The European Commission estimates that progressive taxation levied on global income in Romania, with tax rates of 6%,12%, and 18%, would bring EUR 11.8 billion in revenues to the budget, according to an analysis consulted by Profit.ro. The study does not account for the [negative] impact on employment or capital formation and GDP growth, however.

The progressive taxation scheme envisaged by the EC stipulates a 6% income tax for incomes below 33% of the average income, 12% for incomes between 33% and 100% of the average income, and 18% for incomes above average. 

Currently, there is a flat 10% income tax on wages, charged after the 10% health system contribution and 25% pension contribution, and a personal deduction. But other types of incomes (from dividends, liberal or freelancing activities) have different regimes, some of them more favorable and hence used for tax optimization.

The impact on individual income would be positive 0.16% for those with a gross income in the first(lowest) decile, negative 0.47% for those with a gross income in the fifth decile (close to the median income) and negative 4.47% for those with an income in the tenth decile (the highest earnings). 

A number of external institutions, such as the European Commission, the IMF, and the World Bank, have been suggesting for several years that Romania introduce progressive taxation.

However, Romania has major inequities in the way it taxes labor income excessively compared to other types of income, so before considering any form of progressive taxation (a decision that should not be taken without significant support at the societal level), politicians should ensure a fair tax system, with the same rules for income regardless of its nature (through income globalisation and non-discriminatory treatment), as well as a cap on social contributions that benefit the overall income, according to the Commission’s recommendations.

iulian@romania-insider.com

(Photo source: Juan Moyano/Dreamstime.com)