Flat Tax in Romania

Romania’s flat tax is generating results that would make French politicians delirious with joy — huge increases in tax revenue. Income tax collections jumped 44.7 percent in 2005, the year the flat tax was introduced. (Sadly, the increased revenue isn’t keeping pace with Romanian government spending; as the country works to meet the various conditions for EU membership, its budget deficit is growing, which has led to complaints from Brussels.)

Rather than learn from this “Laffer Curve” example, the high-tax nations that dominate the EU are complaining about Romania’s “harmful tax competition.” A Hungarian news service reports:

Romania increased spending on roads, railways, pensions and other areas last year, mainly in December, to bring standards closer to those in the EU, which it joined on January 1.

…The Finance Ministry said today the government boosted revenue to 31.8% of GDP last year from 30.3% the previous year, helping meet a key EU recommendation. EU Monetary Affairs Commissioner Joaquin Almunia said last year that budget revenue as a proportion of GDP was lower than in any EU nation and recommended the country increase it. Economic growth, which the government has estimated at about 8% last year from 4.1% in 2005, also stimulated revenue collection, the finance ministry said.

…Romanian government spending increased 25% last year in nominal terms and accounted for 33.5% of GDP, from 31.2% in 2005, the ministry said. Income tax collection rose 44.7% to 9.8 billion lei ($3.8 billion). Romania has said income tax revenue has consistently increased since January 1, 2005, when it introduced a flat tax of 16% on corporate and personal income, the lowest in eastern Europe. It replaced a corporate tax rate of 25% and a personal income tax rate of as high as 40%.