The Romanian attempt for abolition of the flat tax is still embryonal
Bulgarian media reported on 29 June, basing themselves on an article by Reuters, that Romania has started revoking the flat tax in the same day the new government of social democrats and liberals with Mihai Tudose as a prime minister received parliamentary support and its political life started. The news might have sounded surreal to many. Just a few days earlier the social democrats’ opponents were foreseeing that the biggest party in the Romanian parliament would not be able to vote successfully a vote of no confidence to the former premier Sorin Grindeanu, appointed by the social democrats themselves. But now the articles claimed that Liviu Dragnea’s men were going all in against the most clear symbol of capital’s domination over labour in Romania and Eastern Europe – the flat tax upon the income and the profst, which is 16% in our northern neighbor. What’s going in Bucharest, where in the era of Trump it looks like politics is less and less easy to forecast?
At this moment the situation with the tax changes looks more like a storm in a cup of water. Nobody knows whether there will be any changes, what are they going to be, when will they enter in force, how will they influence the economy. But the bomb has already been detonated and it’s true that some revolutionary ideas for changes of the Fiscal Codex and the financial sector have been launched. However, everything is in the land of the hypothetical.
Reuters announced concrete numbers in the proposed changes. According to the revised governance program of the social democrats the profit tax at 16% could be replaced by a progressive tax upon the turnover. On the other hand, the lower social strata would probably support the desire of Dragnea and Co. to lower the income tax to 10% with an untaxed minimum of 2000 lei (438 euro). But the people with lower financial capabilities would probably not be happy with their social security payments lowered by 4,25% to 35% and the whole burden of them being put upon the workers.
At the same time the owners in the Romanian economy could also have grounds for both happiness and sorrow, if the proposed measures enter into force. On one hand, the dividend tax would disappear. On other hand, the lowering of VAT with 1% would be postponed with one year to 2019. Thirdly, citizens who have incomes above 3178 euro per month would have to pay “solidarity tax”.
It looks like the social democrats want simultaneously to give and to take from both the rich and poor, attempting to support the ordinary voter and stimulate the business. But the finance minister Ionuț Mișa declared that all those data are preliminary in the times of their announcement. In other words, he announced something that could turn out to be nothing more than a trick for wagging the media dogs.
The prime minister Tudose and the social democrat’s leader Liviu Dragnea add that the discussion for the concrete dimensions of the measures will take place in the future, and the different opinions will be respected. The labour minister Lia Olguța Vasilesccu hopes that the government will manage to skip the legislative requirement for the changes to enter in force no earlier than six months after their publication in the Official Monitor (the state newspaper where all laws are published in order to start having legal power). She wants these changes to be active as of the beginning of 2018.
Additionally, the finance minister Ionuț Mișa announced the government’s intentions to nationalize the obligatory private pillar of the social security. At this moment 7 million Romanians make social contributions to obligatory private funds, that have assets of 7,69 billion euro, reports Reuters. Similar nationalizations have already taken place in Poland and Hungary.
The Polish university lecturer Piotr Kozarerzevski explained these activities with the changing balance between the state and the market in the advantage of the state in an interview for the Romanian edition of the American magazine “Foreign Policy”. Another Polish university professor – Jan Toporowski, commented on the lack of confidence in the Polish conservative party “Law and Justice” towards the foreign capital: “This economic nationalism is further strengthened by the common belief of the present Polish state administration that the managers of the Polish companies are not sufficiently patriotic”. Toporowski reminded that in the Polish case “the return of the pension system back towards the public sector was inevitable, given the scandals in the private pension system, which bases its incomes on the financial markets”.
Just like the Polish party ”Law and Justice” the Romanian social democrats are in essence a conservative formation that upholds values such as orhodoxy, family and tradition, even though they are officially to the left. They express more emphasised positions in support of the national business.
According to Liviu Dragnea the foreign companies pay three times lower taxes in Romania compared to the local firms, even thought they make almost the same turnover. According to data, provided by the social democrat leader the multi national companies have an overall turnover of 127 billion euro, but are taxed upon overall profit of only 2 billion euro, whie the local Romanian companies generate turnover of 120,5 billion euro, but declare a taxable profit of 6 billion euro. ”I don’t belive the foreign companies that have come to Romania don’t know how to make business. Let’s see if there are objective or subjective reasons for this phenomenon”, says the politician.
Dragnea’s arguments put water in the mill of a radical proposal that has been discussed for some time – the replacement of the profit tax with turnover tax. The explanation is that at this moment many of the foreign companies don’t declare profit, or declare minimal profist, so that they could avoid or minimize their taxes. At the same time they develop activity of wide scale, which remains outside the budget. The expectations are that current and the next year Romania will have the highest levels of budget deficit in the EU, while the social democrats follow the policy of salaries hikes.
Money should come from somewhere and given the lack of other tools for influence over the economy, the political battle takes place at the territory of taxes. Romania has been pursuing an active fiscal policy for at least two years. In 2015 it introduced a special VAT rate of 9% for foods, which made the products cheaper, left more money in the poor social strata (that vote for the social democrats), raised the consumption, but was criticized for causing disbalances in international trade, as the rise of imports was higher than the rise of exports.
The last change of the Fiscal Tax was in the end of 2016, when VAT was lowered to 19%. Also in 2016 102 state taxes were abolished. Among them were the radio and TV taxes, the environment wax in cases when a second-hand car is bought, consular taxes, and others. Their financial dimension for the budget was insignificant – less than 1%. But the measure had its symbolic meaning. It showed how the social democrats, who have introduced the special TVA rate for food in 2015, in reality support the reducing of bureaucracy. And this is a main demand of the middle class, which is wooed by all the parliamentary political forces.
The social democrats’ unclear plans met an expected resistance among the economic experts and the international capital. Among the greatest critics of their tax change proposals is the expert Mihaela Mitroi of the audit company PwC Romania. In an article of her own for the site HotNews she underlined that the desire of social democrats to tax the turnover will enter in conflict with the European law, and that is why it simply can’t work.
Another criticism is that the higher levels of taxation for foreign companies would make the foreign capital flee Romania. Foreign investors are always sensitive towards taxation in countries such as Romania and Bulgaria, but it is possible that other advantages – such as the cheap labour, make them stay in case of a more moderate raise of taxes for them. A part of the international companies to the north of the Danube are in lucrative spheres – such as banking, mining, and electricity distribution. They would hardly go away at the smallest raise of their taxation.
Dragnea himself doesn’t see a conflict between his party’s proposal for turnover tax and the European law: “At this moment our country applies such taxation with a rate of 1% for ventures with a turnover of up to 500 000 euro. It was well accepted and created jobs.” On their turn, opponents of the idea point out that there are many firms that declare only minimal profit and a turnover tax would make them go below the red line in their accountancy balance.
The Coalition for Development of Romania – an organization that unites the associations of the investors in the country north of the Danube, has already said that the proposed measures need to be discussed publicly and their influence needs to be evaluated. At this moment Romania has attracted almost 70 billion euro foreign investments. Foreign investors have hired directly 1/3 of the private sector employees – 1,2 million people, while other jobs have been opened indirectly, as a result of the economic activity of the foreign companies.
It’s not difficult to observe that the foreign sector of the Romanian economy is well developed. It is responsible for a big part of the exports and for the big economic growth that has reached 5,7% in the first quarter of 2017. At the same time Romania is on the last places in the region in terms of foreign investments per capita – 3 130 euro per capita. Even Bulgaria “makes it better” – 5 270 euro per capita. Hungary and the Czech Republic are further forward – respectively 8 386 euro and 9 703 euro per capita.
Perhaps both “the strength” and “the weakness” of foreign capital in Romania explain the maneuvers of Dragnea. To the north of the Danube there are many people who support passionately the fight against corruption and understand modernization as elimination of the corrupted politicians, including among the circles of the social democrats. There are also many that fear that the foreign influence in the Romanian economy and state is too strong. The Social Democratic Party might have received 45% of the votes at the latest elections, but the economic power in the state often is controlled by other people and lobbies. The fight against corruption is not under the control of the social democrats too. That is why their taking of “patriotic” economic positions could give them red points among the people.
However, the way they do it – chaotic and contradictory, shows that perhaps the storm in a glass of water might have another function – to discredit ideas that could be meaningful, if applied intelligently. At the end of the day, at least a part of the suggested ideas serve the capital In Romania, who has a strong influence in the economy and his its tools for influence in all the parties, including the Social Democratic Party. After the outbreak of the February protests, that have united thousands Romanians against the Grindeanu government and Dragnea the first opinion poll showed that the approval rate for social democrats has been above 50%. At the same time, both in February and now those who hate Dragnea and the social democrats mobilise.
Indignation of passions along the axes national-international gives dividends to both parties. The problem is that at this moment everything remains just rhetoric. The true reforms want actions and not words. Poland and Hungary are often crticised by Brussels, exactly because of the fact that they stepped into action and changed certain internal and external politico-economic balances. Will Romania go along the Central-European way? There are wishes in that direction, but the influence of the Western European business and the capabilities for play of the national political theatre should not be underestimated.