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January 3, 2005
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The Flat Tax Spreads to Romania

by Alvin Rabushka

In an election held on December 13, 2004, Trajan Basecu, the mayor of Bucharest, won a surprise victory as president of Romania. His candidacy of the "Justice and Truth" coalition formed by the National-Liberal Party and the Democrat party was based, in part, on the introduction of a 16% flat tax on personal income and business profits. Following the election, the coalition was joined by the Humanistic Party and the Hungarian Democratic Union of Romania. Together the coalition controls 242 of the 469 seats in parliament, a clear majority. On December 26 Basecu named his 24-member cabinet headed by Calin Popescu Tariceanu as prime minister and 40-year-old economist Ionut Popescu as public finance minister. Parliament promptly approved the cabinet on December 28.

President Basecu emphasized his desire to make the 16% flat tax effective on January 1, 2005. Cabinet members took their oath of office early in the morning of December 29. The new prime minister, using a special ordinance, installed the flat tax of 16% on personal and business income to be enforced starting January 1, 2005. Had the cabinet and parliament waited until the new year to enact new tax legislation, the flat tax would not have taken effect until 2006.

The 16% flat tax replaces the former personal income tax, which imposed five rates: 18% on taxable income up to 28,000,000 Romanian Lei ($969.05), 23% on income between ROL 28,000,001 and 69,600,000 ($2,408.80), 28% between ROL 69,000,001 and 111,600,000 ($3,862.40), 34% between ROL 111,600,001and 156,000,00 ($5,399.05), and 40% over ROL 156,000,000. (US$1 = ROL 28,894) The 16% flat tax also reduces business profits tax from 25%. Further details on the new 16% flat tax will be posted to this site as they become available.

Romania's decision to adopt a low flat tax reflects fiscal competition from other Central and Eastern European countries that have adopted the flat tax: Estonia, Latvia, Russia, Serbia, Ukraine, Slovakia, and Georgia. I have omitted Lithuania, which has a 33% flat rate on wage and salary income, from this list because its tax system imposes a wide variety of rates depending on source of income.

Other countries are waiting in the wings. The likelihood of a flat tax in these countries depends on the elections that will be held in the coming years. The shadow finance minister of the Czech Republic, Vlastimil Tlusty of the Civic Democratic Party, is urging his country to follow suit. His party has drawn up plans for an integrated 15% flat tax on corporations and individuals, a reduction from the current top rates of 29% and 31% respectively. The Civic Platform in Poland has also proposed a 15% flat tax on both personal and corporate income.