Romania’s past fiscal policies increased social discrepancies

The fiscal policies conducted by the Romanian authorities over the past years have resulted in consequences opposite to the declared targets: namely they widened the discrepancies between social groups in the country, according to a Working Paper published by the World Bank.

The combination of direct and indirect taxes and transfers leads to an increase in poverty segment of population, as direct cash transfers to poor households are not large enough to compensate them for the burden of indirect taxes, the authors concluded, according to local Adevarul.

Moreover, recent reductions in the rates for personal income and value-added taxes are expected to have led to an increase in inequality, as most of the tax relief accrued to the wealthy category of households, the authors believe. They recalled that Romania cut the value added tax (VAT) from 20% to 19% in 2017, and the income tax decreased from 16% to 10%, at the beginning of 2018, although this measure came to package with the transfer of social contributions. The VAT reduction, the authors argue, has especially helped the rich of Romania, because they consume more. The poor population also benefited from this measure, but only marginally.

A more effective way to achieve poverty and inequality would be to keep the tax rates constant, but increase the volume of social transfers directly to the target segments of the population. Such an alternative would not only have cost less, but would have been even more redistributive, the authors of the report said.

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