Raising taxes and fees, removing exemptions in construction, agriculture and IT, and introducing progressive taxation are solutions suggested by a study by Cornel Ban for the Friedrich Ebert Foundation in Romania on the budget deficit.

*Cornell Ban teaches international political economy at the Copenhagen Business School

See the full study:”Fiscal reform – short-term proposals“

According to the cited source, the relatively modest fiscal reforms will bring 38 billion lei (7.6 billion euros) to the state budget.

“This amount allows to finance the budget deficit from the first half of 2023 (20 billion RON) and positively respond to the underfunding of education highlighted by the teachers’ strike (8 billion RON, 1.6 billion euros),” the document says.

According to him, less than half of this money will come from the introduction of a moderately progressive tax at regionally competitive rates, and the rest of the money will come from:

• increase tax on dividends to 18%

• tax of 1.2% of turnover over 1 billion lei for energy companies, 100 million lei for retail companies, all gaming companies

• lowering the threshold for micro-enterprises to 250,000 euros

• cancellation of benefits for IT, construction and agriculture.

“Nearly 61% of these fiscal mobilization efforts will be directed at increasing taxes and fees, while the rest will be aimed at eliminating benefits and sectoral taxes on construction, IT, food and agriculture,” the document said.

The study also says that if Romanian society can mobilize for a strategic project of systemic transformation of the tax system to bring it to the average regional level of the countries with which we most often compare ourselves (the Visegrad Group), it will require four times more effort than the document suggests .

“Thus, in order to reach the average share of tax revenues from the reference group represented by the countries of the Visegrad Group, another 130 billion lei (26 billion euros) will be needed in the conditions in which the reforms proposed by us are not carried out,” the cited source notes.

• “This target will simultaneously require even higher taxes and an increase in ANAF’s collection capacity to reduce, in particular, the scourge of VAT non-collection (estimated at 33%), transfer pricing and debt transfers (unestimated impact but estimated in other high dependency countries from multinational companies as significant)”.

According to him, ANAF should centralize such data as:

• fiscal losses caused by the 5% VAT rate, which are difficult to defend under current conditions (e.g. supply of 120 sq m buildings with a price cap of €120,000, stock market gains),

• multiple properties in multiple counties so we can see how much can be achieved by taxing properties larger than one house.

The study notes that there is a need for qualitative data that would allow wealth taxation, simulations with current personal incomes that take into account not only salaries, but also other incomes (rents, dividends, stock options), the impact of the application of the European Rule, according to by which a PFA must have multiple clients to not be considered a full-time employee.

4 scenarios of progressive taxation

Cornel Bunn created 4 scenarios for the application of a progressive tax:

“1. Keeping the current rate of 10% on all income, but 16% on anything above €2,200 gross.

In this scenario, only the wealthiest 10% of taxpayers pay the increased rate, leaving the rest unchanged.

Given that the flat tax was 16 percent in 2017, in this practical scenario even the richest 10 percent are effectively paying the same as they were a few years ago.

Of all the scenarios, this is the easiest to accept. The problem: under this scenario, only 5.73 billion lei more money will be collected for the budget, an amount too small to have a significant impact on the problems.

2. Rate of 10 and 19%, respectively, on any amount exceeding 2,200 euros gross.

In this scenario, the idea was to minimize political opposition by protecting the position of the vast majority of taxpayers, but increasing the tax burden on the top 9-10% of incomes above the historic flat tax threshold.

This is also the scenario supported by the IMF in its technical assistance report on fiscal reform in Romania last year. The impact is somewhat greater: 7.5 billion lei more money has been collected for the budget. However, the amount is only a quarter of the budget hole in 2023.

3. Our personal proposal is to return to the 2017 tax burden for the vast majority of taxpayers, applying a rate of 16% but retaining 10% for incomes below the minimum wage (inclusive), and then applying the top decile rate 21%, a modest increase over the old flat tax of 16%.

Thus, the principle of minimizing the fiscal pressure on revenues that are already fiscally mobilized and collecting a much larger amount is preserved, but without pushing the basin with revenues above 2,200 euros into intensive political defense. Simulations show us that this is the solution

optimal, because 15 billion more money is collected in the budget.

4. Slovak scenario with a step of 19 and 25%. In which we will keep the 10% rate for those who earn up to the minimum wage. Another RON 20 billion was raised. However, the difference with the previous scenario is not so great that, in our opinion, it is worth the political costs.”

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