GOVERNMENT OF ROMANIA NATIONAL COMMISSION OF ECONOMIC FORECASTING

The effects of 16% flat tax in Romania

PhD. Ion Ghizdeanu PhD. St. Cristian Stanica PhD. St. Fanel Videanu Daniela Plavicheanu

International Academic Forum on Flat Tax Rate Bled, Slovenia, February 3-4, 2006

Structural, institutional and behavioural tensions in 2004

High fiscal burden. Less transparent tax system. Progressive tax which did not stimulate work. High level of hidden economy. Conclusion: the only viable solution was the introduction of a flat tax which was meant to bring a fiscal relaxation.

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Benefits of 16% flat tax The introduction of the flat tax led to: - simplification and a more efficient computation system of global income taxation; - reduction of bureaucracy; - increase of transparency in tax collection; - the flat tax introduction brought fiscal relaxation.

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Expectations before the flat tax

The expected impact was mainly the change in economic behaviour of business environment, by: Increasing the tax base; Increasing the voluntary compliance in paying budgetary obligations; Increasing the arrears recovery.

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Income categories influenced by 16% flat tax

income from independent activities; income from wages and salaries; income from pensions; income from agricultural activities; income from prizes and other sources.

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Expected results

In the budgetary revenues projection by using SAMMEGA model, we took into account the behaviour of economic agents: The partial formalization of employment: growth by 415 thousands employees during 2005 2008; The increase of collection rate for social security contribution by 2%; The nominal gross average wage will not exceed 60% during 2005 2008.

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Positive effects of fiscal relaxation

Incentive role of the direct taxation on labour and capital reduction. The transfer of resources from the budget to the population and society has a multiplying effect in economy, by generating superior revenues from other taxes (social security, VAT).

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The main conclusions emerged from statistical data analyses Stimulating the economic growth

The profit tax reduction assured important financial resources to the economic agents for production and investment . The Gross Domestic Product, excluding non-tax activities (agriculture and household industry), which basically were the most affected by the long and extended floods in 2005, grew by 6.5% in the first 9 months 2005.

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GDP growth
9 months 2004 9 months 2005 - percentage changes vs. the same period of the previous year Industry, of which: 6.0 20.1 19.7 9.5 6.4 8.9 8.1 6.6 6.0 2.0 -7.9 -12.6 7.1 7.9 6.7 3.6 5.8 6.5

- Households industry
Agriculture Construction Services Net taxes Gross Domestic Product (GDP) GDP excluding agriculture GDP excluding agriculture and households industry

Note: In the first 9 months the agriculture, sylviculture, fishing, forestry and hunting represented 11,9% of GDP in 2004, respectively 8,3% in 2005, and households industry 4,4% in 2004 and 3,6% in 2005.
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Technological modernization

Technological modernization of economy has accelerated, with positive impact for the future economic growth (9 months): Gross Fixed Capital Formation has increased by 9.4 percent. The import of capital goods increased by 31.2 percent, as compared to the average increase of imports of 23.7 percent and with the one of consumption goods of 24.7 percent.
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Improvement of the effective rates of taxation

Increasing the degree of voluntary compliance. The budget revenue from the profit tax was 50 percent higher than the due profit tax. The VAT revenues grew by 36.2 percent, fact that was reflected in the increase of indirect taxes by 25.3 percent

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The budgetary revenues

The budgetary revenues were higher by 17.8 percent than in 2004, meaning in real terms an increase by 8.1 percent. Due to the increasing number of both employees and average earning salary, the revenues of the main social security funds (state social security budget, unemployment fund, health social insurance fund) increased by 11 percent in 2005.
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General Consolidated Budget Revenues

Achievements (mil. RON) 2004 2005 TOTAL REVENUES, of which: Direct taxes - Profit tax - Income tax - Social security contributions - Other direct taxes Indirect taxes - VAT - Excises - Custom duties - Other indirect taxes Non-tax Capital Grants
Note: 2005 - provisional data

Nominal Real growth growth 2005 / 2004 (%)

17.8 8.1

Weight in total revenues (%) 2004 2005 100.0 100.0

70826.3

83435

38152.3 6483.9 7122.4

22457.4 2088.6 28525.9 16547.2 7965.1 1623.3 2390.3 3639 386.1 123.0

42413.5 6545.3 6744.4

26678.2 2445.6 35743.2 22535.7 9079.4 2040.9 2087.2 4736.2 400.6 141.5

11.2 0.9 -5.3

18.8 17.1 25.3 36.2 14.0 25.7 -12.7 30.2 3.8 15.0

2.0 -7.4 -13.1

9.0 7.4 15.0 24.9 4.6 15.3 -19.9 19.4 -4.8 5.5

53.9 9.2 10.1

31.7 2.9 40.3 23.4 11.2 2.3 3.4 5.1 0.5 0.2

50.8 7.8 8.1

32.0 2.9 42.8 27.0 10.9 2.4 2.5 5.7 0.5 0.2

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The effects of introduction of the flat tax rate on employment

The statistical data regarding the first semester (households inquire) show that the increase in employees number totally represented a transfer from the hidden economy to the official one, by 125 thousand persons, respectively.

The operative data at the end of October reveals that the employees number was higher by 140 thousand persons, as compared to December 2004.

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The effects of flat tax on average wage

During JanuaryNovember 2005, the increase of gross average wage was only 2 percent over the forecasted level. The share of net average wage in the gross average wage became 76.4 percent, exactly as anticipated.

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Thank you for your attention !

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