Romanian Social Democrats criticise flat tax

Monday, January 24, 2005

Bucharest, Romania —Romania's Social Democrat Party has criticised the government's new fiscal policy, which is centered around the introduction of a 16% flat tax for personal income and company profit.

The Social Democrats, which were in government between 2000 and 2004, were defeated in Romania's elections at the end of 2004. The current centre-right governing coalition is made up of the Liberal and Democrat parties, as well as the Humanist Party and the Democratic Alliance of Hungarians in Romania.

The Vice-President of the Social Democrat Party, Mihai Tănăsescu, expressed his concerns that the flat tax would reduce individuals' contribution to the state budget by 10%. He also envisioned a rise in inflation as a result of a greater budget deficit.

The current government, however, defended the flat tax, saying that the drop in budget revenues will be lower than expected, due to taxes being collected more efficiently. The current Minister of Finance, Ionuţ Popescu, said that, "effects of individual tax cuts, along with reducing taxes on companies' profits have helped countries such as Slovakia, Russia and Ireland develop."

During Romania's election campaign in 2004, President Traian Băsescu promised that he would introduce a flat tax of 16%. Romania's previous progressive income tax, during the Social Democrat government, ranged between 18% and 40%. Based on the models of Slovakia and Estonia, which have prospered from a flat tax system, the new 16% tax is expected to ensure higher economic growth, reduce corruption and the grey economy, and encourage greater foreign investment.

The 16% tax rate has meant that Romania now has one of the most liberal and competitive fiscal policies in Europe, similar to what Ireland introduced before its Celtic Tiger period, which resulted in very high growth and development.