Flat tax introduction set to produce mixed results

The flat tax has caused uproar among employees, who expect higher salaries, and spurred ideas among business people, who are making plans about how to invest the extra cash they will have available following the tax cut. The high social security contributions level, however, remains an obstacle that prevents high wages from “coming out in the open”, that is the payment of such contributions up to the real wage. What will probably come out will be the incomes of the self-employed people: architects, notaries, accounting experts, lawyers, who might prefer to pay 16% instead of 40% and avoid the risk of being charged with tax evasion. Yet this will only happen if the tax inspections become more efficient. Similarly, the small wages paid on the black market in the textile industry, for instance, will come out in the open only if employers are driven not only by the lower taxes but also by the fear of a Labour Inspection team dropping by.

Not every employee will stand to gain, however, but only those that negotiated their salaries as a gross amount.

The employees that have their contracts concluded for net amounts will make the same money as before or will share that something extra with the employers.

“I believe there will be grievances and dissatisfaction, because there are people who are paid gross salaries and people who are paid net salaries inside the same industry. In our case, all the amounts are gross amounts, so that the increases will go to employees completely,” says Mugurel Ceraceanu, the general manager of Asiban insurance company.

Salaries are usually negotiated as gross amounts at insurance companies, banks and generally multinational companies. The average income of those employees usually falls into the highest tax bracket, so that net salary gains will be 10 to 20%.

There are also multinational companies that pay net salaries.

“In Oriflame’s case, the fund surplus derived from the tax cut will be allocated to marketing and advertising investments. Salaries will go up by about 20% next year, though not because of the introduction of the flat tax, but because we negotiate net salaries in our company,” said Monica Tatoiu, general manager of Oriflame Romania cosmetics company.

She feels the reduction of the underground economy weight, following the introduction of the flat tax will lead to an increase in the consumer lending and eventually to a decline in the consumer loan interests.

Salaries were negotiated in gross amounts at furniture maker Alprom.

“We negotiate gross amounts, which means the introduction of the flat tax will lead to an increase in revenues for employees. As for the benefits derived from the profit tax cut, the funds will go to investments in new technologies mainly for environment protection and production,” stated Dumitru Petcu, Alprom Romania’s general manager.

Alprom is currently employing 3,500 people and its turnover stands at more than 20 million euros. Petcu added his company had been faced with a strong migration of the work force to destinations abroad.
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