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Big winners of an improvisation: five strategic errors of new tax measures

de Cristian Grosu , 6.11.2017

We can hope that the measures announced by the Ministry of Finance in last week’s government meeting are still under debate.

So, we shall formulate below a picture, not so much of the “little things” that every taxpayer sees in her corner of economy and Romania but of the deviations from a minimal strategy of preserving the fragile balance in which we maintain our underdevelopment.

First, we should mention that we cannot expect, after this incoherent year, for the fiscal measures to be seen by decision-makers as the only instrument by which the state can intervenein a constitutional manner – in the economy. This truth is already an easy thing.

Below are some truths that no one seems to have calculated.

  1. Blocking and/or even destroying small business based on investment/production in Romania that does not produce

Who loses:

Romania that does not produce: that is, Romania of the small towns (over 50% of the urban segment – beyond the leopard spots of the county residences) as well as rural Romania that sells raw and unprocessed commodities and fails to sparkle at least here and there any investment in the community.

* – The 1% tax on turnover affects exactly those companies between EUR 3-400 thousand and EUR 1 million that make or are preparing to make the small production based on which the above-mentioned communities can rise:

investments do NOT depreciate anymore, NOT even the smallest acquisition of minimal technology is encouraged, expansions of the small enterprises that can NO more deduct their expansion are blocked.

(There is not and has not been at the level of any government in the last 15 years this vision of urban Romania beyond the county capital city – that is, the city of the local political baron – and that is why there has never been a vision or an economic solution for these real infrastructure hubs that should support Romania).

Incidentally, the big stake of the local economy – with the potential to mobilize the domestic initiative – is the accession of as many companies as possible to a turnover between 2 and 5 million – that share is missing from the local economy. It is possible to reach that level by starting from a turnover of hundreds of thousands, sustained by investment in production and services, with an important incentive for the state.

Taxing turnovers of less than one million euros hits exactly that segment. And this is of a violent evidence if we look at the list of concrete and incredibly simple things that we import although they can be produced anywhere.

* – It also hits another segment: the one of the small trader who is killed by the lack of throughput, lost to the supermarket networks.

* – It also hits one more segment: the segment of tenacious businesses, based on small margins and low prices:

a farm with transparent activity and documents, a value-added carpentry unit, a service agency that operates with 2-3% profit, a car service with transparent documents and activity, a canning factory, etc.

Who’s winning:

Companies that DO NOT INVEST definitely win.

Consulting companies win (the years of glory for “consulting”, “trading”, “management”, “know-how” fields and other cunnings difficult to grasp because of the vague and hardly palpable nature of the “commodity” they trade – are back) as well as those who do not need to put any brick on which to build jobs in medium and long term.

And a bigger stake stands:

Considering the figures, the Government’s generosity seems extreme, because even though production companies, with investment will suffer from the 1% tax on turnover, budget losses seem to be certain: let us only consider the favoured types of activities listed above.

But there might be another stake too that could even generate some money for the budget in compensation:

Those who are ready to switch to tax optimization, in the hundreds of possibilities that the mix of measures announced allow them and especially those willing to repatriate, with 1%, some hidden money:

I do not see what prevents us from imagining hundreds or even thousands of companies to absorb, each of them, one million euros (taxed at 1%): they would be in fact the most certain winners.

The Government (the same government) tried once this facility before, for the same ones, by the provision (abandoned later) to have 0% tax on dividends, no matter where they were obtained.

  1. Increase of most dangerous phenomenon that threatens society, workforce and social balance, with impact on economy’s health: SOCIAL INEQUALITY.

A friend, a lawyer, with contracts that remove all his financial emotions, is more concerned than decision-makers who do not have money in the budget: “With what will this country be built? Until now I used to pay about EUR 2,000 to the CASS fund, these people want to decrease this contribution to less than 100 euros.

Well, an employee with the average national salary will pay more than him!

Who loses:

Taxation for social insurance budgets will further deepen social inequalities, being employed will be the most disadvantaged position, work will remain the worst activity.

That, in the context of Romania having the highest social inequality in the EUwe are, as a structure of society and according to the GINI coefficient, the South Americans of Europe.

Who’s winning:

Consulting activity, law practice, media. This is roughly what is good to buy when you are a government willing to obtain some peace of mind.

Full stop.

  1. Full stop? Problem just begins: middle class continues its decomposition

I wrote before about this paradox that makes Romania a case study, literally, generated by the salary increases in the public sector, corroborated with the rise in the minimum wage in the private sector and companies’ inability to increase the other wages proportionally:

the minimum wage has reached 80% of the median wage – just like in the northern countries! with the mention that these wages are 10 times smaller: and the fact that they are 10 times smaller shows the very lack of the middle class on which a sustainable consumption can be based, as well as the production behind it.

The assumption that the Government aims, by forcing the minimum wage, to impose a growth trend on wages in the private sector cannot stand:

the quality of jobs in Romania is very low precisely because of the lack of investment in the entrepreneurial sector, the overall productivity is very low because of the anachronistic technology, the education system does not create future-oriented professionals but anachronistic “products” commensurate with the set of educators.

Who wins:

It is a little inverse here: employees who know a foreign language win and are young enough to run away and start fresh in a friendlier place.

And there are also real winners: politicians win and parties that live and accede to power by preserving a layer as broad as possible from the base of the payroll.

Who loses:

The economy loses – with one off damages and sometimes irreversible or recoverable only over generations. And society loses along with it.

  1. New fiscal measures preserve demographic decline and birth rate problem by completely ignoring a logical and equitable calculation

The current system of deductions for employees with more dependents (children, in general) has not changed in 10 years, although it was intended to increase.

The new tax proposal spectacularly promotes a null effect: the increase in deductions (by 60%!) for children brings exactly 3 (three) lei in a family pocket, even supported by a 10% decrease in the income tax. Such “care to people” of the party is not a joke for a family of employees with children.

  1. Preserving in 2018 as well a reactive and chaotic “taxation” method

All but absolutely all measures announced by the Ministry of Finance have no connection to the needs and direction of the economy, they have a zero effect, at best, for the employees and are toxic for the mechanism that generates the budget:

they are meant to ensure one thing: the implementation at any price, really at any price apparently, as of January 1, 2018, of the so-called unitary pay law.

But the effect on the next year’s budget will be high and the deficit target will be maintained at the same price as this year: cutting public investment, postponing the absorption of the European funds to avoid the related co-financing, and especially blocking local investment, by a genuine sabotage, so that surpluses obtained at local level to balance the big deficit from the central budget.

No experience has avoided the easiest solution for governments in the last 15 years: when something goes wrong, we go back to the tax law: those 2.5% that companies are to pay as a solidarity tax, renamed, can become at any time 4-5-6% – money that will produce no effect for the employees who will have received some peanuts this year.

  1. Finally – another kind of error: when populism replaces expertise

The measures have been announced before the government meeting in a way that we were hoping to be only related to election campaigns:

“Romanians will receive …”, “Romanians will earn …” “the measures will bring more money into the pockets …” etc., etc. All that, instead of impact studies, budget and development targets, – anyway, instead of a sober and minimally decent attitude of accountants who articulated them randomly. The professional compromise is severe: don’t we have a budget projection for 3 years? Can these figures be placed in a context – but realistically, not like the 2017 budget? How are all these placed in relation to the simple calculation, at least at a level enough for the way it functions instinctively in an ordinary household?

We have something else. And it is hard to believe that such a “school” of analytic hypocrisy and defiance of the professionalism would belong to Minister Misa: to bring the amateurism on such heights and with such serenity, it takes years of serious training in mockery of any kind of responsibility, an institutionalized nerve that is not taught at a part time school.

Which is not Mr. Ionut Misa’s case but that does not help us at all. Looking at 2018, we can only estimate it from the perspective of the last 8-9 months. At the end of which we cannot help asking ourselves who wins, in fact, not so much from the improvisations that fall one after another on the economy and that are, in the end, a consequence. But from the fact that we could go through another year without a prime minister and a minister of finance.

***
Cristian Grosu is editor in chief at cursdeguvernare.ro

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