Tackling a taxing problem

Doubling the penalties for tax evasion – this was a measure suggested in an amendment to a law put forward by Senate vice-president, Dan Voiculescu. The amendment was not supported by his colleagues, prompting Voiculescu to resign. So where does Romania stand on tax evasion?

July 2012 - From the Print Edition

In previous years, local tax evasion reached more than 10 percent of the Gross Domestic Product (GDP), meaning EUR 10 billion in absolute value.
Much tax evasion comes from the black labor market. Employers fail to report approximately 35 percent of the employees registered in the national accounts to the state’s registries. This means that over two million jobs are unofficial, almost half the total number of pensioners. Other major sources are unpaid VAT and income tax.
A report by the Fiscal Council for last year claimed that if Romania fully collected all the taxes and charges that were payable, it could have record budgetary revenues – as a percentage of GDP – close to the EU average. This suggests a complete rethinking of how to collect taxes in Romania is called for. The state should pursue tax dodgers, not try to get even more out of those who currently pay, as our politicians seem to favor. In other words, it’s not increase existing revenue streams that should be the target, but getting the evaders to start paying up.
A few years ago there was a buzz about the idea of a wealth tax. Many of us have encountered enterprising individuals whose official income seems unable to support their lavish lifestyle, and yet there is no obvious source for their additional earnings. Such a tax ought not to be punitive, but should encourage all categories of citizens to participate in achieving the GDP.
Unfortunately, the idea did not get beyond the discussion stage in Romania, though it has been successfully applied in Europe. For example in Germany, a solidarity tax of 5.5 percent is levied on income tax for higher earners. Very large estates are taxed in other countries, such as France, Switzerland and Norway. It is clear that such a law must be very well designed, as it must not simply hammer the wealthy. The law should be crafted so it catches almost all taxpayers who own property and who can really afford to pay tax but avoid doing it.
Recently, a ranking of the prices in Romania compared to EU prices was released. In some categories Romania has the lowest prices in the EU, and these include alcohol and tobacco. The thought occurred to me: why don’t we apply – even if just temporarily – an additional tax (let’s name it for solidarity) on these types of products?
But the issue would still probably be the state’s capacity to collect. The government must therefore find a way to persuade tax evaders to go legit. Everyone knows that some of the more persistent offenders will need a hard line to be taken. Specifically, in Romania’s case, strong sanctions for tax evasion – doubling the current punishments should work.
Which brings us back to the recent goings-on in Parliament. I won’t get bogged down in the detail of who came up with the amendment and the reason for the resignation. But I wonder why MPs rejected it. Do they have a vested interest in continuing to protect those who cause the biggest holes in the budget through tax evasion? Whether or not we get an answer to this question, unfortunately the problem remains, and given the parlous state of Romania’s finances a solution is becoming increasingly necessary.