The Flat Tax Is More Equitable than the Progressive Tax

“From each according to its ability, to each according to its needs”. Most of the Romanians would immediately recognize this famous slogan, which was very popular with communist propaganda (no surprise here, one of the guys who actually enjoyed saying this was Karl Marx). The argument for progressive taxation is that it is natural that the rich pay more taxes than the poor.

Apart from the fact that the very basis of this argument is flawed (because the rich do not benefit more from the services financed from the state budget than the poor; in fact the very opposite might be true), the way the problem is presented is simply deceiving: under the flat tax system, the “rich” already pay more taxes. One person earning 100 lei per month will pays 16 lei in income tax. Its neighbor receiving a salary of 1000 lei per month, will pay ten times more, which is 160 lei. It is as simple as that.

The Costs to Manage the Flat Tax System Are Lower

One major advantage of the flat tax system is that it`s less prone to abuse or random application by the tax authorities. When you make 100 lei as income, you just know that you have to pay to the state 16% applied to that amount. On the other hand, an effective progressive tax system needs to be associated with legislation granting the possibility of tax deductions for certain expenses. This means unfortunately a more complicated legislation, entailing more bureaucracy and less predictability in the way the legislation will be interpreted and implemented.

The Flat Tax Rewards the Active Members of the Middle Class

Critics of the flat tax argue that this would be a system which would be beneficial mostly to the very rich. It is indeed a fact that the gap between the wealthiest and the poorest Romanians is widening, and that is frustrating for many individuals who came to feel that our country is not offering fair and equal chances to all.

“Property is theft!” said once a 19th century French anarchist. “Big property is theft!” cries out now the Romanian media and public opinion, confronted with the unexplained and often unexplainable manner in which the immensely rich have amassed their fortune. While the accusation of theft might be true in at least some of the cases, the adequate remedy for stealing remains the appropriate and consistent enforcement of criminal law, and not an increase of the financial burden of all citizens via the establishment of a progressive tax system.

After 20 years or so of capitalism or so, Romania still lacks an authentic and well established middle class. The income flat tax encourages the active members of the middle class, incentivizing them to work harder and collect immediately and directly the reward of their efforts. We are still decades away economically and socially from the most advanced members of the EU. The only way to reduce this gap is to give to the most active and capable members of our society the
motivation they need and deserve. Taxing them more is not going to do the trick…

A Few Conclusions

The return to the progressive tax system is simply not the right way to go for Romania. However, the economic crisis and the current condition of the public finances dictate tough measures; these days the Government proposed to the Parliament a cut in the public spending to be achieved by reductions with 25% of all salaries paid by the state institutions and 15% of the pensions. If these measures will stand the vote of the Parliament and the review of the Constitutional Court remains to be seen.

Irrespective of the fate of these proposals, there are still things that ought to be done and that could be done by the Government in order to improve the condition of the public finances, such as to (and the list and inherently incomplete):

• Encourage employment by simplifying procedures related to the employment of personnel and the payment of salaryrelated taxes and contributions;
• Enhance the efficiency of spending of public money;
• Improve legislation on public acquisitions to ensure free competition, fair chances to all bidders, and the reduction of capital costs for the state budget;
• Encourage more domestic and foreign investment in production capacities;
• Ensure observance of the law – fight smuggling and “black” economy.

Last, but not least, we need an education system which should be able to instill a true entrepreneurial culture and dismiss the pernicious idea that state employment would be somehow safer and more beneficial than working in a private company…

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