The current income tax system for the natural persons, based on an incomplete globalisation of income sources, has yielded no results, although much money has been spent to manage it in the past three years.
A difficult system, both for the citizens and for the tax authority’s administrative body, which led to piling debts to the budget, can now be replaced by a simple formula, already tested in other countries – a system in which all levels of income are taxed at the same rate. However, the numerous pros (a simple, easy, neutral tax system) are facing an ideological principle: social equity, arduously supported by President Ion Iliescu.
Although ministries’ experts have worked out a method so that budget revenues should not take a sharp fall after the flat tax is applied and those with small incomes should not pay bigger taxes than they do now, the fiscal reform is now mired in political talks.
The Government has agreed, in principle, to introduce the flat tax, business officials are all for it and even most of the trade unions have been persuaded that no one will lose money.
However, President Ion Iliescu says the flat tax is not fair, socially speaking. Moreover, officials of the ruling party (PSD) yesterday said the party was looking to perform more “simulations”, so as to test the potential effects of the flat tax. PSD officials are saying that this “in-depth”, detailed analysis has nothing to do with President Iliescu’s stance.
“We will probably not make a decision this week, either,” said Prime Minister Adrian Nastase.
However, the flat tax system has several obvious advantages. Flat tax secures simplicity, objectivity (fair system) and contributes to growth, by boosting investments. It entails the elimination of deductions and exceptions, but allows certain personal deductions. The system will boost people’s savings and investments, taxing both earnings and savings (when applied “fully and fairly” the system comprises taxes for the entire income).
Flat tax brings more money to the budget – companies will pay salary taxes, arrears will go down and debt rescheduling will become a rare occurrence (thus avoiding allegations regarding debt rescheduling granted to accommodate certain interests). Companies now have mounting debts, where salary taxes and social security contributions are concerned.
The income statement that the taxpayer needs to fill in will be much easier to understand, with fewer paragraphs.
The system will also help the budget save money – tax returns amount to 1,500bn ROL under the current system, but this money can go back to the budget (health, education) and to the economy, through investments.
Flat tax is just another form of social equity – the more someone makes, the more they pay, because this is a percentage, not a fixed quota. Moreover, it encourages business, since it allows companies to invest in productivity (by paying bigger wages), ergo in competitiveness. Furthermore, highly-paid professionals will no longer look for loopholes, trying to evade taxes, as the taxation system will be very clear.