The payroll taxes are extremely high in Romania and the higher the taxation becomes, the lower the number of employees gets, the World Bank’s latest Poverty Assessment report shows.
“Such high taxation of the formal sector workers and employers alike results in an inflexible labour market leading to inefficiencies and contributing to high unemployment levels,” World Bank analysts say.
They explain the Romanian authorities are aware of the problem, but the three-percent payroll tax cut will not make up for the increase in the last few years.
“The Romanian Government is aware of the problem, and in 2003 payroll taxes
were reduced from 57 to 52 percent. But such relatively small decreases will not make-up for the large increases in previous years (in 1997, payroll taxes were 35 percent of gross wage),” the World Bank’s report shows.
Any possible reduction in payroll taxes would not lead to decrease of revenue at the same rate, because reductions in payroll taxes would in part be compensated by the expansion of tax base – through shifts from informal to formal work and reduced unemployment; as well as through increased compliance in terms of accurate wage reporting and tax payments, the World Bank’s experts say. Payroll taxes now amount to 35 percent of the gross salary for employers and to 17 percent for employees. Companies pay 24.5 percent to the pension fund, 7 percent to the health care fund and 3.5 percent for the unemployment fund. Employees pay 9.5 percent as pension contribution, 6.5 percent for medical insurance and 1 percent for the unemployment fund.
The authorities promise they will keep reducing the social security contributions level by another three percentage points as of next year and estimate payroll taxes to reach 42-45 percent throughout 2005-2006. Payroll taxes reached 61% in 2000. The World Bank report also warns about the labour legislation it deems as restrictive. miruna.lebedencu@zf.ro