concepts 14; and yet
legislators have had the assumption that it may nevertheless have a significant effect on
philanthropic behavior in transitional socie ties. At the same time, the percentage
designation in the legal sense is a special form of tax allocation and therefore has an
effect on the redistribution of public funds as well as on the understanding of citizen

In fact, it is this multifunctional nature of th e percentage mechanism that makes it rather
unique – and quite unpredictable. Its intended impacts are severalfold and there are a
range of reasons governments and NGOs have used in campaigning for its adoption. In
the following we will examine this idea in the light of the possible rationales that support
it. All of the following four rationales were in some way mentioned during the political
debate that preceded the adoption of the law in Hungary.

II.1. Policy rationales that support the introduction of the law

One rationale is that of what one author calls “taxation self-determination ”15, i.e. the
possibility that tax paying citizens make auto nomous decisions on the use of a – whatever
small – portion of their income tax, thereby exercising direct democracy. Hungarian
researchers examining the impact of th e law entitled their book “Citizen’s Votes”
reflecting this principle. In the context of th is rationale, the mechanism is actually a tool
of strengthening democratic values (in this ca se, citizen participation and taxpayer control
of spending public funds) in transition societies.

Another rationale is that of “civil society development” , i.e. the role this mechanism can
play in strengthening civil society by (a) providing new resources to the NGOs, (b)
raising awareness about NGOs, and (c) increasing the skills of NGOs in communication
and community outreach. In light of this argument, the mechanism actually helps
educate the general public about the role and importance of NGOs and at the same time it
motivates NGOs to communicate with the public . These functions are crucial in societies
that are ignorant or hostile with NGOs. Also, importantly, the one percent provides
13 Some parts of this Section II are also elaborated on in a paper by this author (N.B.) entitled “Percentage
Philanthropy and Law” and presented at the Percentage Philanthropy Conference, January 19-20, 2004 in
Budapest, Hungary
14 A donation is given from the donor’s own property, while in this case, it is given from public funds. A
tax benefit or a tax incentive means a financial (economic) benefit to the donor as s/he will have to pay less
taxes. This is not the case with the percentage designation where taxpayers have to pay the same amount of
tax whether they make a designation or not.
15 Erzsébet Fazekas, The 1% Law in Hungary: Private Donation from Public Funds to the Civil Sphere ,
The Journal of East European Law Vol.7, Nos 3-4, Columbia University (2000), e.g. on page 447
16 Eva Kuti and Agnes Vajda, Citizen’s Votes for Nonprofit Activities in Hungary , Nonprofit Information
and Training Center – Nonprofit Research Group (2000); available at https://www.niok.hu/1/indexe.htm , or
at https://www.onepercent.hu/documents.htm#SlStudies


another income source for these organizations that they can use with relative freedom to
further their cause (as opposed to project funding, the use of which is restricted).

A third rationale is that of “development of a philanthropic culture”. This focuses on the
importance of citizen support to NGO endeavors. According to those emphasising this
rationale, in transition societies there is no tradition of philanthropy (private giving) and
this mechanism may be a good first step in developing such culture, as it encourages the
individuals to think about reasons to support an NGO. In addition, it serves as an
indicator of the level of public support to NGOs.

A fourth rationale is “government outsourcing”, in that the method can serve the purpose
of providing decentralized and depoliticized government support to activities that benefit
the public. In Hungary, government funding is generally viewed as too centralized,
politicized and akin to favoritism. In fact, recent reports revealed that 80% of government
funding to NGOs is provided by the central government
17 and 80% of this central
government funding is being distributed via sole source solicitation (i.e. without a tender
18 According to the arguments of the “government outsourcing” rationale,
because the beneficiary organizations ar e conducting public benefit activities the
government is subsidizing important public tasks, but in a decentralized and depoliticized
way, which is a much needed alternative to centralized and bureaucratic decision making.

II.2. Analysis of potential impacts

It is quite difficult to assess the impacts of the One Percent Law in Hungary, even though
seven years have passed since its introduction. The main reason for this difficulty is the
lack of relevant data. While there have been a limited number of research studies
conducted around 2000, these do not provide enough basis to draw definitive

However, it is not our mandate to draw definitive conclusions about the effects of the
percentage legislation in this paper. Rather, we would like to point our a few potential
relations between the law and the way it has been implemented and the effects that can be
observed, focusing mainly on Hungary and drawing upon the information from Slovakia
as well.

In the following, we are going to examine
• The potential impacts related the above described rationales, i.e. is it realistic to
expect such outcomes at all?
• The actual outcomes related to each rationale, i.e. to what extent has this potential
been realized to date?
17 Központi Statisztikai Hivatal: Nonprofit szervezetek Magyaroszágon, 2000 (Central Statistical Office,
Nonprofit Organizations in Hungary , 2000); page 105
18 Állami Számvevőszék: Jelentés a társadalmi szervezeteknek és köztestületeknek juttatott költségvetési
támogatások ellen őrzésér ől (State Audit Bureau, Report on the Control of Budget Support to Social
Organizations and Public Societies ), September 2002; page 9
19 A similar one percent designation system has been operational in Slovakia since 2002.

We have also made a summary chart of the conclusions (again, subjective and tentative
ones to help orient thinking rather than decisive ones) to provide an overview of the
effects. (See
Table 5)

Assessment of Potential and Actual Impacts of the 1% Law *
1=Poor 2=Questionable 3=Limited 4=High
Rationale / Impact Potential Results
Taxation self-determination 3/4 3
Civil society development 4 4
Developing philanthropy 2/3 2
Government outsourcing 2 1

*based on data from Hungary 1997-2002 and Slovakia 2001-2002

II.3. Taxation self-determination

According to this rationale the intended effect would be to strengthen the democratic
values in society by increasing citizen participation and taxpayer awareness. The
questions are then, what is the potential of the law in contributing to these effects; how
and to what extent the law has contributed to these in Hungary?

Based on the Hungarian experience, the potentia l effect in raising citizen awareness and
participation is definitely there, but to da te the ability of NGOs to fully harness this
potential has proved to be rather limited. Since the first year of the 1% designations, the
number of taxpayers who used the opportunity of tax designation has hardly increased.
The proportion of such taxpayers has been stagnating between 30-34% of all taxpayers
throughout the seven years. “Nonprofit organizations made a major breakthrough in 1997
when they managed to acquire almost half of the 1% designation potentially available to
them, but their performance in convincing taxpayers has not been significantly improved
since then.” – say Kuti and Vajda in the most comprehensive study on the impact of the
1% law to date.

Research both in Hungary and Slovakia clearly indicates that taxpayers with higher
education, higher income levels and those who are engaged in philanthropic activities
(i.e. volunteer or donate to an NGO) are the ones more inclined to take advantage of this
21 In other words, these cca. 30% of the taxpayers are the ones who will take
20 Supra note 16, page 10. 21 E.g. in Hungary 43.6% of taxpayers with monthly income in the highest tax bracket, 52.9% of taxpayers
with a university degree and 49.6% of taxpayers who are on the board of a foundation, exercised their right
to designate the 1% in all three years between 1997-1999. See Vajda-Kuti s upra note 16, pages 16-20; and


advantage the opportunity created by the law because they are citizens who already have
an awareness of democracy, a sense of social responsibility and participate in public
decision-making anyway. While informing them about the one percent as an opportunity
is important, they do not need to be particularly persuaded to use the opportunity.
Therefore, at least in Hungary, the 30% “turnout” could be viewed as a baseline rather
than a result – and in the light of this approach, the aim of increasing citizen participation
in this form of democratic decision-making has not really been achieved.

Another reason to be doubtful about the extent to which this impact has been achieved is
the fact that many people think about their 1% designations as “donations” rather than
“tax allocations”. In the research referenced above, the top reasons people named as to
why they made their one percent designations were echoing reasons of philanthropic
behavior: “The two most frequent assumptions are that taxpayers intend to
help people in
, including mainly the poor, sick and disabled persons, and victims of disasters (22.8
percent), or to
support concrete fields or activities , mainly health care, social services, and
education (22.6 percent) when they designate the recipient of their 1%.” 22 However,
although to a lesser extent we can also find the indications of citizen consciousness: “As
one of them said, people want to promote the notion that
‘numerous highly cultivated
citizens be able to better themselves and the lot of the nation’

The fact that the notion of the designation is often mixed with that of a donation is natural
and understandable, but only underlines the importance of the development of a truly
philanthropic culture. (See below.)

Tax return by employers

Another aspect of the taxation self-determi nation is a problem that all CEE countries
introducing the one percent will have to fa ce, i.e. the issue of employer-provided tax
returns. In these countries where taxation was abolished for decades and the culture of tax
evasion is still very high
24 there is a general custom of employers filing tax returns for
their employees. In Hungary, for example, this is the case when the employee has no
other income than the salary received from the employer. About 50% of taxpayers chose
this way of fulfilling their tax reporting obligations.

In these cases, the taxpayers are discouraged from making the 1% designations as they do
not even fill in their tax forms themselves. In addition, many self-employed
entrepreneurs in Hungary who are liable to file their own tax returns simply leave this
task to their accountants. It could be expected that in such cases the taxpayers will either
not make a designation or make a “surrendered” decision (i.e. they let another person
make the decision for them, such as their bookkeeper or the payroll clerk of their
employer). As for the extent of people not making a designation because of this reason,

for Slovakia: Outcomes of research after the first-year implementation of assignation of 1% of paid tax,
available at https://www.onepercent.hu/documents.htm#SlStudies . 22 Supra note 16, page 7. 23 Id. 24 Supra note 16, page 11


in the research made in 2000, 25% of those whose forms were filled by their employers
reported that the employer did not inform them of this opportunity. This is not good but
also not impossible to decrease in the future.
25 Even more encouraging is data showing
that only 3.2% of all taxpayers who exercised their right to make a designation report
“haphazard or surrendered” decisions.
26 This is also the case in Slovakia, where 2.5%
reported employer instructed designations. 27 Even if we count the “conformity”
phenomena (respondents wanting to conform with perceived expectations, i.e. in this case
they are ashamed to admit the truth), the volume of this phenomena is pleasingly low.

A last point about the employers tax return is that in this case, administrative procedural
considerations may play a bigger role Moreover, in this case, administrative procedural
considerations may play a bigger role, e.g. when completing the designation forms for the
employees is more difficult than for those who file their own returns. This will be the
case in Slovakia as of 2004.

This leads us to the following conclusions:
(a) the fact that employers fill tax returns of employees is likely to be a deterring
factor in making the designation, but not a significant one in itself;
(b) this is even more true if the administrative procedure is not too burdensome for
the employees who want to make a designation;
(c) once the employees decide to make the designation, the employers preferences
will influence only a small portion of taxpayers.

Finally, in relation to the taxation self-determination argument we would also like to
point out another obstacle in the fulfillment of the impact of this principle. This is the fact
that usually the taxpayer cannot or cannot easily check whether the designation was
delivered as intended. There is a tension between the privacy protection considerations
and the need for public accounting, which may be resolved in different ways. In Poland,
however, the designations are not anonymous and the taxpayer has to transfer the given
amount him- or herself to the chosen NGO, thereby exercising full control over the tax
designation process.

In conclusion, we suggest that the percentage mechanism has a good potential for an
impact that is aimed at increasing citizen participation and taxpayer control over public
funds. It has some limitations, especially related to the employers’ tax return and the
ability of citizens to control the execution of their designations by the tax authority;
nonetheless, this potential is significant and important for transition societies. Still, in
order to fully utilize this potential, at least two things are needed:

25 There is, however, a greater “danger” looming in Hungary where the government plans to deliver pre-
completed tax returns to citizens as of 2005. The Tax Office will prepare a tax return for a taxpayer based
on data it has, sends it to the taxpayer, and unless it receives an objection, will consider the tax agreed to. It
is as yet unresolved how the 1% designations will be included in this scheme.
26 Supra note 16, pages 23-25 27 Supra note 20 28 In Slovakia, “regular” taxpayers will have the opportunity to make a declaration in their tax forms, while
those submitting tax returns via employers will still need to post the declaration separately.


• Much more effort on part of the NGOs (and the government) aimed at a
significantly higher level of involving citizens in this scheme (to go beyond the
“30% baseline”);
• More efforts to develop philanthropy as distinct from this form of tax allocation
and raise awareness among citizens of the difference between the two.

So far, the implementation of the law has not addressed these aspects and therefore, the
level of achievement in the field of tax-self-determination can be described as “limited”.

II.4. Civil society development

There are three aspects that we suggest examining under this rationale, i.e. the level of
resources; the level of citizen awareness of civil society and the relationship between the
general public and NGOs; and the level of the development of individual organizations
participating in this process.

Increasing resources

The potential amount of the percentage of all taxes that may be brought into the resource
base of the NGO sector can be relatively easily calculated. A realistic picture implies that
initially about 30% and within a few years, about 50% of the total potential percentage
contributions may be expected as additional resources for the sector. The question then
becomes, what is the significance of this amount in the whole of the sector’s income;
both in volume and in quality.

In Hungary, the total amount designated to civil organizations (excluding churches) has
grown from 2 billion to 6.1 billion HUF between 1997 – 2003. 29 However, this amount
has not reached 1% of the income of the nonprofit sector in any given year; it represents
0.8% of its total income in 2003. As described above, the share of the “1% income”
within government support for the sector is 3.3%.

In other words, this income is not significant in terms of volume of new resources coming
to the nonprofit sector. It is however, significant in terms of the kind of organizations and
activities it supports. Firstly, the 1% reaches out to a wide range of organizations (in
2003, for example, 44% of NGOs received this kind of income); and while not significant
for the sector as a whole, such support may be very significant for the individual
organizations. It seems to be especially important for smaller NGOs: only 4% of the
income of large organisations is from 1% donations, while the smaller ones get
approximately 25% of their income from this source.
31 Second, this support is different
in its quality from the general governmental support because it may be used essentially as
unrestricted income (the only condition of its use being that it is spent to advance the
29 APEH reports on the 1% income, available at www.onepercent.hu 30 See pages 6-7 of this paper. 31 Large meaning a budget of above 10 million HUF, while small meaning a budget of under 100 thousand
HUF. In: Effectiveness of Hungary’s 1% Law – Survey of NGOs, prepared by NIOK, 1999, page 11.
Available at


statutory public benefit activity). Most government funding in Hungary is restricted for
project spending. Third, this support reaches organizations different from those generally
receiving state support. This is actually emphasized as a major conclusion of the study
conducted by Eva Kuti and Agnes Vajda in 2000 as well: “In contrast with governmental
redistribution, which concentrates on supporting a relatively small number of voluntary
organizations, citizens’ preferences are much more diverse.”
32 We will look into these
differences in more detail below in anal yzing the fourth rationale (government

Therefore, while the one percent income did not mean a major source of funding for the
sector as a whole, it has played an important developmental role in the composition of the
sector. It has increased access to unrestricted funding and channeled public support for
organizations that would otherwise have little or no chances to gain such access.

Increasing awareness

The one percent mechanism has also helped in raising awareness about the civil sector
among the general public, which is a critical element in the development of civil society.
The relevance and strength of voluntary organizations depends largely on the level of
recognition and support they receive from the public. The one percent provision has the
potential to raise awareness about these organizations in almost every household in the

As discussed above, only 30-35% of taxpayers take advantage of the opportunity to make
a designation. However, many more citizen s actually know of the opportunity and form
opinions on the organizations and the sector involved. According to a study made in
Hungary in 1999, 94 percent of the adult population and 98 percent of the taxpayers had
already heard about the 1% opportunity.
33 In Slovakia, after the first year of
implementation of the law, already 71 percent of the respondents of a representative
sample of the population were aware of the opportunity. This suggests that – probably in
part due to the simple fact that it is a tax -related issue and people are likely to want to
find out about it, and in part due to the effective information campaigns conducted by
organizations such as NIOK – the one percent opportunity brings the concept of NGOs
into the lives of people to a greater extent than any previous method in post-socialist

Moreover, not only had people heard of the opportunity but they also approved of its
purpose. Only 14% of all respondents and 10% of taxpayers did not approve of the law.
“Our findings seem to prove that the 1% provision has been generally welcomed by the
overwhelming majority of the adult population. (…) (They) reveal a deeply positive opinion
on the taxpayers’ behavior and suggest that the majority of Hungarians believe in citizens’
virtues.” – says the referenced report.

32 Supra note 16, page 13. 33 Supra note 16, pages 5-6 34 Supra note 16, page 8.


This is an unprecedented opportunity and probably one of the biggest benefits of the law.
It takes decades of education and several generations to change culture and attitudes in a
society. The one percent law offers a unique chance to accelerate such change in relation
to nonprofit organizations and their importance to the lives of people.

Unfortunately, Hungary has also witnessed a number of scandals related to nonprofit
organizations including a major one about a foundation that was not entitled to collect
designations. This is reflected in the fact that almost half of those who disapproved of the
system in Hungary indicated moral and accountability problems on the side of the
potential beneficiaries as their reason.
35 It seems, however, that in the long run these
perceptions do not have a significant impact on the overall inclination of Hungarians to
support NGOs through the one percent scheme. The number of beneficiary organizations
increases year by year; and it is intriguing to note that the foundation mentioned above
actually collected the largest amount of designations in 2002 – only a couple of years
after the scandal.

Organizational outreach and skill development

As the third aspect of the civil society development perspective, it is important to note the
impact of the system on the level of organizational development of the NGOs. The law
has great potential to increase the ability of NGOs to communicate about themselves to
the public and to their stakeholders. Unlike any other government funding measure, this
law provides a strong incentive for organizations to reach out to their members, clients,
communities and the public at large – in other words, to reach out to the people that they
were supposed to serve in the first place. In Hungary, NGOs have been extremely
focused on proposal writing as the main technique of raising funds and this culture lead
to mutual isolation and ignorance between the NGOs and the communities in which they
had worked. With the exception of the limited circles of their clients and (institutional)
donors, NGOs did not make the effort to communicate about their existence and seek for
support. The opportunity of the 1% designations opened up a new avenue to raise funds
that involves a much more open and inevitably more transparent and more accountable
way of operation.

The level to which NGOs lived up to the challenge, of course, varied. In any case, it was
a telling fact that from the beginning, foundations had acquired a higher share of the “one
percent cake” than associations. It was expected that associations that were supposed to
have a strong membership base would be in a better starting position in collecting
designations. However, associations did not perform very well. They collected hardly
15% of all designations. “It wasn’t even the small local associations but the big national
organizations that failed. It seems that to have the members in the register and hold one
35 Statements like “ There are lots of bogus foundations”; “They embezzle money and carry out a number of
frauds. If I only mention the cases we hear about…” seem to suggest that highly publicized scandals have an
important impact on the image of nonprofit organizations. Media influence is easily detectable in the attitude of
most respondents who believe that charities are not sufficiently accountable to the public for how their money
is spent. On the other hand, very few of them reported that they had come to this conclusion on the basis of
personal experience. See Supra note 16, page 8.


yearly assembly is not enough – unless the relationship is live and strong, the one percent
will not arrive automatically on the accounts.” 36 – concludes a report that inquired about
the reception of this law by the NGOs.

For these associations, as well as for all NGOs, the results of the one percent campaigns
held a mirror showing how well they were known and supported among their
stakeholders and the public. As a consequence some lost motivation to pursue this type of
support; but those who took it well and used it to further develop relationships to their
communities, gained tremendous benefits – and not only financially. “We decided to
build membership intensively. We held regular meetings, managed the volunteers,
conducted joint projects and joint parties – our income from the one percent grew from
50 to 350 thousand in a year.” – reported an environmental association from Veszprém.
Other NGOs decided to “play it big” and embarked on professional national PR
campaigns using methods (such as billboards or TV ads) never tackled by NGOs before.
They created models of successful professi onal communication that will be followed by
many – not only in the one percent campaigns but also in other fundraising and even
advocacy work.

In summary, the 1% Law has helped increase the responsiveness, transparency and
accountability of the NPO sector. Efforts by NPOs to convince citizens that they should
support them strengthened communication between the nonprofit sector and society. By
receiving contributions from their stakeholders , NPOs became directly accountable to them
in terms of how funds were spent. In additi on, because the law subjects NPOs to reporting
requirements, it increased the transparency of NPOs and decreased possibilities for the
misuse of funds. Essentially, as a result of the 1% Law, NPOs in Hungary have become
more accountable, professional and transparent.

II.5. Development of philanthropy

A fundamental question to address is whether this form of tax designation qualifies as
philanthropy. This depends on what we understand as “philanthropy”.

A commonly accepted definition of philanthropy is “voluntary private giving for public
purposes” 38. According to this definition, philanthropy is:

• “Voluntary: is intended (with the purpose of making a gift) and uncoerced (rules
out legal penalties for not giving). 39
36 Balázs Gerencsér and Lajos Bíró: Opinion of civil organizations on the 1% law (Az 1%-os törvény
végrehajtásával és megítélésével kapcsolatos vélemények a civil szervezetek körében ), Nonprofit
Information and Training Center, 1999, available in Hungarian at
https://www.nonprofit.hu/ kiadvanyok/tanulmanyok.html 37 Id. Page 13. 38 Martin, Mike W.: Virtuous Giving – Philanthropy, Voluntary Service, and Caring, Indiana University
Press, Bloomington and Indianapolis, 1994. Page 8.
39 Voluntarily is not a synonym for “willingly”. Loyal citizens may pay taxes willingly – but taxes are not
voluntary. Id.


• “Private: means giving own money and time, as opposed to government spending
that means giving public money.
• “Giving: means donating resources without expectation to achieve comparable
economic compensation. 40
• “For the public: is intended for public purposes – virtually all social aims, beyond
helping one’s family and friends.” 41

The act of tax designation in the percentage mechanism would not satisfy all of the above
criteria. Most of all, it is not giving of one’s own money and time – instead it is disposing
of money that belongs to the public. In addition, the question of whether it is given
voluntarily may be debatable. It is true that there is no legal penalty for not making the
designations; however, in this case people only “give” because they have to pay the taxes
42 On the other hand, the designation mechanism also meets several elements of
philanthropy as understood above. The designations are made for a public purpose and
making them leads to no economic advantage to the “giver”.

In any case, there is not one authoritative interpretation of philanthropy. For example, the
Indiana University Center on Philanthropy takes a far-reaching approach when it
provides “the Center’s working definition of philanthropy” as “voluntary action for the
public good, which includes community service, voluntary giving, voluntary association,
nonprofit administration, fundraising, grant making, and stewardship”.
43 Here we can see
a wide range of activities that come within the scope of philanthropy, not all of them
meeting all of the above-described criteria. (E.g., fundraising or nonprofit administration
is often a paid activity involving no “sacrifice” of own resources but gaining economic

A further interpretation of philanthropy makes a distinction between charity and
philanthropy. In this understanding, philanthropy is more than mere charity. It considers
charity as an ad-hoc, accidental or incidental activity that we conduct because we feel
compassion or because it is a customary thing to do. In contrast, philanthropy would be
defined as a conscious and ongoing effort to increase the well being of our community by
both financial support and active involvement in the community. “A planned effort to
improve our society. To make this world a little better place in which to live.”
40 However, some engage in philanthropy to acquiring economic benefit – such as in the case of corporate
philanthropy (which expects PR and marketing). Id.
41 However, philanthropy and friendship overlap – you may give to organization, which your friends
belong to; as long as other people benefit it is philanthropy. Public purposes refers to either (i) the purposes
of the givers (give to promote public good regardless if it will be successful) and (ii) the ends actually
promoted by the gift (successful promotion of public good, regardless of motivation). Id.
42 Robert Payton also argues that critics of the idea of “public altruism” claim – if funds are not voluntary
given but collected, their transfer to someone else is not voluntary, therefore not philanthropic (missing
voluntary dimension in mobilizing resources). See Payton, Robert L.: Philanthropy – Voluntary Action for
the Public Good, American Council on Education / Macmillan Publishing Company, New York, 1988.
Page 47.
43 https://www.indiana.edu/~rugs/ctrdir/cp.html44 Philanthropy Is Not A Taxing Issue, https://www.globalgiftfund.org/pdf/library/article/art- Philanthropy.pdf . See also Payton, supra note 41. Page 44: Philanthropy is the manifestation of two values: Formatted


It is a widespread culture of this kind of conscious, planned and ongoing philanthropic
behavior that has been missing from the countries in CEE, where the “1%” system was
introduced. In these countries the culture of philanthropy is as yet underdeveloped and
few have the wealth that would allow them to exercise philanthropy. With the individual
tax allocation the government enables people to act as though they were exercising
philanthropy. In fact many people consider it as philanthropy, which can be seen from the
fact that the designations are often – incorrectly – called donations.

The above examples illustrate that the designation mechanism is not philanthropy as
understood in its traditional form, based on a “classic” definition, but at the same time it
shows a range of similar elements to philanthropy. Since there is no single definition of
philanthropy, it may even be considered a philanthropic activity. However, this is a
special form of philanthropy, we may call it “transitional philanthropy” or philanthropy
in transitional countries.
45 If we accept this argument, we may conclude that along with
volunteering and giving, a new form of philanthropy has emerged in CEE through the
“percentage legislation”.

The percentage designations and development of philanthropy

The hybrid nature of the percentage mechanism makes it limited in its potential to
develop a philanthropic culture. The main reason is, that it “costs nothing” to the donor
except for the time and effort needed to make the designation. Eva Kuti and Agnes Vajda
in their referenced book “Citizen’s Votes” see this characteristic as a positive one from
the point of view of examining philanthropy “
In some sense, the 1% law has created
ideal conditions for a ‘laboratory experiment’: we can examine how citizens would
behave if financial constraints on private donations were completely removed
.”46 From
another perspective, this is a false basis for comparison and may lead to misleading
results if we accept that philanthropy involves a personal stake and some form of private
investment in the public good. Taxes as such are not considered philanthropy but a civic
obligation and therefore not a voluntary choice of the individual. As seen from the
above, the one percent is a hybrid construct that
can be considered a peculiar form of
philanthropy (“transitional philanthropy”) but whether and to what extent it helps “true
philanthropy” to develop is not clear at all.

There is no recent and clear data on the tendencies of philanthropic giving in Hungary.
On the one hand, the total amount of private individual donations as well as the number
of NGOs that received such donations had been increasing year-by-year since the
introduction of the One Percent Law (until 2000, which is the most recent data available).
Table 6 )

compassion (charity) and community (philanthropy); and Ostrower, Francie: Why the Wealthy Give – The
Culture of Elite Philanthropy, Princeton University Press, Princeton, New Jersey, 1997. page 4.
45 Based on input from Kuba Wygnanski. 46 Supra note 16, page 1.

Individual donations in Hungary since the introduction of the one-percent law 1997-2000
Year Amount of individual donations reported by NGOs
(million HUF)
Increase compared to previous year
Share of individual
donations in the total income of the sector
1997 6,568.8 109.0 2.3
1998 7,272.6 110.7 2.0
1999 9,089.7 125.0 2.2
2000 11,168.7 122.9 2.3
Source: Reports of the Statistical Office 1997-2000

On the other hand, the share of these contributions in the total sector income have been
stagnating around 2.3 percent over the last ten years. The share of private individual and
corporate contributions in the total income of the NGO sector has decreased by almost 10
percent over the last decade (from 23% in 1993 to 14% in 2001).
47 The growth of private
support of the sector in real terms approached 27%, which, however, lags behind the 70%
growth in real terms of government suppor t. Corporate philanthropy performed worst,
with its share in the total income of the sector declining from 10% in 1993 to 5% in

As a result, the picture is mixed. The level of individual giving seems to be gradually
increasing but the significance of private philanthropy decreasing overall. The role of the
percentage mechanism in these tendencies has not been assessed. Kuti and Vajda refer to
this relationship as a potential “crowding out effect”
49, i.e. that the designations may
replace individual donations. In their interpretation, based on data until 2000 this seems
not to have happened. We can certainly conclude that the introduction of the one percent
mechanism did not result in a decline in philanthropic giving of individuals, but we
cannot tell whether it had a positive effect on it.

In lack of recent data to show a clear relationship, all we can do is explore the potential
positive and negative effects of the one percent law on philanthropy. There are some
characteristics of the system that theoretically help philanthropy and others that
theoretically are a hindering factor. Some empirical evidence support both sides.

Positive and negative effects

On the positive side, we have already mentioned that the opportunity created by the law
raised awareness about NGOs and facilitated the understanding of civil society in an
unprecedented way. In this manner, it has made a great contribution to the development
of philanthropy, which is unimaginable without such basic understanding.

47 See Table 3 on page 7. 48 Based on data from Bocz János et al, Nonprofit Organizations in Hungary (Nonprofit szervezetek
Magyarországon ), 1993, 2000 and 2001 Reports of the Central Statistical Office (KSH), Hungary
49 Supra note 16, page 32


Another important effect of the law was that it taught people to think of reasons why to
support a cause and a concrete organization. Each year when taxpayers are making
choices, they go through a thought process that is in fact very similar to that of giving.
This process implies the questions about what is important for the individual, what are his
or her values, what problems does s/he see in society and how he or she thinks an
organization can contribute to solving these problems. In the first years, taxpayers were
more interested in supporting a specific cause important to them than a certain
50 This tendency is slowly changing as people are getting to know more and
more the NGOs themselves.

There are also negative impacts. The main one is perhaps, that because of the mixing of
the concepts of giving a donation or a designation, the understanding of real philanthropy
– in the sense discussed above, i.e. a planned and ongoing contribution of one’s own
property or time to a public purpose – is being delayed. Many people think that by
“giving” the one percent they have accomplished their philanthropic duties and do not
understand or approve of further fundraising efforts on part of the NGOs. While we
haven’t found any recent data on the volume of such behavior, it has been reported
several times by NGOs as empirical evidence.

The truth is, while the one percent mechanism has been widely popularized, no one
advocated as fiercely to develop other forms of philanthropy. There are no champions of
private philanthropy today in Hungary and while many NGOs try to enter the emerging
donor-market with various techniques of fundraising, few have brought about the level of
success as did the one percent. It seems that while there is a good potential of developing
philanthropy in the one percent mechanism, it is by far not enough in itself to address the
lack of a philanthropic culture.

Anonymity and administrative procedures

Another issue to look at in relation to philanthropy is the procedure of the mechanism. In
Hungary (and the other countries, with the exception of Poland), the designations are
anonymous. The NGO does not know who made the designation, how many donors it
had or where from. Obviously, this system works against the development of private
philanthropy, which is based on trust, more than anything else, between the donor and the
NGO. The lack of a personal relationship is something that can be overcome with some
effort (by now slick organizations have various methods to get the data of their one
percent supporters), but it is a built-in obstacle for most NGOs in taking their fundraising
techniques to a new level with the help of this mechanism.

The impersonal approach that anonymity sugges ts (reflecting also that the taxpayer is
actually a decision maker over public funds) results in patterns that work against
philanthropy in the macro level as well. E.g. while the number of designating taxpayers is
not increasing, the number of beneficiaries is growing (even if slowly), which confirms
the empirical experience that people tend to give to different organizations each year.
(There are of course “loyal” supporters of NGOs, e.g. probably those who are in touch
50 Reports on 1% campaigns by NIOK 1998-99


with the NGO during the year in other forms as well.) With an anonymous system, it is
hard to show the value of a long-term relationship between the donor and the NGO.

Interestingly, in Poland the procedure has been altered and the taxpayers make the
transfer of the funds themselves. According to a Polish government official, this was a
decision based on the above-described critique of the system seen in other countries, with
the aim to encourage philanthropic behavior.
51 This, however commendable, raises
another set of questions.

According to the tax authorities in Hungary, the reason for anonymity is related to data
protection. As part of the tax return, the designation represents an individual choice that
is to be respected and not abused. The question of what cause or organization an
individual supports belongs to his or her private sphere which should not be public
without the consent of the individual. When a person supports an NGO working with
AIDS patients or Alcoholics Anonymous, he or she might not want this to be known by
his or her colleagues, for example. Therefore this information has to be handled privately,
just like the question of whether he or she receives a tax allowance for a private insurance
or not. In addition, in Hungary the whole annual income of an individual could be
calculated from the one percent amount. There is a clear tension raising from the hybrid
nature of the law, between treating it as a tax allocation or treating it as a form of

While the Polish case may succeed in addressing the question of anonymity (the taxpayer
makes the transfer privately and only the beneficiary NGO and the tax authority will
know whom s/he supported), it might still not succeed in fully respecting both principles.
Another problem emerges, this time related to the administrative effort and burden placed
on the taxpayer in the execution of the designation.

Because of the philanthropic nature of the action, the golden rule “giving made easy is
giving more” applies to the one percent law as well. The process one has to undertake to
make a designation is the only and therefore decisive cost of the transaction for the
taxpayer. In other words, the more difficult it is to make the designation, the less likely
that people will make it. All evidence to date from Hungary and Slovakia show that the
ease of administrative burdens increases the likelihood of making the designation.

It is indicative, for example, that in Hunga ry, where procedural rules have been eased
repeatedly in subsequent amendments of the law, only 5.1% of those who did not make a
designation cited “technical and administrative problems” as a reason.
52 In comparison in
Slovakia, where such rules are more demanding, 20% of “non-designators” reported that
“the process of assignation was very difficult”.
51 Contribution of Krzysztof Wieckiewicz at the conference of the Institute of Public Affairs on the one
percent legislation, Warsaw, November 2003.
52 Supra note 16, page 25 53 Outcomes of research after the first-year implementation of assignation of 1% of paid tax, available at https://www.onepercent.hu/documents.htm#SlStudies .


In Poland, the abolition of anonymity lead to a more complicated method of making the
designation and therefore it may lead to a lesser number of citizens undertaking it, at least

Unwanted impacts: curbing traditional incentives for philanthropy

A final point on the relation between the one percent legislation and philanthropy. It has
become a trend that governments view this piece of legislation as one that satisfies the
demands for both public and private support to the sector. As a result, traditional tax
incentives (tax deductible donations) have been abolished in Lithuania
54 and in Slovakia
and the same has been planned in Poland following the adoption of the one percent
legislation. This is regrettable and also extremely dangerous. The multifaceted purpose of
the law has become a double-edged sword: it seems as though philanthropic support
could be substituted with the percentage legislation.

Whether as a direct “exchange”, like in Lithuania, or as part of a larger tax reform, like in
Slovakia, governments have been keen on curbing traditional tax incentives based on
fiscal arguments. However, NGOs lose a great deal with such an “exchange”. To
illustrate this, let’s take the example of a fictive country where the tax regime is
progressive and a person can deduct charitable donations up to 10% of its tax base. An
annual income of 1000 monetary units (let’s call them crowns) will fall into the tax
bracket of a 30% tax liability, which would be 300 crowns without any deductions. When
a person with an annual income of 1000 crowns donates 10 crowns, an NGO receives 10
crowns and the tax office “loses” 3 crowns as a result of deducting the donation from the
tax base (30% of 990 crowns is 297 as opposed to 300). In contrast when the same person
makes the tax designation of 1% of his/her tax liability, the tax office will “lose” the
same 3 crowns (1% of 300), but the NGO will receive only 3 crowns as well.

Naturally, there is the argument that the percentage mechanism in our post-communist
countries is likely to be exercised by more people than traditional philanthropy. Initially,
this may be true. However, in the long run and assuming that it is an important goal for
the nonprofit sectors in CEE to increase the personal involvement of citizens in their
communities, it is desirable to maintain traditional tax incentives, as much from a
financial as from a moral point of view.

II. 6. Government outsourcing

The last rationale that was emphasized in de liberations concerning the one percent law in
Hungary (and which played an equally important role in Poland) has been the notion of
providing public funds in a decentralized way to NGOs that conduct public benefit

54 Lithuania passed the legislation on a percentage desgination system in 2002, which is operational as of


This is perhaps the weakest justification in terms of its potential. So as not to
misunderstand this statement we have to affirm that the mechanism itself guarantees for
decentralized and non-political decision-making by the taxpayers. The problem, at least
in Hungary, has been simply that the funds involved are not significant enough to alter
the culture of government funding. The portion of public funds distributed in this way are
minuscule compared to the scale of un-transparent and political subsidies. Additionally,
the very question of who receives the support may effect whether this is an appropriate
way to ensure for public support of NGOs.

Let’s look at the positive outcomes first. As described above 55, the distribution of the one
percent support differed considerably from the distribution of other state support in
Hungary. Some of the findings of the Kuti-Vajda study in this respect are summarized
– The introduction of the 1% scheme more than doubled the number of voluntary
organizations which receive support from the central budget.
– Organizations operating in the field of education, or performing health care and
social services receive 75 % of the income coming from the 1 % designations –
and only half of the budgetary support traditionally distributed.

– Small local not-for-profit organizations receive 16 % of the 1% income – they are
more successful in persuading citizens to support them than in raising other state

– While 95 % of the direct central government support goes to the largest not-for-
profit organizations, they receive only one third of the 1 % designations.

– Regional distribution of the 1 % income is somewhat more even than that of other
public support. For example, Budapest receives almost 75% of all budgetary
support, and “only” 41 % of the 1 % income, villages gain almost three times
more funding from the 1 % designations than from central budgetary supports.

This was the good news. However, the conclusion as stated: “…that the system of
government funding has become slightly mo re equitable and significantly more
democratic by the introduction of the 1% scheme”
56 could be an overstatement. In
Hungary, the 1% represents a mere 3% of all government funding (and as the aim is to
increase state support this will even be less).
57 Grant funding, discretionary subsidies,
contracts and other forms of support dominate the public funding of the nonprofit sector.
The “democratization” effects, while brought notable results for individual NGOs and
from the point of view of civil sector development, are not significant in terms of
government funding as a whole.

Public benefit activities

55 See page 6 of this Study. 56 Supra note 16, page 16. 57 The situation might be quite different in Slovakia, where government funding for the sector, based on
data from the Johns Hopkins University Comparative Nonprofit Sector Project, available at
https://www.jhu.edu/~cnp/pdf/comptable4.pdf , is three times less than the amount designated in 2002.


Here we have to mention another important factor related to the one percent legislation.
Initially in Hungary and consequently in the other countries as well, this legislation was
in some way tied to the so-called public bene fit laws. These are laws that prescribe and
determine when an NGO can be considered being of public benefit and thereby gain
access to a wider range of tax benefits than nonprofits in general.

Being of public benefit involves two interrelated aspects. It means on the one hand that
an NGO provides services and activities that benefit the public at large or a special group
in need; and on the other, that the state provides special recognition for these activities
through direct or indirect support.
58 What activities are of public benefit is defined
differently in every country where such legislation exists; usually there is a list of these
activities (e.g. in Hungary, a list of 22 types of activities including, among others,
education, social services provision, preservation of cultural heritage or protection of the
environment). The type of government support available to the NGOs with a public
benefit status (called in short public benefit organizations – PBOs) also varies. In
Hungary, for example only PBOs may receive tax deductible donations; in Poland there
was an intention to provide a corporate income tax exemption to PBOs only. The
entitlement to the 1% support is another benefit that can be made available to PBOs only
or to a wider circle of NGOs, depending on the government policy.

NGOs that aspire to receive a status of public benefit and the tax advantages that
accompany it have to satisfy additional criteria. Most of all, they have to comply with
higher levels of transparency and accountability so as to ensure proper spending of public
money. For example, they have to prepare a yearly report or establish a supervisory

In Hungary an NGO does not have to have a PBO status to be entitled to the one percent
designations. As a result, a good part of the one percent support reaches NGOs that
government would not necessarily support – e.g. a village association with the aim to
maintain local traditions; animal shelters; or the Alfa Romeo Club Society of Hungary.
While it is great for these organizations to be supported by citizens, one might argue that
taxpayer funds should not be provided for organizations with such particular interests. It
might be more appropriate to fund them by charitable contributions of the same
individuals who now designate taxes to their benefit.

On the other hand, the one percent support al so reaches NGOs that the government would
support anyway – e.g. foundations of major hospitals, the renowned International Peto
Institute for Disabled Children, or the Red Cross. For these institutions, the one percent
represents a minor part of their budget, which is highly subsidized by government
already. In other words, irrespective of taxpayers’ intentions, the government will fund
these organizations and the one percent only adds to such funding to the extent of their
popularity with the public.

58 See more on this in the Handbook on Good Practices for Laws Relating to Non-governmental
Organizations, prepared for the World Bank by the International Center for Not-for-Profit Law (ICNL),
Discussion Draft , 2000; pages 24-25.


There could be more examples cited. The point is that in Hungary the one percent support
can hardly be justified solely or primarily by the intent to “democratize” government
support: if government finds it important to fund certain NGOs (e.g. because they are
providing a task that would be the responsibility of the state), they should fund those
organizations in any case; while on the other hand, it should not provide public funds for
others that are not meeting certain accountability criteria.

Erzsebet Fazekas puts the same argument in a different way: “The state was not fully
successful in realizing its other purpose: to ease the negative outcomes of transformation
to a market economy through a citizen-headed redistribution of wealth. (…) A major
portion of the donations went to purposes that do not respond to the most acute and
pressing social needs.”

Even if the one percent could be directed to public benefit organizations only (which will
be the case in Poland), the tension between deciding on social priorities centrally or in a
decentralized way remains. There is a contradiction between “social justice” and the
philanthropic, “market based” nature of the one percent designations. Inevitably, the
latter results in a competition for the attention of taxpayers, and those more skilled or
equipped to obtain this attention will prevail. The one percent does not serve well NGOs
not intent on gaining wide social support or having an “unpopular” cause, however
important those may be in solving pressing social issues. This is not a problem, however,
unless there is a presumption that through the one percent designations taxpayers will
make effective decisions on where to allocate government support.


As an overall conclusion we may say that the One Percent Law only partly fulfilled the
expectations it had created in Hungary. It proved to be very effective in developing civil
society organizations and raising awareness about NGOs among the general public.
However, its effects on philanthropic behavi or are unclear and it did not fulfill the
expectations related to decentralized and depoliticized government support for NGOs.

From the Hungarian experience it can also be concluded that while several policy
rationales support the enactment of such legislation, this multifunctional nature of the law
results in several tensions in its implementation. The key reasons for the tensions are the
conflicting principles of the policy areas that may be pursued by the legislation. Some of
these tensions include, e.g. the contradiction between the anonymous nature of the system
and the need for direct interaction between the taxpayer and the NGO in order to enhance
the philanthropic effect of the law; or the counter-effects of addressing the need of direct
interaction, thereby increasing the administra tive burden on the taxpayer. As a result,
governments have to be clear as to why they want to introduce the law, otherwise they
may end up expecting too much and achieveing too little in each policy area.

59 Supra note 16, page 502