In 2017 a new Government was elected and, of course, the Tax Reform had to continue. The different perspective of the new Governance brings in the spotlight the individual income taxation. There is no doubt that in the last month the hottest and trendiest subject was the income on household. Modeled by the ‘American Dream’ the tax on household aims to replace the obsolete income tax and provide a better life for the citizens of Romania.
In fewer words, this legislative project considers the replacement of the 16% withheld income tax paid on a monthly basis, with an annual review of the income and expenses per household in order to determine the income tax due for an entire year. To this purpose, the household is defined as “a group of one or more related or unrelated individuals having a common patrimony that they manage together from an economic and financial point of view disregarding the fact that they live or not at the same cadastral number”. It seems quite simple, considering the fact that many other countries apply similar taxes. The issue comes as the legislative change is scheduled to enter into force as of January 1st, 2018.
The question from everybody’s lips could not have been more pertinent: Are we really ready for this major change?
The answer is not hard to guess. The issues have many facets and just the willingness to expand the Tax Reform will not guarantee the success of this project.
First of all, given that the responsibility of the tax is transferred in the back yard (literary) of the individual, each and every one of us must have a coherent understanding of the basic economics and financial issues. Even if we start taking seriously the importance of economic education in school and we educate our youngsters to be financially responsible, it will still take at least 4 to 8 years to successfully implement this system.
The hasty implementation of income on households may have devastating repercussions both on micro and macroeconomics. From the individuals point of view, the income tax not being withheld will determine a growth of the consumption – considering the “increase in income” and the fact that the “expenses” can be deducted. The problem will appear at the actual computation of the tax. Will the non-economically educated individual be capable of the computing and paying such a considerable amount in tax? On the long run, isn’t this system going to discourage the local small production (considered income source), the consumption (as not every expense is deductible) and the overall economic growth?
From a macroeconomic prospective, Romania will suffer from a sharp decrease in collected tax to the State Budget. This will lead, therefore, to a cash-flow problem and external loans shall be required in order to balance the budgetary deficit.
One may ask oneself many questions on this topic. All signs point to an unsuccessful implementation of this system, if adopted at 1st of January 2018, but only time will tell. Maybe consultants and tax specialist are missing some vital information that will change the overview of this entire legislative proposal.