Finance minister in one last push for introduction of flat tax

The Finance Ministry is making a final push to introduce the flat tax in Romania, after its previous attempt ended in failure last fall. “A calculation method based on a 14% tax has already been completed and it would trigger no losses for the state budget, even if we do not consider last year’s increased tax collection rate,” government sources told Ziarul Financiar.

The flat tax, which is sensibly lower than last year’s proposed level (23%) would neutralise the counterargument referring to the losses that were to be incurred by the small taxpayers, who are now paying an 18% tax. To be enforced in 2005, the entire project to modify the income tax system must be finalised and endorsed by Parliament by the end of June, in line with the Fiscal Code modification norms.

The Ministry of Finance has again requested the help of consultancies to prepare the second project draft for the introduction of flat tax. “We started the general talks and we will start working on the new system’s details in March-April,” said Rodica Segarceanu, tax-partner with Deloitte&Touche. Besides the technical issues, the war will be waged on the ideological battlefield. Last fall, the Finance Ministry’s attempt at replacing the progressive tax system with five income categories did not stand a chance, given the opposition voiced by President Ion Iliescu and some members of ruling party PSD (Social Democrat Party), which supports the principle of social equity. Moreover, trade unions did not agree, either, claiming that people with small wages will actually lose money, because the tax would have climbed to 23%. The Ministry disputed their arguments, saying deductions were available. The trade union members, however, continued to argue that only people with big revenues would had gained from the proposed set of measures.

Although the Finance minister himself was not a big supporter of the flat tax last summer, when talks began, Mihai Tanasescu is now trying to introduce a new taxation system. However, many issues need to be dealt with before the new system is applied, such as the possible elimination of the deductions included in the current version of the Fiscal Code. However, this is not deemed as a significant obstacle, since the deduction of contributions to the occupational pensions, for instance, will not even be applied this year. The biggest problem lies in the income categories for which the flat tax would apply. According to Government sources, it is hard to believe the new system would go all the way, so that the flat tax could enclose the entire range of incomes, including the money earned from interest rates and dividends.

From the macroeconomic perspective, it may be argued that the additional revenues, which would appear as a result of small-scale introduction of the flat tax, would fuel demand for imported products, which is already soaring. However, the flat tax alternative is supported by the example of Slovakia, which enforced the 19% flat tax (both for income and for profits) on January 1, 2004. Flat tax was opposed by the president of Slovakia, but Parliament eventually won the battle. The tax cut has already caught the eye of the country’s German neighbours, willing to move their fiscal residence to Slovakia.
razvan.voican@zf.ro