Tax Policy Under the Curse of Low Revenues: The Case of Romania

Transcription

1 Tax Policy Under the Curse of Low Revenues: The Case of Romania by Daniel Daianu, Professor of Economics, SNSPA Bucharest Ella Kallai, Chief Economist, Alpha Bank Romania Laurian Lungu, Cardiff Business School and Macroanalitica October 26, 2011, Bucharest The authors would like to thank Friedrich Ebert Stiftung (FES) foundation for its financial support. Opinions or points of view expressed in this presentation are those of the authors and do not necessarily reflect either the position of FES or the institutions they represent.

2 Findings: 1. Romania has a low level of tax revenues => due to low tax collection efficiency and large shadow economy, but not necessarily due to poverty 2. Implicit tax rates in Romania are among the lowest in EU-27/NMSs. The tax system is not optimal impedes economic growth 3. There is a need for a comprehensive analysis of the fiscal policy, in general, and the tax system in particular. 2

3 A History of Low Tax Revenues %GDP Revenues and expenditures of consolidated budget % Romanian tax revenue-to-gdp gap total revenues tax revenues total expenditure vs. NMS vs. EU-27 Low tax revenues/gdp compared to both NMSs (5% gap in 2009) and EU-27 (9% gap in 2009) over the last two decades. Is this a structural issue? 3 Source: Eurostat, European Commission Spring Forecast 2011

4 Not Necessarily Due to Poverty Is poverty responsible for low tax revenue? The thesis that this is normal for an emerging economy does not stand scrutiny: Bulgaria, Montenegro and Serbia collect more than Romania as % of GDP GDP/capita, US$ Tax revenue-to-gdp ratio Albania 3, Bulgaria 6, Croatia 14, Macedonia 4, Montenegro 6, Romania 7, Serbia 5, Source: Albania-IMF 2010 Article IV Consultation Preliminary Conclusion of the Mission March 19, 2010, IMF Country Report 09/73; Bulgaria-and Romania European Commission, Croatia-IMF Country Report 10/179 and 9/185, Macedonia IMF Country Report 11/42, Montenegro-IMF Country Report 9/88 and 11/100; Serbia-IMF Country Report 9/158, 10/25 and 11/95 4

5 But Rather Due to Tax Collection Inefficiency % Rom ania % NMSs VAT households' income tax corporate income tax social security contribution VAT households' income tax corporate income tax social security contribution Corporate income tax is collected in a proportion of 33% of potential, rising after There is a relatively high degree of tax compliance by individuals Efficiency of SSC collection far below other NMSs VAT collection efficiency also lower Differences can be explained by tax exemptions, loopholes and more tax avoidance possibilities in Romania vs NMSs 5 Source: own computation based on Eurostat

6 % % SSC & VAT Collection Rates Are Low R omania gap= 9% VAT NMS gap= 7.3% gap= 7.4% gap= 5.8% Revenues from VAT,SSC,PIT and CIT 80% of tax revenues legal tax rate implic it tax rate SSC NMS R omania gap= 26.9% gap= 20.7% gap= 9.3% gap= 11.1% legal tax rate implic it tax rate Source: Eurostat, European Commission Taxation trends, After 2005: Tax collection efficiency increased for both VAT and SSC (gap between legal tax rate and implicit tax rate reduced) Tax collection efficiency for VAT approaches NMSs performance SSC collection efficiency remained far bellow NMSs performance 6

7 % % To a Less Extent PIT and CIT 30.0 R omania C IT NMS Before 2005: gap= 18% gap= 10.2% gap= 19.8% gap= 12.7% CIT collection efficiency was better than in NMSs After 2005: legal tax rate implic it tax rate P IT R omania NMS gap= 19.1% gap= 15.8% gap= 8.3% gap= 13.6% legal tax rate implic it tax rate Tax collection efficiency of PIT and CIT improved The gap between legal taxes rates and implicit tax rates more than halved for PIT Tax efficiency for both PIT and CIT exceeds the efficiency from NMSs (lower gaps between legal and implicit tax rates) Source: Eurostat, European Commission Taxation trends,

8 Tax Revenues before and after the Introduction of Flat Tax By tax categories By economic function of taxes 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% EU-27 Romania NMS % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% EU-27 Romania NMS indirect taxes direct taxes SSC tax on consumption tax on labour tax on capital After 2005: Share of indirect taxes increased above their respective shares in EU27 and NMS and compensated the relative decline of SSC and direct taxes Share of consumption tax increased compensating the decline of labour and capital tax 8 Source: Eurostat

9 The Shadow Economy Implications for Tax Revenues GDP shadow economy (bn RON) GDP shadow economy as % of 2010 GDP Total fiscal evasion (as % of GDP), of which: SSC VAT PIT Estimations of the shadow economy vary substantially 3 scenarios considered If the size of the shadow economy were 27% of GDP, or RON 139 Ron, fiscal evasion would amount to some 12.3% of GDP. In this case, full compliance of paying taxes would bring to the budget revenues equivalent to 12.3% of GDP (assuming a VAT rate of 24%). VAT revenues alone would rise by 6.5% of GDP Source: European Commission Spring Forecast

10 Shadow Economy, Estimated Size (Cont d) Share of informal economy brought to light The size of the informal economy, % of total output SSC VAT PIT Increase in budgetary revenues SSC VAT PIT Increase in budgetary revenues SSC VAT PIT Increase in budgetary revenues Diminishing the size of informal economy would have considerable positive budgetary implications Source: European Commission Spring Forecast

11 Concluding Remarks Fiscal austerity, or economic policies that compensate intense deleveraging in the private sector growth? Short-term vs. medium/long-term fiscal correction. Strive towards achieving optimal tax would spur economic growth. The implicit tax rates suggest the current tax structure is not optimal. Tax revenues to GDP ratio in Romania is extremely low. Need a fiscal strategy for the long term. Define a clear tax policy concept: tax more personal income or consumption? Such an approach involves a forward-looking attitude to tax policy. Improve tax revenue collection less pressure on the budget deficit create room for lowering taxes. Adopt a Transparency and Credibility package: full transparency of government spending programmes; clear strategies for investments in infrastructure, health care and education; cost benchmarking; adopt a fiscal policy concept; government s fiscal policy needs to be forward-looking and predictable. 11

12 Tax Policy Under the Curse of Low Revenues: The Case of Romania by Daniel Daianu, Professor of Economics, SNSPA Bucharest Ella Kallai, Chief Economist, Alpha Bank Romania Laurian Lungu, Cardiff Business School and Macroanalitica October 26, 2011, Bucharest The authors would like to thank Friedrich Ebert Stiftung (FES) foundation for its financial support. Opinions or points of view expressed in this presentation are those of the authors and do not necessarily reflect either the position of FES or the institutions they represent.