The Truth and Justice Alliance and their candidate, Traian Basescu, won the November Presidential Elections from Romania. In the first days, after assuming the Prime Minister function, Calin Popescu Tariceanu and his cabinet introduced the flat tax of 16% policy. Tariceanu's centrist cabinet attempts to prepare Romania for its role as a stabilizing factor in the Balkans and the Black Sea and and for its 2007 accession to the European Union. In this context, the new Romanian Government has introduced a new fiscal policy to eliminate, or at least reduce the tax evasion, corruption and poverty.Romania's new rate of 16% applies to both personal and corporate income. It replaces five personal tax brackets ranging between 18% and 40% and a corporate income tax of 25%. The International Monetary Fund approved the move and called it a "good fiscal policy". But, is the flat tax really working? Those who are in favor of such a move say that it encourages the economic activity while bringing more revenue to the government.
Romania's move towards a single, flat tax comes after Estonia began the trend back in 1994, being followed by Latvia, Lithuania, Ukraine, Russia, Serbia and Slovakia. Some economic analysts predict that Poland and the Czech Republic will soon join the club.
Apart from reducing the tax evasion, the flat tax system is also easy to administer and it encourages the unemployed to seek jobs, while the ones who already work are encouraged to work harder in order to increase their salaries for themselves, not only for the state's sake.By implementing this new fiscal policy, Tariceanu's government expects to bring the black economy in the open and tax it. Dr. Alexander Klemm analysing the effects of the tax flat in Estonia, declared that while there was some improvement in reducing the tax evasion, a fix single tax did not have any effect on the labour supply work efforts or higher revenues to the state budget.
In Romania, as everywhere else in the former communist countries the taxes imposed by the state were progressive in order to finance various social welfare measures. After the fall of communism in 1989, the Social-Democratic Party (PSD) continued to perpetuate the political and the economical legacy of the former communist party to a certain extent. Thus, it kept the progressive taxation system, based on five classical brackets. However this system has become less and less efficient, due to increases in taxation levels and widespread corruption.
A centralized government controlled system as the one we have had in Romania in the last 15 years had by its nature to evolve into a sordid game of lobbying, bootlicking, favours granted and bribery, with its rewards going to the sycophants, the inept and the immoral in contrast to the free-market system of competition, that rewards skill, efficiency and productivity.
The long-term consequences of the massive corruption are still very much present in today's Romania and are related to the:
- A disintegration of the community, because it has reduced the social transparency and the social opportunities for the active or passive Romanian citizens
- A state with weak institutions
- Suffocating bureaucracy
- Incomplete and approximate legislation
The newly elected government realized that the only way to reduce the massive corruption is to stop the practice of arbitrary interfering in economy or justice by adopting a series of measures that are in agreement with the liberal socio-political and economical system of the Occident.
Due to the very poor administration of the state budget, in the last four years the underground economy was evaluated at 40%.
However, the new fiscal policy is not all about the 16% tax. In the pre-accession programme sent by the new Cabinet to Brussels few weeks ago, there were few financial aspects the civil society just found out about. Therefore, the EU accession is asking its tribute in bigger excises, a more expensive price for energy, gas and oil.
The fiscal "relaxation" promised by the new government continues with the following list:
Increased taxes on:
- Stock exchange earnings
- Agricultural activities
- Real estates
- Possessions of agricultural lands
- Crude oil
New TVA (tax on added value) rates/quotes
- For medicines
- For agricultural producers
- Tourism services
The new 16% flat tax will cause an important financial decrease at the local budgets; the representatives of various municipal councils fear that they will enter in collapse, most probably at the beginning of summer. In this context, they cannot finish the projects already started, and are not in condition of initiating other needed projects, like the consolidation of roads and buildings infrastructure. The present lack of balance was produced by the abuse in the public budget administration of the former government. The new flat tax is not improving the situation for the time being but it's not making it much worse either.
What Romania needs at this point in time and taking in consideration the difficulties it has to deal with, is a transparent financial policy and a competitive business environment. When Romania will achieve a level of security in terms of foreign and domestic financial investments, then the 16% flat tax may revitalize the national economy.
Manuela Paraipan has been published in The Wall Street Journal, The Washington Times, World Security Network (WSN), World Press, Yemen Times and other publications.