Joint Position Letter from the Business Community Regarding Progressive Taxation

Since 2019, Romania has been under the excessive deficit procedure. Real solutions have been postponed for too long, and we are now in a difficult situation regarding budget sustainability. Under these conditions, the swift formation of a new government and the adoption of a realistic plan of measures are essential to keep the economy on a stable trajectory.   In a previous public letter, we—the representatives of Romania’s private sector—outlined the principles that, in our view, should support a structural reform plan for the public budget system. We believe that the budget deficit should be corrected through efforts to reduce public spending and improve revenue collection, without further increasing taxation. In the long term, a strategic perspective is needed to reduce fiscal deficits, one that leverages Romania’s economic growth potential and ensures that fiscal reforms support the private sector’s ability to reinvest in the national economy.   In response to the public debate around proposals to introduce a progressive personal income tax system as a way to reduce the budget deficit, we reiterate our previous position. The business community believes this measure would not generate the necessary short-term budget revenues. Over the long term, it must be carefully assessed for its economic effects on the labor force and investors, and should be preceded by broad consultation with all stakeholders.   Maintaining competitiveness in terms of labor and capital taxation is a top priority for Romania’s economy, especially for bridging development gaps. An increase in taxation would currently mean a heavier burden on the same compliant taxpayers, to the detriment of collecting from non-compliant businesses or broadening the tax base to include more taxpayers who currently pay no taxes or social contributions.   A stable and predictable tax system is crucial for any economy that seeks to attract long-term investment, as well as to retain talent. Young professionals today have access to many global opportunities, and a predictable and supportive tax environment can influence their decision to remain in Romania and contribute to its development. The flat tax offers this stability and has significantly contributed to simplifying the tax system, reducing evasion, increasing labor force participation, improving voluntary compliance, and attracting investment.   The stability and predictability provided by this regime have been essential to the development of the business environment and the growth of the middle class, contributing to Romania’s convergence with Western European countries. Econometric studies show that a simplified tax system reduces incentives for tax evasion and improves revenue collection in the short and medium term. Data shows Romania already has one of the highest and most uniform effective tax rates on labor income in the European Union—37.2% in 2021 compared to the EU average of 31.9% and the OECD average of 34.5%, ranking Romania 5th highest in the EU for tax burden.   The scenario of introducing progressive taxation should be evaluated based on the country’s stage of economic development, the timing within the economic cycle, and the capacity of the tax system to collect and implement major policy changes. Any tax modification must estimate its effects both on total budget revenues and the overall economy.   Implementing a progressive tax system would increase the administrative burden for both taxpayers and tax authorities. It would require additional investments in staff training, fiscal education campaigns, and the introduction of a comprehensive deduction system, alongside pension and healthcare reforms based on capping citizen contributions to these systems. Moreover, shifting to progressive taxation may encourage wage income to be redirected into less transparent forms of compensation to take advantage of more favorable tax regimes. Instead of reinforcing tax compliance and the transition to a fully formalized economy, we risk exacerbating migration toward informal or semi-formal practices.   The implementation of progressive taxation does not automatically guarantee sustainable revenue growth or reduced economic inequality. These are not caused by the flat tax nor by wage-based income.   Romania faces a reputational challenge due to a tax system perceived as unstable and unpredictable. This perception is further influenced by frequent legislative changes, a lack of clarity, varying interpretations, bureaucracy, and complex procedures.   Therefore, switching to a steep or insufficiently prepared progressive tax regime would only reinforce this negative perception. Higher taxation would directly reduce Romania’s competitiveness. One of the key goals of fiscal policy—besides distribution effects—should be to support long-term economic growth.   Considering all the above, we call for political responsibility both in assuming governance and in adopting a set of measures that will keep Romania on a positive path for investors, without progressive taxation (direct or hidden), and by maintaining the flat tax rate.   Signatory Organizations: Romanian-German Chamber of Commerce and Industry – AHK American Chamber of Commerce in Romania – AMCHAM ROMANIA Romanian Businessmen’s Association – AOAR Belgian Luxembourg Romanian Moldovan Chamber of Commerce – BEROCC British-Romanian Chamber of Commerce – BRCC French Chamber of Commerce, Industry and Agriculture in Romania – CCIFER Romanian-Portuguese Bilateral Chamber of Commerce – CCBRP Italian Chamber of Commerce in Romania – CCIPR Dutch-Romanian Chamber of Commerce – NRCC Employers’ Confederation CONCORDIA Foreign Investors Council – FIC Romanian Business Leaders Foundation – RBL