Analysis of the Tax Burden in Romania based on the Laffer Curve in the Period

Transcription

1 Annals of Dunarea de Jos University of Galati Fascicle I. Economics and Applied Informatics s XVIII n o 1/2012 ISSN Analysis of the Tax Burden in Romania based on the Laffer Curve in the Period Gabriela DOBROTĂ *, Maria Felicia CHIRCULESCU ** ARTICLE INFO ABSTRACT Article history: Accepted March 2012 Available online 30 April 2012 JEL Classification E62, H21 Keywords: Fiscal pressure, Budget revenues, Laffer curve The fiscal pressure requires certain limits of affordability for taxpayers. These limits are imposed by the reactions of taxpayers who can resist to compulsory levies increase, reacting with evasion, fraud, reduce productive activity or even riots. If by a certain time, the tax pay is made voluntarily by the honest taxpayer, at a time when taxes exceed certain limits of endurance events occur that bring serious damages to state's desire to collect these revenues. Taxpayer behavior becomes abnormal in any way always trying to avoid paying tax, hoping for a reduction in tax burden. The phenomenon to increase or decrease the size of the tax burden is the result of economic and social role of the state. Analysis of state intervention in the economy led to a new liberal economic thinking, thinking that was approached it by the American economist Arthur Laffer. The aim of this paper consists in the empirical analysis of the correlation betwen the tax pressure rate and the tax incomes for Romania in the period using the methodology creating by the Laffer curve EAI. All rights reserved. 1. Introduction Fiscal pressure requires certain limits of affordability to the taxpayers. These limits are imposed by the side of taxpayers who can resist to compulsory levies growth, reacting through evasion, fraud, reduce productive activity or even uprisings. If to a certain point, pay tax is voluntarily made by the honest taxpayer (in this case individual person), when taxes exceed certain limits of endurance some events occur which lead to serious disadvantages to the state desire to collect these revenues. Taxpayer behavior is abnormal, always trying, by any means, to evade tax payment, hoping for a reduction of tax burden. The phenomenon to increase or decrease the size of the tax burden is the result of economic and social role of the state. Analysis of state intervention in the economy led to a new liberal economic thinking, thinking that was approached it by the American economist Arthur Laffer. Arthur Laffer, prioritizing individual person, developed certain policies that could solve the problems faced by modern economies. Why is it important to measure tax burden? Decisions on the use of taxpayer's income tax burden are influenced by tax burden fluctuations. Increasing the tax burden discourages saving and investment, income tax hit because the total amount saved and future income from the use of savings. The question of the taxpayer in terms of higher tax rates are: work or leisure time? Consumption or savings? Starting from this premise, the purpose of this paper is to realise an empirical analysis of the correlations between the tax pressure rate and incomes tax in Romania, during , to identify the area where it rank, as a result of fiscal measures adopted by the government. Concrete, the objective of this study is to provide new empirical results with respect to the effects of fiscal pression on fiscal incomes in Romania at the level of state budget, state budget social security and the general consolidated budget, using the Laffer curve. The study has six sections including the introduction part. The second part presents some aspects regarding the corelation between fiscal pressure and the fiscal incomes, the effects of high tax pressure and the parameters that influence the Laffer curve. The third section included the Laffer curve representation based on gross tax burden to the state budget level and the identification the area where is situated Romania in the analysing period. In the sections four and five we determinated the Laffer curve on the basis of contributions pressure to the state social security budget and the pressure at the general consolidated budget. The conclusions are presented in the section six. 2. Parameters that influence the Laffer curve American economist Laffer reveals through the curve a connection through fiscal pressure and flow rate of tax revenues, ie tax revenues are given by the multiply of tax rate and tax base (the concept by,,laffer curve was introduced by Wanniski, J. in 1974) [9]. Any change in tax rate lead to variations in one direction or another of tax receipts, but to overcome a threshold tax rate will produce reductions in tax revenues and neither an increase of it. *, ** Faculty of Economics and Business Administration, Constantin Brâncuşi University of Târgu Jiu, Romania, addresses: gabi.dobrota@utgjiu.ro (G. Dobrota), chirculescu_felicia@yahoo.com (F. Chirculescu)

2 Regarding the theories of Arthur Laffer there are still question whether tax cuts will be enough to change the anticipation or if it will not incite behaviors speculators. Adam Smith, in 1776, formulated the concept according to which taxation rates too high, destroying the tax base [8]. This ideea was taken by Artur Laffer, who considered that tax rate changes may have on tax revenues as arithmetic effects, as well as economic effects [5]. Arithmetic effects refers to the fact that taxation rate change will lead to changes in the same sense of tax revenues (expressed in units of taxable income). Economic effects, however, reflect the positive impact of declining tax rates on labor and production, and therefore the tax base. Conversely, increased taxation will have an opposite economic effect, the penalty of participation in the activities taxed. Analyzing the two effects we can appreciate that the arithmetic effect will always act opposite to economic effect. If it change the two types of effects the tax rate change consequences on tax revenues will not be so obvious. From the analysis of the Laffer curve we observe that: to a tax rate of 0%, the tax incomes will be zero; to a tax rate of 100%, due to economic effect, the tax incomes will be zero; although between these two extremes rate of taxation, tax revenue is less predictable, however we can say that to attract the same level of tax revenue can be used two rates of taxation, which is a large tax rate applied to a small tax base or lower tax rate applied to a large tax base. Zone A, called admissible area, indicate the zone that the taxpayers accept increased tax burden, that aim to benefit from a high amount of public utilities. Increase tax revenues, although there is a gradual reduction of taxable matter [7]. Zone B, called the unacceptable area, indicate the area where a growing part of the income factor is taken over by the state. Consequently, taxpayers restrict their activities directly taxable and taxable materials is reduced. Taxpayers repudiate utilities preferring private utilities. As fiscal pressure increase produces a decrease in production and thus of tax revenues [7]. Fiscal pressure from the inadmissible area, cause unnecessary redistribution of income equalization taxpayers, whose final effect is found in discouraging economic activities, individual initiatives and in taking risks. Thus, economic theory recommends an optimal tax policy to maintain fiscal pressure in the admissible set A. This requires that optimal point, ie the optimal fiscal pressure, which is considered by most specialists impossible to determine. [9]. The analysis of Laffer curve in dynamics was realised and by Agell and Mats [1]. Although there have been numerous criticisms regarding the legitimacy of the Laffer curve [4; 6], advocates of this thesis have considered as it can be used to the analyze of the tax burden [4]. Moreover, Lafffer had supported the theory with practical examples which reflected the expected effects [5]. In order to build the curve that bears his name, the american economist considered the fiscal pressure determined as the ratio between tax revenues and GDP. Further analysis made by experts in the field have shown that may be relevant Laffer curve construction using net fiscal pressure indicator. In these circumstances consider that the exact and pertinent Laffer curve for Romania form is difficult, but by analyzing the effects of increasing or decreasing the tax burden on the contrary, we can determine whether we are in the admissible or inadmissible Laffer curve. In this research we try to see in which part the Laffer Curve has situated Romania in the 21 years since the revolution, while taking into account the economic context of our country. In this sense, we make the analysis at the following three levels: state budget; state social security budget; consolidated state social budget Each of the three levels, for shaping Laffer curve we use gross fiscal pressure. Specifically, the indicators on which we determine the Laffer curve for Romania are: nominal tax revenues realized - represented by the amounts taken from the accounts of the execution of the state budget and state social security budget and the reports of the Ministry of Finance; planned nominal tax revenues to the state budget, taken from the state budget laws of the period subject to analysis; gross domestic product, settled in current prices of the year; GDP deflator, which summarizes the asset prices that make up GDP. GDP deflator is presented from a year earlier and on this basis we will calculate from 1990; achieved real tax revenues, calculated as the ratio of tax revenue and nominal GDP deflator taken from 1990; real gross domestic product, calculated as the ratio between real GDP and GDP deflator from 1990; gross fiscal pressure, calculated as the ratio of actual tax revenues realized and real gross domestic product. 3. Laffer curve representation based on gross tax burden to the state budget level For graphic representation of the Laffer Curve on the state budget revenues in the period , we represented the two variables used (OY and OX) tax revenue and fiscal pressure made to see if we can come off as a function form. For a pertinent analysis we transformed both the values for tax revenues, as well as values for GDP in constant prices of Under these conditions the fiscal pressure made is determined as the ratio of tax revenue and the gross domestic product made: Vfr Fiscal pressure made = 100 PIBr where: Vfr represents the achieved tax revenues; PIBr achieved GDP. Applying Laffer curve on the Romanian case, only by comparing the variation of tax pressure variation achieved real tax revenues can say what time we were in zone A (permissible area) and to what period of time we were in the B (the unacceptable area). Thus: 64

3 If an increase in tax burden from one year to another will be accompanied by an increase in real tax revenues we believe that we are in the Laffer curve admissible area. In the same area we are if the lowering the tax burden from one year to another is accompanied by lower real tax revenues; otherwise, thus the increase (decrease) in tax burden from one year to another will be accompanied by a decrease (increase) of real tax revenues, we believe that we are in the Laffer curve inadmissible area. Graphically representing developments to the two indicators, based on data presented in Table. 1 we will get the following configuration: Graph 1. Laffer curve for state budget tax incomes made Source: own processing based on dates from table no. 1 Analyzing the evolution of annual income tax burden and tax incomes we notice that in the years: 1998, 2005, 2006, 2007 and 2008 taxation in Romania stood in the Laffer curve inadmissible area. Thus: In 1998, an increase in tax burden from 15,84% to 16,23% was accompanied by a decrease in tax revenues from 118,87 billion lei to 116,79 billion lei; In 2005 a reduction of tax burden from 12,23% to 11,95% resulted in an increase in tax revenues from 114,79 billion lei to 118,21 billion lei; In 2006 a reduction of tax burden from 11,95% to 11,00% resulted in an increase in tax revenues from 118,21 billion lei to billion lei; In 2007 a reduction of tax burden from 11,00% to 10,77% resulted in an increase in tax revenues from 137,37 billion lei to 154,7 billion lei; reduction of tax burden from 10,77% to 10,71% in 2008 led to an increase in tax revenues of 154,7 billion lei to 176,74 billion lei. Table 1. Indicators which influence Laffer curve for state budget achieved tax revenues ΔVfr real ΔPfb -% - admissible inadmissibile ,55-7,04 X ,53-0,32 X ,84-3,19 X ,04-1,53 X ,78 0,56 X ,20-1,18 X ,75-0,25 X ,08 0,39 - X ,74-0,65 X ,21-1,35 X ,90-2,47 X ,93-0,69 X ,70 0,88 X ,08 0,28 X ,42-0,28 - X ,16-0,95 - X ,60-0,23 - X ,77-0,06 - X ,75-0,94 X - Source: Statistics National Institute, Data from Ministry of Public Finance, Own calculations 65

4 In future research we intend to conduct an analysis based on the Laffer Curve differential revenues and planned based on income. We believe that such an analysis is essential because if the tax revenue realized depends on a number of incidental factors that often during the transition could not be mastered, the planned tax revenues reflect fiscal policy at a time, and even in this situation, the gross fiscal pressure would have to always fall on the Laffer curve admissible area. 4. Laffer curve determined on the basis of pressure contributions to the state social security budget. For the state social insurance budget, we analyzed only the tax revenue realized. Graphically representing the two indicators, gross tax revenues and fiscal pressure, we obtain the following configuration: Graph 2. Laffer curve for the state social insurance budget incomes made Source: own processing based on dates from National Institute of Statistics and Ministry of Public Finance Compared with previous tests conducted in the state social security budget can not draw any evolution. Thus, if the budget can distinguish a trend located in the Laffer curve allowable for state social insurance budget, we can not draw a general tendency. For this reason, we believe that it is necessary to perform analysis on each year by correlating change the tax burden with changing of real tax revenues. As in previous cases, we believe that we are in the area: admissible of Laffer curve if an increase (decrease) of tax burden from an year to another is relatedto an increase( decrease) of real tax incomes; inadmissible of Laffer curve, if anincrease (decrease) of tax burden from an year to another will be related to a decrease(increase) of real tax incomes; Analyzes allow us to conclude that the state social security budget pressures related to social security contributions was in the Laffer curve inadmissible in 1992, 1995 and Thus: In 1992 there was an increase in tax burden from 7,44% to 7,75% while the actual % tax revenue decreased from 55,54 billion lei. to 52,8 billion lei; In 1995 the tax burden fell from 5,50% to 5.,34%, increased the reduction of tax revenue to 39,5 billion lei real to 41,09 billion lei; and in 2006 reduced the tax burden by 0,16 percentage point increase in tax revenues caused by 13,61 percentage points. Table 2. Indicators which influence Laffer curve for State social insurance budget ΔPfb -% - ΔVfr real (billions lei steady prices of 1990) admissible inadmissibile ,22 2,24 X ,31-2,74 - X ,31-8,26 X ,94-5,04 X ,16 1,59 - X ,22-0,14 X ,67-7,55 X ,99 5,73 X ,52 2,99 X ,12-0,31 X ,01 2,44 X ,14 3,36 X ,40 7,80 X ,63-1,34 X ,26 5,48 X - 66

5 ΔPfb -% - ΔVfr real (billions lei steady prices of 1990) admissible inadmissibile ,16 13,61 - X ,01 11,19 X ,25 16,46 X ,38 44,81 X - Source: National Institute of Statistics, Data from the Ministry of Public Finance, own calculations Statements previously presented allow us to appreciate that in the time period that we position ourselves in the Laffer curve inadmissible, lower taxation is beneficial to the state social security budget by taking a superior system of real tax revenue. However, these partial analysis (Laffer curve on the state budget revenues, Laffer curve on the planned state budget revenues, Laffer curve based on gross tax burden to the state social security budget) we do not allow a relevant assessment on how fiscal policy was conducted in Romania after This can be done only at the general consolidated budget reflecting the total tax revenue collected in Romania. 5. Laffer Curve representation and analysis of samples based on pressure required at the general consolidated budget Importance of the Laffer curve based on gross tax burden in the general government, we allow a general characterization of taxation levels recorded in Romania between Laffer curve values which influence a indicators for general government are presented in Table no 3. Graphical representation of the evolution of the two indicators allows to obtain the following configurations: Graph 3. Laffer curve for general consolidated general budget made incomes Source: own processing based on dates from National Institute of Statistics and Ministry of Public Finance From graph. 3. we see that employment in the Laffer curve admissible or inadmissible area in the general government budget differed from one year to another, so that we can capture and analysis of annual variations. In 1992, and in , the taxation of Romania was registered in the Laffer curve inadmissible. In 2005, taxation was back in the Laffer curve admissible area. Table 3. Indicators which influence the Laffer curve to the consolidated general budget ΔPrpvb -% - ΔVfr reale (billions lei steady prices of 1990) admissible inadmissibile ,17-20,78 - X ,08-10,96 X ,22-14,62 X ,36 19,36 X ,01-7,21 - X ,37-15,87 X ,31 1,12 X ,27 12,38 X ,83-3,14 X ,25 2,42 - X ,08 10,11 - X ,18 10,17 - X ,99 14,25 - X ,35 21,79 X ,58-36,77 X ,15 32,80 - X ,09 37,45 - X ,80-33,32 X - Source: National Institute of Statistics, Data from the Ministry of Public Finance, own calculations 67

6 By comparing the variation of pressure variation mandatory levies tax revenues collected (table no. 3.) compulsory levies see that pressure, in Romania, between , was located in the Laffer curve admissible or inadmissible area. Thus, if an increase (decrease) of the tax burden from one year to another will be accompanied by an increase (decrease) in tax revenue collected real, fiscal pressures will be in the Laffer curbeil admissible area. If, however, increase (decrease) in tax burden will be associated with decreased (increased) real tax revenue collected, then we believe that fiscal pressure has exceeded the optimum pressure, being in the inadmissible curve area. In situations where the taxation is inadmissible area is desirable to enlarge the tax base that will lead to increased tax revenues generated by the stimulating effect of the measures to be taken to boost production investments. The low level of tax burden in Romania, given that tax rates for the main taxes are similar to those applied by other countries in Eastern Europe, indicating a low tax levy collection due mainly to the phenomenon of evading payment of tax liabilities. Steady decrease in the tax burden in Romania, after 2000, due to growth in real terms of GDP, respectively, reduce tax rates for the main taxes can be explained either by increasing the tax base that is not enough to compensate loss of income due to reduced tax rates or by decreasing drastically increasing the level of tax compliance and tax evasion phenomenon expansion. 6. Conclusions The level of fiscal pressure is an important element in determining the behavior of taxpayers. Increasing the fiscal pressure discourages saving and investment because the income tax hits the total amount saved and the income provided by future savings. In this context, due to high tax rates, taxpayers may decide to reduce the level of effort for a longer period deciding to devote more time to leisure or increasing their consumption at the expense of savings. Also, the option of tax evasion seems to be a solution to problems resulting from an excessive fiscal pressure for many taxpayers (the practice has shown that it occurs more amid high tax rates). From the analysis of samples required pressure, and the relationship between them and the volume of tax revenues, we can specify these: increase tax rates to the point of optimum taxation generates increased tax revenues at a pace which does tend to diminish as fiscal pressure increases; tax revenue recorded a maximum level when the marginal collection is null; variations in tax revenues are determined primarily by variations in tax rates; a high level of fiscal pressure strongly influence market supply inputs. Inclination manifested for work or leisure contributed mainly influence or effect of income or substitution effect; a low tax burden increases labor supply, saving and investment shift towards consumption, so that finally the production and growth are stimulated. In Romania existed, during the analyzed period, ten years of,,admisible period and eight years of,,inadmisible area. The results of the analysis reflect the fact that the real problem for the fiscal systems of Romania isn t the general level of taxation but the reduced degree of the collection of tax revenues. The comportament of the taxpayers is determinated by the hight number of taxis and the fiscal measures adopting by a fiscal autorities, in neconcordance whith the growth degree of the Romanian economy. References 1. Agell, J., Mats, P., On the Analystics of the Dynamic Laffer Curve, Working paper, 2000, pp Clark, J. R., Lee, D.R., Sentencing Laffer Curves: Re-sponse to the Critics, Social Science Quarterly (University of Texas Press), Vol. 77 Issue 2, June 1996; 3. Dobrotă, G., Chirculescu, F., Ungureanu D., (2011), The analysis of the contribution of the income tax in forming budgetary revenues and the implications for economic operators in Romania, Proceedings of the International Economic Conference, IECS 2011, Sibiu, pp ; 4. Dornbusch, R., Fischer, S. (1990). Macroeconomics, New York: McGraw, Hill International EditionsFriedman M., Friedman R., Free to choose. A personal point of view, All Publishing House, Bucharest, 1998; 5. Laffer, A.B., The Laffer Curve: Past, Present, and Future, The Heritage Foundation, 1765, 2004, 6. Mirowski, Ph., What s wrong with the Laffer Curve?, JEI, Journal of Economic Issues, vol. XVI, Septembre Padurean, E., Taxation in Romania and the European Union, Oeconomica Article, 2005, pp Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations, ed. Edwin Cannan, London: Methuen & Co., Ltd. 9. Vacarel I., Bistriceanu Gh. D., Bercea Fl., Anghelache Gabriela, Mosteanu Tatiana, Bodnar Maria, Gerogescu Fl., Public Finances,The VI th edition Didactic and Pedagogical Publishing House, Bucharest, Wanniski, J., Taxes, revenues, and the Laffer curve, National Affairs, no. 50, *** *** *** *** *** 68