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The effects of 16% flat tax

in Romania

GOVERNMENT OF ROMANIA

NATIONAL COMMISSION OF ECONOMIC FORECASTING

In ternat ional AcademicForum on Flat Tax Rate

Bled, Slov enia, February 3-4,2006

PhD. Ion Ghizdeanu PhD. St. Fanel Videanu

PhD. St. Cristian Stanica Daniela Plavicheanu

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International Academic Forum on Flat Tax Rate

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.

Structu ral, ins t i tut ional and

behaviou ral tens ions in 2004

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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 fiscalrelaxation.

Benef i ts o f 16% flat tax

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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.

Expectations before the

flat tax

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income from independent activities;

income from wages and salaries;

income from pensions;

income from agricultural activities;

income from prizes and other sources.

Incom e catego r ies inf luenced

by 16% flat tax

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In the budgetary revenues projection by using SAM-MEGA model, we took into account the behaviour ofeconomic agents:

The partial formalization of employment: growth by415 thousands employees during 20052008;

The increase of collection rate for social securitycontribution by 2%;

The nominal gross average wage will not exceed 60%during 20052008.

Expected resu l ts

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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).

Pos it ive effects o f f iscal relaxat ion

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The main conclusions emerged from

statistical data analyses

St imulat ing the econom ic grow th The profit tax reduction assured

important financial resources tothe economic agents for

production and investment.

The Gross Domestic Product,excluding non-tax activities(agriculture and householdindustry), which basically werethe most affected by the longand extended floods in 2005,grew by 6.5% in the first 9months 2005.

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GDP grow th

9 months 2004 9 months 2005

- percentage changes vs. the same period of the previous year -

Industry, of which: 6.0 2.0

- Households industry 20.1 -7.9

Agriculture 19.7 -12.6

Construction 9.5 7.1

Services 6.4 7.9

Net taxes 8.9 6.7

Gross Domestic Product (GDP) 8.1 3.6

GDP excluding agriculture 6.6 5.8

GDP excluding agriculture andhouseholds industry

6.0 6.5

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 of economy has

accelerated,with positive impact for the future economic

growth (9 months):

Gross Fixed Capital Formation has increased by 9.4percent.

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.

Techno logical modernizat ion

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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 25.3percent

Impro vement of the effect ive rates

of taxat ion

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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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Achievements (mil. RON)Nominal

growthReal

growth Weight in total revenues (%)

2004 2005 2005 / 2004 (%) 2004 2005

TOTALREVENUES, 70826.3 83435 17.8 8.1 100.0 100.0of which:

Direct taxes 38152.3 42413.5 11.2 2.0 53.9 50.8

- Profit tax 6483.9 6545.3 0.9 -7.4 9.2 7.8

- Income tax 7122.4 6744.4 -5.3 -13.1 10.1 8.1

- Social security contributions 22457.4 26678.2 18.8 9.0 31.7 32.0

- Other direct taxes 2088.6 2445.6 17.1 7.4 2.9 2.9

Indirect taxes 28525.9 35743.2 25.3 15.0 40.3 42.8

- VAT 16547.2 22535.7 36.2 24.9 23.4 27.0

- Excises 7965.1 9079.4 14.0 4.6 11.2 10.9- Custom duties 1623.3 2040.9 25.7 15.3 2.3 2.4

- Other indirect taxes 2390.3 2087.2 -12.7 -19.9 3.4 2.5

Non-tax 3639 4736.2 30.2 19.4 5.1 5.7

Capital 386.1 400.6 3.8 -4.8 0.5 0.5

Grants 123.0 141.5 15.0 5.5 0.2 0.2

Note:2005 - provisional data

General Conso l idated Budget Revenues

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The effects o f introduc t ion of the f lat tax

rate on employment

The statistical data regardingthe first semester (householdsinquire) show that the increase inemployees number totally

represented a transfer from thehidden economy to the officialone, by 125 thousand persons,respectively.

The operative data at the end ofOctober reveals that theemployees number was higher

by 140 thousand persons, ascompared to December 2004.

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During JanuaryNovember 2005, the increase

of gross average wage was only 2 percent overthe forecasted level.

The share of net average wage in the gross

average wage became 76.4 percent, exactly as

anticipated.

The effects o f f lat tax on average

wage

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Thank you for your attention !