Taxes and economic principles

Back in May, acting as de facto head of the executive, president Traian Basescu announced a set of severe austerity measures, the toughest of which were a 25% cut in state salaries and a 15% cut in all pensions.

The measures, he added, were meant to reduce the budget deficit by protecting the private sector, already affected by the crisis, from new shocks caused by higher taxes.


In June, the Constitutional Court ruled that the pension reduction was unconstitutional, and the government, led by pro-presidential Liberal Democratic party leader Emil Boc, was quick to react, raising the VAT from 19 to 24%.

‘I had no other legal solution’, the prime minister argued. But Basescu fiercely contested the VAT increase which came into force on July 1st.


On Saturday, Basescu said he would call on the government to reduce the VAT, as well as the 16% tax on all pensions.


It was, therefore, high time for Finance Minister Sebastian Vladescu to come into the limelight.

He joined the off-tune choir and pleaded for a reduction of the VAT, concurrently with the reintroduction of the progressive taxation of income.

‘In the current state of the economy, with a recession exceeding 1.5% in 2010 and with dim prospects for 2011, a 16% income tax rate can no longer support the budget for education, health care or pensions”, the Minister said.


Both economically and politically, removing the flat tax rate would cause the government’s total surrender.

From an economic point of view, progressive taxation is the solution supported by the social democratic left, sticking to the principle: the bigger the salaries, the higher the taxes.

From an economic point of view, analysts say, quoted by the daily Romania Libera, one of the right’s arguments in favour of the flat tax was to boost collection, from 28 to 32% of the GDP, by bringing the gray economy up to the surface.


The daily Adevarul believes that ‘Vladescu’s statements bring anarchy into the economy’, signaling, among others, the danger of having foreign investors, attracted only by the flat tax, run away.

Gandul quotes Regional Development and Tourism Minister Elena Udrea as saying, quote: “Rather than saying whatever crosses his mind, Mr. Vladescu should find solutions to fight tax evasion.

(Radio România Internaţional, Serviciul în limba engleză).