​The modification of the tax system, a topic that has recently gained momentum in the public space, is inevitable against the background of the increasingly likely exceeding of the budget deficit target for this year, a situation that may lead to the loss of part of the European funds and the increase in the cost of borrowing for the state. A reduction in funding sources will have an immediate impact on economic growth. But the current situation has deep roots in a long period when taxes and tax changes were introduced haphazardly, without analysis, without impact studies, and basically reduced the tax base, affecting fiscal fairness. That is, we have a systemic problem that cannot be solved by a few adjustments, but by a different approach to the taxation system, to tax administration, to budget policy, to the payment of state employees, to pensions, to the way state funds are spent, because otherwise we will again face the same problems that need to be solved today.

The situation with public finances is well known, so the objectives set by the PNRR in the fiscal reform chapter are aimed at solving current problems. In this context, the World Bank (WB) at the end of last year presented a report on the analysis of the tax system, a report that was then to be published and put out for public discussion. Also, according to the main indicators defined by the PNRR, in the first quarter of 2023 there should have been “changes to the Fiscal Code to reduce and/or cancel other fiscal incentives to simplify the fiscal system, making it more efficient, transparent and fair by 2024, as well as legislation to expand environmental taxation.”

The World Bank report also shows that a holistic approach to public finance and public policy is needed, which the business environment has supported for many years. The changes proposed by the World Bank until 2023 aim, in particular, to: replace the transaction tax with a capital gains tax on the sale of residential real estate, maintain the 10% tax rate on capital gains received through an intermediary and increase the tax rate on dividends to 10%, consolidation rules to prevent the artificial division of companies to gain access to the micro-enterprise regime, the removal of the CAS ceiling applicable to self-employed workers. and abolition of reduced VAT rates. These proposals were to be put out for consultation later this year, which would have given enough time for analysis and discussion to ensure that those measures which do not create greater imbalances and are implemented predictably are adopted. But the discussion has been postponed and now we are under pressure, it is about the urgent need to change taxation even from September 1, so that Romania does not suffer from financial sanctions.

In conclusion, let us once again note the formalism of public consultations and the ad hoc approach, without a long-term perspective of supporting the consolidation of public finances, both for the benefit of the state and the private sector. I emphasize, only a few changes to the Fiscal Code, as it was done before, without analysis, without economic modeling of the impact, do not solve the fundamental problems. The way in which fiscal administration is carried out, how public money is spent, the architecture of fiscal policy – ​​all these need to be re-analyzed and reconfigured on a sustainable basis to have a positive effect in the long run.

Also, read about this topic in the article: “Budget and taxes: shall we buckle up?”

Article supported by Pwc Romania