Based on an empirical survey in 1996, 1998 and 2001 of 300 medium-sized and large firms each in the manufacturing, construction and commercial sectors, the study analyses developments in contract and fiscal discipline and the prevalence of some phenomena in the hidden economy. It is found that the range of the hidden economy lessened in these segments of the Hungarian economy between 1996 and 2001, while contract and taxpaying discipline improved and the soft budget-constraint syndrome continued to retreat. A part was played in this by the improving business prospects and by the increasing integration into the European economy. The improving prospects and growing GDP raised the incomes expected from the legal economy, while tax inspection was also improving. The latter raised the costs of participating in the hidden economy for registered business organizations. The opinions of entrepreneurs on fiscal policy and tax administration also improved strongly between 1996 and 2001. Tax laws were felt to be more transparent and comprehensible and the tax system more predictable. Small firms showed much greater sensitivity than large to complexity and frequent change in tax regulations, which were more likely to upset small firms' business plans and thereby their commercial prospects. The findings support the supposition that transparency of the tax system influences competitiveness, and that the introduction of simplified taxation forms for small firms will promote efficiency and competition on an equal footing.