ACADEMIA DE ŞTIIŢE ECONOMICE BUCUREŞTI ”

FACULTATEA DE CIBERNETICĂ, STATISTICĂ ŞI INFORMATICĂ

„

ECONOMICĂ ”

„„ SPECIALIZAREA”: INFORMATICĂ ECONOMICĂ

THE HARMFUL IMPACT OF THE

„FISCAL REVOLUTION” ON
ROMANIAN SMALL-AND-
MEDIUM-SIZED BUSINESSES „

„Coordonator ştiinţific : ”

Prof. Camelia Delcea

Student :
„ ”

Kovacs Erik-Robert

Bucureşti
„ ”

2018
„ ”
 Table of contents

Introduction 1

Background 1

State of the Economy prior to changes 2

The „Fiscal Revolution” 3

Effects on small-and-medium-sized businesses 5

Conclusion 7

Bibliography 7
 Introduction

The set of tax measures touted by the PSD government as forming a „Fiscal
Revolution” were proposed in one form or another beginning with the third quarter of 2017,
passed into law 8 November 2017 and were effective beginning with January 2018. They mostly
consisted of tax changes affecting social contributions, income tax, the minimum wage, and
corporate taxes. Despite being defended by the government as a way to streamline Romania’s tax
system, they were often justified to the public using ideological discourse1 and were of dubious
necessity to both domestic analysts’ as well as foreign observers’ eyes, who questioned the
intentions and reasoning behind the tax overhaul. After coming into effect, apart from never
materialising in the utopian predictions its creators promised, the observed net effect was an
increased burden placed on the private sector, and a slight but noticeable rise in inflation and
interest rates2. This paper aims to examine and summarize these negative effects with a specific
focus on the small-and-medium-size business sector in Romania.

Background

To understand the tax changes discussed in this paper, one needs to know some
key facts regarding the political situation of Romania in the past few years. Because of relatively
low wages, low corporate taxes and a high concentration of skilled young professionals,
Romania is one of the EU countries with the highest economic growth rates, and has been for the
past few years3. The country escaped the political turbulence brought by the EU migrant crisis
virtually unscathed, but the Colectiv club fire in late 2015 has brought the subject of political
corruption, an endemic ailment the country has suffered from ever since the 1989 revolution, to

1
- ***, Liviu Pop: De la 1 ianuarie, angajatorii de bună credință ar trebui să dea salariul mai mare, Stirile ProTV,
https://stirileprotv.ro/stiri/politic/liviu-pop-de-la-1-ianuarie-angajatorii-de-buna-credinc-a-ar-trebui-sa-dea-salariul-
mai-mare.html, 28.05.2018
2
- ***, Dragnea despre inflaţie: "Doamne fereşte! Trebuie nişte răspunsuri", dcnews.ro,
https://www.dcnews.ro/dragnea-inflatie-scrisoare-guvernatorului-bnr_580678.html , 28.05.2018
3
- Sergiu Vonsovici, Romania: The Fastest Growing Economy in the EU, The Market Mogul,
https://themarketmogul.com/romania-economy/ 28.05.2018

1
the forefront again4, resulting in large protests condemning Cristian Popescu Piedone, mayor of
Bucharest’s Sector 4, and his party, the PSD, for seemingly routinely accepting bribes in order to
issue safety permits to noncoompliant businesses. Victor Ponta, Romania’s then prime minister
and president of the PSD, already under investigation for tax evasion, resigned and lost
leadership of the party to a relatively unknown ideological hardliner, Liviu Dragnea.
Following an interim government headed by Dacian Cioloş, the PSD won the
2016 parliamentary elections with a wide majority on a platform of increased wages for
government employees and more consistent social benefits coupled with tax cuts5, led by
Dragnea. The PSD’s reign as of May 2018 has, however, stood out not because of their fiscal
policy, but because of the innumerable scandals - including passing controversial criminal-law
bills regarding coruption by emergency decree (shot down by public indignation)6, two prime
minister sackings in less than a year and a half7, and attempts to control the media8.
It is in this political context that the fiscal measures, first proposed by the Tudose
government, were adopted by the Dăncilă government. Taking into account the previous history
of the party and its latest actions, the conclusion can be drawn that the PSD will take measures
that defy principles of good governance in order to sate the short-term demands of its voter
base9: pensioners, government employees, rural people and the unemployed.

State of the Economy prior to changes

The tax cuts and raises afforded to government employees since March 2017
injected a lot of cash into the Romanian economy, sustaining a booming consumption-based
4
- ***, CORUPTIA UCIDE: Peste 35.000 de oameni au ocupat strazile Capitalei. Proteste de amploare au avut loc
in toata tara, Stirile ProTV, https://stirileprotv.ro/stiri/actualitate/noi-proteste-sunt-anuntate-si-pentru-miercuri-
seara-ce-vor-manifestantii-sa-se-intample-dupa-caderea-guvernului.html, 28.05.2018
5
- ***, PSD – program de guvernare 2017-2020 , Site oficial PSD,
http://www.cdep.ro/pdfs/guv201706/Program_de_Guvernare.pdf, 28.05.2018
6
- Ana Petrescu, OUG 13 a provocat cel mai mare protest de după Revoluție, Stirile EVZ, http://evz.ro/oug-13-
protest-revolutie.html , 28.05.2018
7
- Radu-Sorin Marinas, Romania's PM resigns after losing party's backing , Reuters,
https://www.reuters.com/article/us-romania-government-pm/romanias-pm-resigns-after-losing-partys-backing-
idUSKBN1F42IV , 28.05.2018
8
- Mihai Popescu, Cum funcționează propaganda Antena 3 și de ce pun părinții tăi botul la ea, Vice.ro,
https://www.vice.com/ro/article/z4x443/cum-functioneaza-propaganda-antena-3-si-de-ce-pun-parintii-tai-botul-la-
ea-457 28.05.2018
9
- Camelia Badea, Revolutia fiscala, o strategie de a cuceri si mentine puterea politica mizand ca oamenii nu inteleg
ce se intampla, Ziare.ro., http://www.ziare.com/economie/analiza-economica/revolutia-fiscala-o-strategie-de-a-
cuceri-si-mentine-puterea-politica-mizand-ca-oamenii-nu-inteleg-ce-se-intampla-interviu-1501400 , 28.05.2018

2
growth that looked great on paper, but by the end of the year tax revenue had fallen to a 25-year
hsitorical low10, second-to-last in the EU when expressed as percentage of GDP11. The Tudose
government was faced with a dire situation, as mandating wage cuts now would spell protests
and resignations, yet the tax gap in lost revenue and increased spending was not made up by an
increase in fiscal reporting as had been hoped. Private wages stagnated, leading to people starting
to consider migrating into the public sector12. At the same time, the government faced a sharply
polarised public, in no small part due to a hyper-partisan media13, that made any kind of dialogue
very difficult.
In this situation and bearing in mind the idea mentioned above that the PSD will
take measures that defy principles of good governance in order to sate the short-term demands of
its voter base, a plan was set in motion by minister of labour Olguţa Vasilescu to compensate the
losses sustained by the state in the last year involving a series of tax measures that would become
known as the „fiscal revolution”. These measures seemed to have two guiding principles: (I)
bring in hard cash to the state coffers, and (II) not be obviously perceived as new or increased
taxes, or at least not have a direct effect of being perceived as such.

The „Fiscal Revolution”

The best-known measure from the set is the transfer of social contributions from
employer to employee. Before the changes, these contributions were split between the employee
and their employer according to the following table (values are expressed as percent of gross
salary and reflect a typical case – i.e. not miners, military personnel, etc.)14:

10
- Adrian Ionescu, Romania 2017 – the lowest tax revenues in the last 25 years. Ionut Dumitru: We are on a
certain path towards dissolution , Curs de Guvernare English News, http://cursdeguvernare.ro/romania-2017-the-
lowest-tax-revenues-in-the-last-25-years-ionut-dumitru-we-are-on-a-certain-path-towards-dissolution.html ,
28.05.2018
11
- ***, Romania, second-to-last in EU for the share of tax revenues in GDP, Romania Insider,
https://www.romania-insider.com/romania-tax-revenues-gdp/ 28.05.2018
12
- Adrian Ionescu, op.cit.
13
- Mihai Popescu, op.cit.
14
- Mariana Bechir, Romania could become the only EU country where social contributions are paid only by
employees, Curs de Guvernare English News, http://cursdeguvernare.ro/romania-could-become-the-only-eu-
country-where-social-contributions-are-paid-only-by-employees.html , 28.05.2018

3
 Contribution type Employer’s share Employee’s share
Unemployment Fund 0.5% 0.5%
Health (CASS) 5.2% 5.5%
Social Security (CAS) 15.8% 10.5%
Warranty Fund 0.25% 0%
Contribution to holidays and 0.85% 0%
health insurance allowances
Insurance contribution for 0.15% 0%
occupational accidents and
diseases

Transferring all that onto the shoulders of employees has led, on an average, to a
21% dip in real wages in the private sector15 and to a bizarre situation in which many people got
wage increases that would look great in statisctics but they themselves would take home not a
penny more than before. The situation differs in the budgetary sector, since in this case the state
IS the employer, and the transfer of the contributions exists solely as accounting figures. Another
insidiuous and less-discussed measure is the reduction in the Pilon II pension contributions,
which could also have dangerous long-term effects.
These measures fulfilled the abovementioned requirements, as are, at a glance, not
obviously harmful in any way . But at closer inspection, their peculiarities emerge, and the
potential benefits become as confounded as the rationale for their adoption. Let us examine their
effect on the backbone of the Romanian economy, the thousands of small and medium sized
businesses that employ 2.516 million of Romania’s working population and contribute 44%17 of
its GDP.

15
- Stoiciu Victoria, Ce ascunde transferul contribuțiilor sociale de la angajator la angajat, Republica,
https://republica.ro/ce-ascunde-transferul-contributiilor-sociale-de-la-angajator-la-angajat , 28.05.2018
16
- Panaete Madalina, Economia are 2,5 milioane de angajaţi care lucrează în IMM-uri, Ziarul Financiar,
http://www.zf.ro/profesii/economia-are-2-5-milioane-de-angajati-care-lucreaza-in-imm-uri-15508211 , 28.05.2018
17
- Medrega Claudia, IMM-urile româneşti creează mai puţin de jumătate din PIB, sub nivelul din UE. Şi mai puţin
de 40% din IMM-uri fac profit , Ziarul Financiar, http://www.zf.ro/imm/imm-urile-romanesti-creeaza-mai-putin-de-
jumatate-din-pib-sub-nivelul-din-ue-si-mai-putin-de-40-din-imm-uri-fac-profit-14267140 , 28.05.2018

4
 Effects on small-and-medium-sized businesses

According to a survey by the National Council of Small and Medium Enterprises ,

half of the owners of small and medium-sized businesses say they will undertake staff
reductions because of the rise in the minimum wage since January 1. The survey shows that
"79% of the employers had difficulties with the increase in the minimum wage, and 81% had to
increase other salaries as well. Half of them say that this forces them to make redundancies, and
over 45% of them say they will fire between one and five employees. "The increase in
contributions for part-time employees at the minimum wage level has put 81 percent of firms at
risk. 68% of them have employees whose salary is lower than the minimum social contribution
of 665 lei, ie the employee should have brought home money", the poll shows. This is because
according to the new tax laws, part-time employees were obliged to pay social contributions not
to the level of the earned income, but to the gross minimum wage in the amount of 1,900 lei.
The government has since patched (via emergency decree, an increasingly popular tool it would
seem) this particular absurdity, but many other problems remain.
By February 2018, 7 out of 10 SMEs have already made the transfer of
contributions from the employer to the employee, but most of them have run into significant
difficulties, accepting significant risks to the future of the business, according to a survey
conducted by the employers' association on a sample of about 1,800 SMEs.
According to Florin Jianu, president of the National Council of Private Small and
Medium Enterprises in Romania (CNIPMMR), and in line with the data presented above, the
most significant tax changes that have had a strong impact on SMEs are raising the minimum
wage starting with January 1 and transferring social contributions from employer to employee in
the form provided by emergency decree 79/2017.
According to this survey, not less than 80% of employers said they had
difficulties in raising the minimum wage of their employees. In addition, 1 in 2 entrepreneurs
estimated they would have to lay off between 1 and 5 employees following the implementation

5
of this measure, given that Romanian SMEs have an average number of 2.5 employees. It is
quite obvious that some of these companies may be closed down as a result of layoffs18.
On a micro level, let us examine a junior software tester’s case from an IT startup
in Bucharest that was kind enough to share the details for the purposes of this paper.
Before measures After measures After employer’s
adjustment
Gross salary 2395 2395 2874
Net salary 2000 1556.89 2000
Delta income for - -443.11 0
employee
Delta expenditure for - 0 -479
employer

As one can see, this is an extreme reduction of income from a salary just below
the median to one just above the minimum wage. One can also observe that the employer has to
pay a significantly higher gross salary to compensate the measures, while the employee stands to
gain nothing. Quite the contrary, as the slightly inflated prices and higher interest rates that we
have mentioned will have them significantly worse off than before. There is also the situation
that the employer is unwilling or unable to afford the raise, in which case the employee might
seek greener pastures – a catastrophic blow to small-and-medium-size businesses with 3-4
employees.
Observers would be right to point out that the hardest-hit were SME’s with few
employees, low-paid employees, employees with part-time or zero-hour contracts or those
engaging in other business practices that could be construed as dubious or otherwise exploitative,
yet many Romanian communities subsist on such small businesses. Many university-town small
companies which offer students part-time contracts are their only means of income while
completing their studies, and small startups are oftentimes their entryway into industries that
shun novice workers.

18
- Gabriel Kolbay, Revolutia fiscala face prapad la IMM-uri: Un antreprenor din doi va face concedieri, Ziare.ro,
http://www.ziare.com/impozit/contributii/revolutia-fiscala-face-prapad-la-imm-uri-un-antreprenor-din-doi-va-face-
concedieri-1502579 , 28.05.2018

6
 Conclusion

So what was the point in all of this? Bearing in mind the opinions and data
discussed above, and viewing the ideological motivation with skepticism, we can draw a series
of conclusions based not on the alleged motivations, but starting with the effects, the short-term
ones specifically as we are in need of more data and time to discuss the long-term ones. We have
established that tax cuts don’t play well with increased budgetary spending, as well as the
government’s unwillingness to „look bad” by widening the tax gap – or worse – acknowledge
inability to sustain the salary increases in the public sector.
The negative effects on the private sector, namely wage cuts, staff reductions, and
business closures, can be assumed to have been incidental or simply not taken into account, as
their potential impact seems to have been insufficient to deter the government from covering
their more urgent emergency: imminent inability to pay pensioners and government employees.
The „Fiscal Revolution” can thus be viewed as an attempt by the government to
„mask” the strain on the state budget that its increased spending has incurred, by magically
transferring money from one state pocket to the other. The effects of the measures are, however,
dire in comparison to the benefits, and there are indications that even the desired effect of
preserving the state budget has been overestimnated, as of May 2018 a budget deficit of 6.05
billion RON has been measured19. Due to this as well as other considerations, the measures were
patched via emergency decree no less than 4 times as of May. Even worse, their devastating
effect on the EUR/RON exchange rate, as well as the interest rates, has not been discussed due to
space considerations. These are dire news indeed for both Romanian workers and entrepreneurs,
continuing the trend of a self-serving political class that adopts ambiguous measures
accompanied by populist rhetoric that results in a net loss for the Romanian business
environment and people.

19
- Florin Puscas, 'Revoluţia fiscală' a lovit în plin încasările la buget: Deficit uriaş faţă de 2017 , Stiri pe Surse,
https://www.stiripesurse.ro/oficial-revolutia-fiscala-a-lovit-in-plin-incasarile-la-buget-deficit-urias-fata-de-
2017_1267266.html , 28.05.2018

7
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angajatorii-de-buna-credinc-a-ar-trebui-sa-dea-salariul-mai-mare.html, 28.05.2018

*** (20.02.2018), Dragnea despre inflaţie: "Doamne fereşte! Trebuie nişte răspunsuri",
dcnews.ro, https://www.dcnews.ro/dragnea-inflatie-scrisoare-guvernatorului-bnr_580678.html ,
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*** (07.11.2015), CORUPTIA UCIDE: Peste 35.000 de oameni au ocupat strazile Capitalei.
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*** (2017), PSD – program de guvernare 2017-2020 , Site oficial PSD,

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Vonsovici, Sergiu (07.01.2018), Romania: The Fastest Growing Economy in the EU, The
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Marinas, Radu-Sorin (15.01.2018), Romania's PM resigns after losing party's backing , Reuters,
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Popescu , Mihai (18.02.2016), Cum funcționează propaganda Antena 3 și de ce pun părinții tăi
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politica mizand ca oamenii nu inteleg ce se intampla, Ziare.ro.,
http://www.ziare.com/economie/analiza-economica/revolutia-fiscala-o-strategie-de-a-cuceri-si-
mentine-puterea-politica-mizand-ca-oamenii-nu-inteleg-ce-se-intampla-interviu-1501400 ,
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8
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http://www.zf.ro/imm/imm-urile-romanesti-creeaza-mai-putin-de-jumatate-din-pib-sub-nivelul-
din-ue-si-mai-putin-de-40-din-imm-uri-fac-profit-14267140 , 28.05.2018

Kolbay , Gabriel, (20.02.2018) Revolutia fiscala face prapad la IMM-uri: Un antreprenor din
doi va face concedieri, Ziare.ro, http://www.ziare.com/impozit/contributii/revolutia-fiscala-face-
prapad-la-imm-uri-un-antreprenor-din-doi-va-face-concedieri-1502579 , 28.05.2018

Puscas, Florin (25.05.2018), 'Revoluţia fiscală' a lovit în plin încasările la buget: Deficit uriaş
faţă de 2017 , Stiri pe Surse, https://www.stiripesurse.ro/oficial-revolutia-fiscala-a-lovit-in-plin-
incasarile-la-buget-deficit-urias-fata-de-2017_1267266.html , 28.05.2018