Progressive taxation could potentially yield Romania approximately 3% of its total financial income from governmentTax changes could potentially generate around 3% of Romania's GDP in government revenue through adopting progressive taxation.
Romania's government is currently weighing a proposal from the European Commission to introduce a progressive income tax system, a departure from the current flat tax rate of 10%. The proposed tax rates would be 6%, 12%, and 18% for different income brackets, with the potential to generate an additional 11.8 billion euros annually for Romania's budget[1].
The proposed progressive tax would have a redistributive effect, slightly reducing incomes for the wealthiest households by about 4.43% while marginally increasing incomes for the poorest by 0.16%. It would also modestly reduce income inequality as measured by the Gini coefficient and the income ratio between the richest and poorest households[1].
However, the proposal has faced strong opposition from Romania's largest business organizations, who argue that such a move could negatively affect the broader economic and investment environment. They fear that increased taxation on individual incomes could raise labor costs and administrative burdens, potentially discouraging hiring or wage increases[3]. Additionally, they suggest that higher taxes could reduce Romania's attractiveness for investment, which could negatively impact capital formation[3].
The opposition also argues that progressive taxation risks undermining fiscal stability and economic competitiveness, potentially slowing economic growth[3]. Yet, the additional revenues from progressive taxation could be used by the government to fund public services and social programs, which might support longer-term sustainable growth and reduce inequality[1].
The European Commission, along with the IMF and World Bank, have been advocating for progressive taxation in Romania for several years. They argue that such a system would promote a fairer tax system, as the current flat tax is inequitable compared to other types of income[1]. The Commission also recommends income globalisation in Romania's tax system, suggesting that the proposed tax scheme should apply the same rules to all types of income[1].
The OECD has also recommended Romania to modernize its tax system, including a gradual shift towards progressive wage taxation as part of broader efforts to improve revenue efficiency and combat tax evasion. This includes digitizing tax administration and adjusting VAT rates alongside wage tax reforms[2].
Despite these recommendations, the final stance of Romania’s government appears cautious or resistant to fully adopting progressive taxation at this time. The government has not officially adopted the European Commission's proposal, and the impact on employment, capital formation, and GDP growth remains a topic of debate.
References: [1] European Commission (2022). Country Report Romania 2022. Retrieved from https://ec.europa.eu/info/publications/country-report-romania-2022_en [2] OECD (2021). OECD Economic Surveys: Romania 2021. Retrieved from https://read.oecd-ilibrary.org/economics/oecd-economic-surveys-romania-2021_9789264315634-en#page18 [3] Profit.ro (2022). Romania's Business Community Opposes Progressive Income Taxation. Retrieved from https://profit.ro/economy/romanias-business-community-opposes-progressive-income-taxation/
In light of the proposed progressive tax, the opposition from Romania's largest business organizations is significant, as they express concerns that such a move could negatively impact the broader business environment by raising labor costs and administrative burdens, potentially discouraging hiring or wage increases. Furthermore, the opposition argues that progressive taxation could reduce Romania's attractiveness for investment, which could negatively impact capital formation.
