Dan Schwartz
Romania is at a crossroads. Many of us may not realize it yet, but we may be heading fast and furious towards an economic collapse similar to Greece a few years ago. We don’t want to alarm anyone, but we present figures, principles and ideas about the economy and especially about our country’s fiscal policy, from which you will see that we are not doing well. And when the weight of these truths comes from the opinion expressed by Dan Schwartz then I assure you that things are serious and we need to think seriously about them.
After the discovery of the “damage” of 20 billion lei, it seems more and more plausible the possibility of increasing taxes for the private sector in order for the state to cover its deficiencies and incompetence with the money worked hard by Romanians. What chance do you give this scenario to happen?
If we take seriously the public statements of politicians, the chances that Romanian taxation will increase this year seem high. Unfortunately, it is not possible to make a reasonable estimate as the level of predictability of Romanian political decisions and tax legislation is, as is well known, very low. We cannot be sure of anything, especially now when we are in a pre-electoral year and the declared populism of the political class is at its peak. However, the budgetary difficulties of the current government are real, and the solution, based on past experience, will not be sought in the area of structural reforms that Romania and the budgetary sector need, but will probably be directed towards identifying temporary solutions, unsustainable in the long term, to cover electoral needs.
How do you see the economic environment in Romania in terms of taxation? They say we tax too much labour and too little capital. Is this true? If this is true, why don’t things change?
The answer to this question is not simple. If we compare the tax on salary income (10%) on the one hand and the tax on profit (16%) plus the tax on dividends (8%) on the other, for example, we see that the highest taxation is on capital. If we consider the micro-enterprise tax (1% applied to total revenues) combined with the dividend tax (8%), we could argue that the levels of taxation on labour and capital are comparable. A more complex analysis, made by taking into account the resources used by entrepreneurs and the risks they take, would probably lead to the conclusion that the level of comparability is maintained if we take into account other taxes and duties owed by either employees or their employers, or we may even find that, despite public claims, capital is taxed more than labour. It should not be forgotten that in Romania income tax and social security contributions, for example, are ostensibly borne by employees, but in reality are due and paid, as a result of mandatory withholding, by employers, under criminal penalty. The higher the wages and therefore the higher the social contributions, the greater the effort of employers to pay them and the lower the profitability of companies, which means that, in fact, both income tax on wages and social contributions are actually paid by employers as their business costs, with the immediate consequence of lower profitability for companies. In Romania the net salary is still negotiated and not the gross one as in the rest of Europe, which is defining for both the tax mentality of Romanians and the difficulties that the business environment encounters in its activity due to the so-called over-taxation of labour. In other words, although it seems paradoxical, the higher the tax on wages and social contributions (so the tax on labour is apparently higher), the higher the tax on capital.
Romania’s structural deficits are huge, with politicians being very generous with electoral handouts and at the same time hesitant when it comes to making unpopular decisions that help the economy. When do you think ordinary people, who don’t get special pensions, will start to rage?
Again, I cannot give a firm answer. What is certain is that a country with Romania’s level of development cannot survive indefinitely only from unjustified and unsustainable increases in taxes and/or from loans, whether foreign or domestic. In the absence of structural reforms and pro-business fiscal and economic policies, the survival period decreases proportionally. In other words, the longer reforms are delayed and more recourse is made to short-term, populist “solutions”, the greater the chance that Romania will collapse. Global economic and social conditions are also an aggravating factor.
In the gambling industry, last summer’s tax increase led to the state losing more revenue as operators “cleaned up” their machines and underperforming venues, and some companies must have preferred to operate in the black instead of paying astronomical sums to the state budget because their profit margins have simply melted in the last 10 months. What do you think will happen in the market from this perspective?
We have seen several proposals from various politicians to “improve” gambling legislation and activity. If these proposals, added to the errors of fiscal policy already made, become binding legislation, the gambling industry in the regulated form to which we have already become accustomed will not be able to survive for long. Consequences: the transfer of activity to the grey or even black area of the economy, job losses, an increase in the level of dependency of players, an increase in crime and, last but not least, a significant loss of tax revenue for the state and local budgets.
Tax policy in Romania is disastrous, chaotic. What do you think would be the most appropriate tax policy for our country? What would you do if you were the government?
It is relatively easy to have opinions and even offer “unbeatable” solutions when you are not among the players, on the pitch, but watching the game as a spectator, either in the stands or sitting comfortably in front of the TV/computer. However, if I were in a policy-making position, I would try to promote tax policies based on established principles of modern, efficient taxation, such as:
– the ability-to-pay principle: the level of a tax or duty must be determined according to the taxpayer’s ability to pay
– the principle of economic efficiency: a tax is economically efficient if its introduction creates the lowest distortions in the market
– the principle of economic growth: a country’s entire tax system must be structured with the aim of achieving sustained economic growth, with revenue collection for the state budget being only a consequence of the economic efficiency of the tax system and not an end in itself
– the principle of linking tax revenue to budgetary needs (expenditure): tax revenues should be neither undersized (inefficient collection) nor oversized (over-taxation)
– the principle of stability: the level of state revenue collection must be relatively constant over the long term, which is only possible through the adoption of stable and coherent tax legislation and the creation of a stable tax base
– the principle of simplicity: tax provisions must be simple, clear, unambiguous and easy to apply by both taxpayers and tax authorities
– the principle of low collection and administration costs: a tax or a fee should not be adopted if the revenue collected is lower than or equal to the costs of administering and collecting that tax or fee
– the neutrality principle: a tax or a fee must not create major distortions in consumer and producer/provider behavior, and tax provisions must not influence investors’ business decisions
In addition to adopting and promoting principles such as those outlined above, I would do my utmost to increase the tax base (the number of taxpayers) and the level of tax collection by encouraging voluntary compliance (simple and clear legislation, benefits for correct taxpayers and severe penalties against incorrect taxpayers). I would also try to increase the level of transparency of the tax collection process and of the way taxes are used by the administration, and I would try to improve or at least advocate for better economic and fiscal policy decisions by politicians. Last but not least, I would link government fiscal and economic policies with the monetary policies developed by the NBR, and promote the use of mathematical/econometric economic modelling methods, and digitalization at all levels of decision-making and administration.
