Romania needs more tax funds

BUCHAREST (Reuters) – Romania struggled to maintain previous budget revenue levels in 2005 after the centrist government’s new flat tax failed to make substantial inroads into the vast gray economy, analysts said yesterday. They said the government would probably have to introduce further tax measures and improve tax collection to boost revenues significantly in future. The International Monetary Fund has also warned Romania it may need to find other sources of income after cutting taxes. Budget data for 2005, released Sunday, showed revenues stood at 29.7 percent of gross domestic product, flat to 2004, while expenditures amounted to 30.5 percent of gross domestic product. The Finance Ministry did not give absolute figures but said the budget deficit stood at a lower than expected 0.8 percent percent. «One of the aims of the flat tax was improving budgetary revenues, and as long they are still under 30 percent of GDP, this goal was not met,» said ABN Amro senior analyst Radu Craciun, adding, «The key to meeting the need of investment in infrastructure is to boost budget revenues closer to 34 percent of GDP.» Romania, which hopes to join the EU in 2007, needs to upgrade its crumbling infrastructure to prepare for EU entry. The government argued a 16 percent flat tax, which it introduced at the start of 2005 to replace a 18-40 percent sliding income tax scale and a 25 percent corporate tax, would bring tax evaders out of the gray economy. Analysts said the government also needed to tax pensions and the agriculture sector in the impoverished countryside, where around 45 percent of the 22 million population lives, as well as improve tax collection. But they reserved judgment on the 2005 tax take until seeing final figures from the ministry to better assess the impact of the flat tax. The Finance Ministry figures were preliminary and final data could still show the budget gap rising to 1 percent of GDP, they said. The ministry said revenues from corporate tax fell by 0.4 percent of GDP last year while those from income tax fell by 0.6 percent. But those reductions were compensated by hefty rises in value-added tax and social security contributions.

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