Tax fraud scandal in Hungary

On November 8 a surveyor of taxes, András Horváth, turned to the prosecutor’s office to report a breach of fiduciary duties committed by the top leaders of NAV (Nemzeti Adó- és Vámhivatal/National Office of Taxation and Customs). During his press conference he stood between representatives of two civic groups, Levegő Munkacsoport, an environmental organization, and Vállakozók Érdekvédelmi Szövetsége (VÉSZ), basically a lobby group of small entrepreneurs.

Horváth claimed that large-scale cheating goes on with fictitious VAT reimbursement payments, especially in the case of large multinational and domestic companies. Since Horváth was mostly involved with agricultural products and foodstuffs in general, I assume that the companies he was talking about are mostly large food chains. He claimed that the loss incurred in just this sector of the Hungarian economy amounts to about 1.7 trillion forints per year, more than 10% of the country’s entire yearly budget of 15 trillion forints.

The interest was great at András Horváth’s initial press conference
Photo Ákos Stiller

Horváth seems to be a naive soul because before his revelation he turned in his resignation and was expecting to sever relations with NAV only in two months’ time. I guess you will not be surprised to hear that Horváth was immediately dismissed from NAV and that currently NAV is in the process of pressing charges against him.

When Index asked for details from NAV, they were told that tax fraud is usually committed through complicated layers of phony companies and that therefore it is often impossible to find the culprits despite the concerted efforts of NAV’s employees. The spokesman for NAV emphasized that the more than one thousand large multinational and domestic companies actually provide 42% of all tax revenues. These companies are thoroughly investigated.

Yet NAV, either on its own or because of prodding from above, immediately announced an internal investigation. Keep in mind that NAV has 23,000 employees, and yet over the weekend in only two days’ time (November 9-10) the “investigation” turned up nothing. I have the feeling that the internal probe couldn’t have been too thorough.

On Tuesday, November 12, disappointed by the internal investigation of NAV, Horváth put all his trust in the government, emphasizing that he has no political motivations. He just wants the truth to surface. In fact, he was an early Fidesz party member and has old friends in the party from those days. He indicated that he knows two of the “highest dignitaries of the land.” I think he was talking about János Áder and László Kövér. He also said that he wrote two letters to leading politicians in the Prime Minister’s Office and he definitely knows that one reached the person for whom it was intended. I assume again that this was János Lázár. Exactly when Horváth wrote to the person in the Prime Minister’s Office is not clear, but we definitely know that he wrote a long letter to Antal Rogán, head of the Fidesz parliamentary caucus, back in November 2011.

Rogán didn’t seem to remember any such letter. His only recollection was that somebody stopped him in the corridor of the parliament and exchanged a few words with him. But then Horváth released his long, detailed letter which Átlátszó.hu, an investigative online paper, published in its entirety. At that point Rogán’s memory was jiggled, but he still claimed that the letter contained only generalities. It is true that Horváth didn’t mention any names, but he indicated that some of the high officials of NAV were getting paid off for their “leniency” and that some of them had become quite rich in the process.

The way the fraud was committed does look complicated, but in essence it entails a phantom supplier who gets reimbursed for VAT, which is the highest in the European Union. Thus a product for which the Hungarian company paid 100 forints to, let’s say, a Slovak company cost the Hungarian company only about 80 forints and thus its profit margin is about 20-25% higher than it would have been without the assistance of this phantom company. There is a drawing of the scheme in Index.

Fidesz naturally suspects political motives behind Horváth’s revelations. Mihály Varga, minister of economics, warned Horváth that he as a civil servant is not supposed to engage in political activities. Horváth insists that politics has nothing to do with it and that the law is on his side. After all, he says, the law is supposed to shield those who unveil corruption and fraud. But Horváth is in trouble because so far his case has not been taken up by the prosecutor’s office. They want additional information, which sounds like a diversionary tactic. Knowing the political orientation of the prosecutor’s office, I will be most surprised if Horváth’s case is ever taken up.

Meanwhile, of course, the case became thoroughly politicized. It couldn’t have been otherwise. András Schiffer’s LMP immediately moved into action. Next Friday the party will stage a demonstration for “the purity of the tax office and for the upstanding taxpayers.” At the same time, LMP and József Ángyán, formerly Fidesz but now an independent member of parliament, initiated the process to set up a parliamentary committee to investigate the NAV case.

The establishment of such a committee must be supported by 77 members of parliament. As it turned out, in addition to the seven-member LMP only a few independents, a handful of Együtt-PM, and Jobbik members signed the petition.  And that’s not enough. Without MSZP there can be no committee investigation of the case. DK members also refused to sign. The reason for both MSZP and DK holding back was the signatures of Jobbik members. They refuse to join any parliamentary action in which Jobbik is involved.

It is true that, even if the necessary number of signatures had been obtained, the investigative commission most likely wouldn’t have seen the light of day. Fidesz would have voted it down flat. But at least the charge couldn’t have been leveled against MSZP that they were reluctant to sign because they didn’t want their own part in the tax evasion scheme to be unearthed. Indeed, the reason for their refusal to sign doesn’t sound quite genuine, as some Együtt-PM members point out, because in the last three years MSZP members signed several documents on which one could find Jobbik names as well. Attila Mesterházy’s explanation for MSZP’s action (or lack of action) in this case is that the party decided to boycott Jobbik in parliament and elsewhere only recently.

I’m not sure whether refusing to collaborate with Jobbik in every instance is necessarily a smart political tactic. My feeling is that Mesterházy and others can explain their reasons until they are blue in the face, yet people who are inclined to equate the two parties when it comes to corruption will never believe them. And these are exactly the people whom Gordon Bajnai and Attila Mesterházy want to convince to vote for them. Of course, those who argue that nothing would have come of the investigative committee are right, but at least MSZP could have avoided another reason for labeling them a corrupt party, just as corrupt as the “mafia government” of Fidesz.

Viktor Orbán at Tusnádfürdő/Baile Tusnad

I just finished listening to Viktor Orbán’s 56-minute speech at Tusnádfürdő/Baile Tusnad in Romania. He had a large, enthusiastic audience despite the heat. Applause was especially loud and long when Orbán talked about his fight against multinational companies, banks, and the European Union.  In the audience one could see very young children who, though they most likely didn’t understand a word, were enthusiastic nonetheless. It seems, however, that not everybody was equally impressed. The camera stayed focused for a fairly long time on a man who seemed to have fallen asleep, and I heard later that a couple of men threw tomatoes at Orbán on his way out from the camp site.

Source: MTI / Photo László Beliczay

Viktor Orbán made sure that his audience doesn’t forget about next year’s election. He began his speech with a reference to it and at the end stressed the importance of his staying in power and continuing the policies that will lead to a complete transformation of Hungary’s political and economic system.

It seems that once Orbán comes up with a pet theory about the political and economic functioning of the universe, and he has a large inventory of them, he simply cannot let it go. In fact, in every new speech that touches on one of these theories he ratchets up his rhetoric and makes increasingly indefensible statements. For instance, his original theory about the decline of the West has by now become a prediction of a political and military clash between the West led by the United States and Asia led by China. By now he makes no secret of his intense dislike of the United States and accuses it of “trying to prevent other countries from catching up with it.”

Or, a few months ago he talked about the dominance of larger member states over the smaller ones within the European Union. By now this observation has morphed into the conviction that the “great powers” actually exploit the small ones by siphoning financial and human resources away from the smaller countries. The chief culprit here is again the United States. Hungary’s goal is to prevent such an exploitation and brain drain. This is in fact the essence of Hungary’s national strategy. To stop the great powers and use this new world’s opportunities to Hungary’s advantage.

After a rather lengthy and debatable historical treatise starting with World War I, he reached his favorite subject, the present financial crisis which in his opinion cannot be solved by the European Union. The institutional framework of the Union, the Commission, the Parliament “are unfit to handle the historical challenges facing us.” Orbán’s remedy is to shift the locus of power to individual nation states because only they are capable of overcoming the present crisis.

Orbán rarely passes up an opportunity for double-talk. This time he quoted a line from Sándor Kányádi, a Hungarian poet from Transylvania who had a line referring not to clear to what that “the dog is the same, only the chain was changed.” Of course, he immediately added that the change that occurred then wasn’t as simple as “left the tanks and came the banks,” as István Csurka claimed in the early 1990s, but “there is something to it.”

Then came a rather confused explanation of the differences between the gross national product (GDP) and gross national income (GNI). GDP is the market value of all officially recognized final goods and services produced within a country in a given period of time. GNI, a less familiar concept, consists of personal consumption expenditures, gross private investment, government consumption expenditures, the net income from assets abroad, and gross exports of goods and services after deducting gross imports of goods and services and direct business taxes.

Hungary’s GNI, Orbán claimed, is greater than its GDP. The difference, some two trillion forints annually, is moved abroad by banks and foreign companies. When national governments are in power, he argued, the difference between the two economic measures shrinks; when the socialists and liberals govern, the gap widens.

Let me stop for a moment. According to data published by the Hungarian Central Statistical Office, this claim is inaccurate. The Budapest Business Journal  wrote in September 2010: “The gap between nominal GDP and GNI widened each year between 2003 and 2007, from HUF 871 billion or 4.6% of GDP to 6.9%, but has narrowed since, dropping to HUF 1,721 billion or 6.4% of GDP in 2008 and to HUF 1,303 billion or 5% in 2009, the figures show.”

Why the gap between the GNI and the GDP in Hungary? According to Orbán the explanation is simple: “We created this wealth and it disappeared” abroad. He admitted that Hungary couldn’t manufacture cars on its own and therefore if Mercedes Benz makes a profit and takes this profit out of the country it is legitimate. After all, they provide job opportunities. But the banks are different. They amassed unreasonably large profits and therefore the bank levies are justified. These banks as well as the utility companies are siphoning money of the country. Again, let’s stop for a minute. It is a well-known fact that the foreign banks have been pumping money into their Hungarian subsidiaries for a number of years. That is the reason they haven’t gone under yet.

After this harangue against foreign companies and banks he listed eleven accomplishments he is proud of. I do not have the space, nor is it even worth the effort, to list them all. However, a couple of points that he made in connection with these accomplishments are worth noting.

One is his belief that if a country’s national debt is 90% or more of GDP there can be no economic growth. This mistaken notion most likely comes from a since largely debunked study by Carmen Reinhart and Ken Rogoff, two otherwise respected economists. The study, called “Growth in a Time of Debt,” claimed that economic growth slowed rather dramatically for countries whose public debt crossed the threshold of 90% of the gross domestic product.  Unfortunately, they made some errors in their calculations. The most serious was their failure to include years of data that showed Australia, Canada, and New Zealand enjoying high economic growth and high debt at the same time. More can be read about the Reinhart-Rogoff study here. It seems that whoever told Orbán about the correlation between national debt and economic growth knew about the study but not about its “Excel coding errors.”

Among the laundry list of accomplishments I found reference to an odd economic theory which even Orbán admitted was unique. As he put it, “as regards this question everybody is on the other side and we are the only ones on this side.” Well, that is frightening enough. So, what was Orbán talking about? Those on the other side claim that economic growth must come first and that this growth will then foster higher employment. But Viktor Orbán is convinced that exactly the opposite is true. First, one creates jobs, and this job creation will create economic growth. He claims that this is precisely what happened in the United States in the 1930s. Alas, it is a well known fact that it wasn’t Roosevelt’s public works program that managed to pull the U.S. economy out of the great depression. But Orbán is convinced that the same strategy will work in Hungary although even he has to admit that the two situations cannot be compared because the United States was rich enough to start building railroads and such while Hungary, being poor, can only employ public workers to dig ditches. How 300,000 ditch diggers can lead Hungary out of the economic crisis remains a well-kept secret.

We might think that these primitive economic notions are frightening, but Orbán received his greatest applause when he said that Hungary is following a road on which he is completely alone. Where that road will take the country I hate to think.