(FORTUNE Magazine) – The tax man has sneaked behind the Iron Curtain and is emphatically not getting any Red carpet treatment. On January 1, Hungary became the first Soviet bloc country to impose a personal income tax on citizens. Now they also pay a value-added tax when they shop. Hungary was an early innovator in introducing market-oriented policies, and its latest package goes the furthest yet. The government is cutting subsidies to industrial companies, raising prices, and asking citizens to suffer silently as it gets control of a worrisome budget deficit and ballooning foreign debt. Karoly Grosz, 57, who became Prime Minister last June, is the Gorbachev- style politician who wants to inject a bigger dose of capitalism into Hungary's near-stagnant economy. Will it work? Experts at the World Bank say the government's ability to hold the public's confidence will be an important factor. Anticipation of 15% price rises sparked runs on furniture, VCRs, and other products last fall, and some workers reportedly set factories ablaze when bread prices surged. Hungarian Communist Party leader Janos Kadar, 76, is yielding authority to Grosz but clearly doesn't want to end a 32-year reign on an unpopular note. Hungary's most recent experiments in capitalism have yielded mixed results. About 20 enterprises were expected to be declared bankrupt last year, but only three were reined in because unemployment is politically taboo. The most successful industrial reform effort: Taurus, a large state-owned rubber products company that shut down money-losing lines and introduced performance incentives with the help of the Boston Consulting Group. This year Taurus's 10,000 workers are getting the opportunity to buy ''profit tickets'' in the company, which are something like stock without voting rights. Grosz's plan for 1988 puts some market sense into a controlled economy, but maybe not enough. In return for losing some government subsidies, state-owned companies will get to keep a bit more of what they earn. But taxes on private businesses, the economy's most dynamic sector, will more than double to 25% of profits. Says Timothy Condon, an economist at the World Bank: ''Hungary may be in danger of choking its golden goose.''