Value added

It used to be cash or cheque. Then it moved to cash or card. Now the payment lingo has moved up a notch to with invoice or without. I doubt there’s a country in the world (except maybe Switzerland) where the invoice question doesn’t rear its head when it comes to making a purchase. Okay, I’m not talking supermarket stuff; I’m talking services.

You get someone in to paint your house and you pay cash. You get someone to fix your car. Ditto. You go to a flea market or an antique fair and buy some furniture. Same applies. You don’t worry about whether or not they’re paying taxes. That’s their business, not yours. And if you’re one of those strange beings who actually prefer to do things above board, asking for an invoice in some situations can make you look a little deranged. I know. I’ve had the look…the look that is usually accompanied by raised eyebrows and a snort of derision. Well, of course you can have an invoice… if you really want one.

And the cogwheels turn. Why would anyone want to willingly pay the tax due (in Hungary, the valued added tax, familiar to all as áfa, is a whopping 27%), if it’s possible to get can get away with not paying it? The world is rife with tax evaders. Take out the bad boys (and girls), the ones for whom greed is the bottom line and lining their pockets at the expense of the nation is their end goal, and then ask why people choose to evade their taxes.

Because they’re ridiculously high? Because the money paid in taxes doesn’t go where it should go? Because people simply can’t afford to pay the full whack? Because it’s difficult, if impossible, to turn any sort of meaningful profit if you do it all by the book?

I’m not a taxation specialist. I lay no claim to understanding the economics of it all. But it would seem to me that if VAT and the accompanying taxes are so high, then a country should have a great infrastructure, a grade A healthcare system, and an education system that is world class. But sadly this is rarely the case. Is it a mission impossible? Winston Churchill might have been right in his contention that ‘for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle’.

And if high taxes are putting people off paying them, why not lower the taxes so that everyone who should be paying pays. And if someone wants to do it all by the book, then why penalise them for their efforts?

Yes…you’ve guessed. I’ve noticed the new BKV charges.

The price of a monthly travel pass has been reduced to 9500 huf (~€31 / $42). Great news, I thought. What’s to complain about? But if you want an invoice…then you get to pay 10,500 huf (€35/$47).  The mind boggles.

First published in the Budapest Times 17 January 2014

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7 Responses

  1. It isn’t the VAT that the vendors are trying to avoid by not issuing an invoice, it’s the income tax and the paperwork needed for them to deal with VAT. Otherwise, a vendor does not usually pay VAT (they are are VAT exempt if they have a VAT number – they only really collect VAT for the government (making them unpaid tax collectors for the Government, but that is a different issue)). Only you, as the end consumer, actually end up taxed by paying VAT. But by issuing you a bill the vendor have to include this in their income statement, which then they have to pay income taxes on. Different type of tax avoidance, and one mostly for the vendor’s benefit (well okay — so you get 27% cheaper product a well).

    But you are correct, a too high VAT does hurt the market economy:

      1. And yet when consumer and vendors collude to not pay tax there maybe some unexpected consequences.

        If the collusion is done in a Thoreauvian act of Civil Disobedience to encourage the government to lower the VAT there are two outcomes: (1) If one is successful, and politicians listen, one can pat themselves on the back for a job well done. But, (2 and the more likely one) since the government in Hungary has nicely boxed themselves into a corner by how they institutionalized income tax (so it will be difficult to generate more state revenue by any different incoming party in the future), when VAT revenue has dropped due to VAT avoidance their discussions have more turned toward raising VAT. Politicians often do not act in sane, fiscally responsible ways — and many also do not really understand either finance or economics. Why else would a government sell self issued bonds with a return rate above what most economists would call unsustainable — a potential ponzi scheme perhaps that politically merely kicks the fiscal can down the road till some future day of reckoning (which they somehow believe irrationally they can avoid — or at least blame on someone else).

        If, however, the collusion to avoid VAT is done for the consumer’s immediate benefit, then the consumers are in fact placing selective forces to favor the dishonest merchants and vendors (what else, one might start to think, do they do dishonest besides just avoiding VAT). And thus also putting the dishonest merchants and vendors at a competitive disadvantage. The “honest” man then must become also dishonest or go bankrupt or leave country to find their fortunes elsewhere. We are then left with a dishonest merchant class.

        27% VAT is outrageous, and there may be little chance for escape from either scenario above. Of course one way “out” would be to raise the average Hungarian income to that comparable to that of Western Europe. That is, if you make only 1000 Euro a month, while a counter part in Austria makes 3000 Euro for the same job, while basic commodities are priced pretty much the same in Hungary as in Austria, then there is a much larger incentive to try to avoid paying VAT since it takes a much greater percentage of your pay to feed the government. But, again, politicians (in any country) are more interested in spinning “job growth” numbers over discussion if said jobs actually pay a survivorship wage. But that is another story.

        1. Politicians often do not act in sane, fiscally responsible ways … couldn’t have said it better myself. Great explanation – thanks so much for taking the time to share…

          Sad that : The “honest” man then must become also dishonest or go bankrupt or leave country to find their fortunes elsewhere. This is what I’m seeing every day. One wonders if there’s any hope at all…

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