Economic Nonsense: The Ignorance of ANAF

In recent weeks, several articles in the Romanian press have highlighted a campaign by ANAF to seize as much as three billion euro from our country"s own citizens. This effort - an attempt to "retroactively collect" allegedly owed VAT from physical persons who conducted real estate transactions between 2004-2008 - has been rightfully called "abusive", "unconstitutional", and "desperate". But an equally appropriate adjective is "ignorant", and it is one that is worth expounding upon, because the rest of the press has all but ignored it. Specifically, ANAF"s actions betray an ignorance of economics that we owe it to ourselves, our readers, and unfortunately, the authorities to explain.

The pretext of ANAF"s actions is that physical persons who conducted real estate transactions that had the character of an "ongoing activity" should be retroactively categorized (at ANAF"s discretion) as "traders" and be charged 19% VAT. There is no need to dwell on the vagueness of the definition given above, the absence of normative rules for its application, the potential for blackmail, and the implications of such retroactive taxation within an allegedly free country. The rest of the press is already covering these topics.

In this case, however, the abuse is so large that its economic implications alone are sufficient to unmask its nature. Why? Because in reality ANAF is now trying to charge taxes on transactions that... didn"t exist.

To understand why, we need to create an example comparing two different sellers of real estate. Let"s call them Gheorghe and Dan. Gheorghe is lucky-he, like the majority of people in the market, has not been classified arbitrarily by ANAF as a "trader". Let us assume he is trying to sell his apartment for 100,000 euro and of course is not charging VAT. Dan, however, is not so lucky. He buys and sells a few apartments each year. ANAF therefore tells him that he must charge 119,000 euro when he sells an apartment of equal value as Gheorghe"s. In other words, ANAF has practically told Dan that he is "priced out of the market" and cannot possibly compete other physical persons. Why? Because the majority of people that Dan is buying from are not "traders", hence Dan cannot expect to recover anything close to the 19% that ANAF is forcing him to price into the apartments that he tries to sell. Let"s repeat the exact meaning of that. Dan is structurally priced out of the market and his transactions don"t happen-Gheorghe"s apartment sells for 100,000 and Dan"s doesn"t sell at all. In other words, the very structure of the real estate market cannot allow a VAT regime to exist amongst physical persons, the majority of whom are selling apartments and land without VAT. Such a VAT regime automatically eliminates any small minority of VAT-payers (so-called "traders") who must sell for a higher price on one side while usually not recovering much on the other.

Imagine, for instance, that you own a pizza shop and ANAF says that you (only you) must charge 1.19 euro for a slice of pizza, when three other pizza shops are only charging 1.00 euro per slice. You would likewise be structurally "priced out of the market" and your intended transactions wouldn"t happen. You would just go bankrupt, since the buyers would go elsewhere. But the reason that pizza shops in real life stay in business is that everyone in the market (not just a few unlucky "traders") faces the same VAT regime and has an equal opportunity to recover some VAT within the cost structure as well. As demonstrated above, the real estate market is not the same, because VAT payers have to compete with the majority of physical persons who don"t pay VAT.

For this reason, it is all the more ironic that ANAF describes an economically impossible VAT regime as applying to people who conduct real estate transactions "on an ongoing basis". For it is specifically those people - those cursed with the title "traders" - who cannot expect to remain "ongoing" for very long.

It is also no wonder that this is happening retroactively. Because it couldn"t happen any other way. Had such VAT rules actually been applied from 2004-2008, only a fraction of the transactions reported would have taken place at the agreed prices-and a huge number of them would not have even taken place at all. ANAF must realize this, and hence they are being dishonest-and if they don"t realize this (i.e. they are just ignorant), then that is nearly as unforgiveable.