Abstract
Taking into consideration the recent debates on adopting a progressive tax system over the flat-rate taxation, our paper aims to investigate the impact of a change in the current Romanian personal income tax policy system from the 10% flat-rate tax system to some alternative progressive taxation scenarios. The methodological approach consisted in using the European Union Survey on Income and Living Conditions (EU-SILC) database to micro-simulate the impact upon poverty and income inequality. Through our ex-ante tax policy analysis we bring empirical evidence of a modest, but positive effect upon poverty rate and income inequalities in favor of a progressive taxation system. However, when looking at the government financial implications through the personal income tax budget revenues, we discuss upon the possible trade-off between the benefits on poverty and income inequalities and the possible budgetary drawbacks. Despite the data limitations, this study has the benefit of being among the first attempts to evaluate the impact of a personal income tax policy reform for the case of Romania.
Highlights
Assuring a fair tax burden distribution among people has been a central concern in policy-making for such a long time
Having a high Gini coefficient of 33.9 and an in-work poverty rate of 20.7% according to the EU-SILC database, Romania is among the countries with the highest level of inequalities and poverty in the EU
The economic and social inequalities in Romania have their roots in the transformations that took place at the level of the economy after the exit from the communist regime and the transition to a capitalist market economy
Summary
Assuring a fair tax burden distribution among people has been a central concern in policy-making for such a long time. The National Strategy for Romania’s Sustainable Development 2030 addresses the reduction of social polarization through the gradual and constant increase of the incomes of the poor, the support of economic activities in rural areas, as well as the reduction in unemployment, social protection, and fiscal policy adjustments in order to improve the equality between citizens and to reduce the economic and social gaps between Romania and the EU average Having these in consideration, our paper aims to investigate the impact of a change in the current Romanian personal income tax policy system from the current 10% flat-rate tax system to one of two possible alternative progressive taxation scenarios. The last section is dedicated to the discussions and the concluding remarks of the paper
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