EY argues budget revenues in Romania are low because of insufficient income taxation

Romania lags behind the European Union’s average in terms of public budget revenues (33% versus 47% of GDP in 2021) because of comparatively lower income tax collection - and not because of the VAT tax evasion implied by the highest VAT gap in the Union (35%) – EY concludes in a study based on budget revenues data provided by Eurostat.

And yet, EY argues against progressive taxation – which is the model followed by most European countries.

The business circles believe that the flat tax has worked just fine and “brought Romania where it is now” [at the lowest income tax revenues in Europe?]. “Progressive taxation would be a step back,” partner and head of the tax consulting practice at EY argue, Mediafax reported.

Thus, the revenues generated by the income tax were only 2.4% of the GDP in Romania last year, compared to 3.3% of the GDP in Bulgaria and 9.8% European Union’s average. Comparatively, the revenues from VAT were 6.5% of GDP compared to an average level of 7.5% in the European Union.

The record VAT gap calculated by the EU for Romania is misleading as it is based on assumptions that no preferential VAT rates should be applied, EY’s experts argue. Regarding the low-income tax collected, the causes are multiple: a low tax rate (10%) and loopholes in the system (using microenterprises instead of labour contracts).

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