When will the flat tax for profits and individuals' incomes promised by the new rule enforce?
This question started circulating yesterday, after Adriean Videanu, the state minister appointed for the Co-ordination of Economic Activities surprisingly said the modification would enforce on June 30, 2005. The reason behind this? The fact that the changes to the Fiscal Code have to be set six months before enforcement, according to the law. A few hours from his initial statement, Videanu reconsidered, saying that he hoped the emergency ordinance on the flat tax would enforce as of January 1, 2005. He explained that only in the event the Social and Economic Council (CES), the institution that has to endorse the normative act drafts before enactment had not agreed, then the emergency ordinance should have been issued in January and enforced as of June 30. "We have CES' approval in principle," Adriean Videanu specified. Still, the Social and Economic Council was neither consulted, nor asked to state its opinion on the bill to introduce the flat tax, CES vice-chairman Minel Ivascu says.
The sure thing is that the plan to introduce the flat tax as of January 1, 2005 according to the initial commitment was confirmed by Prime Minister Calin Popescu Tariceanu, in his investiture speech before the Parliament last night.
Still, Alliance sources said the ordinance to modify the Fiscal Code would be published in the Official Gazette on January 1, 2005, yet would stipulate enforcement as of mid-year.
This confusing picture also includes the information about the International Monetary Fund disagreeing with the introduction of the flat tax before a thorough assessment performed by the new government along with the experts of the Washington-based institution.
Back in the autumn of 2003, when the authorities were discussing a similar draft to introduce the flat tax, the IMF did not openly oppose this measure, yet expressed severe concern about the possibilities to make up for the revenue shortfall to be initially caused by a low flat tax. Implicitly, the International Monetary Fund warned about the need for a solid footing for such a flat tax, so that the budget would not experience too severe a shock.
The new Finance Minister Ionut Popescu did tell Reuters that he would meet with the Fund's experts at the end of January 2005 and that the government's goal would be to maintain the macroeconomic targets agreed upon with the IMF, which includes attaining a tight budgetary deficit.
The agreement concluded with the IMF this summer stipulates next year's deficit shall be of 1.5% of GDP.
Popescu, a 40-year old economist, wants to introduce a new flat tax of 16% from January 1, 2005 to replace the current 25% corporate profit tax and a personal income tax scale that ranges from 18% to 40%.
Analysts said the change could bring more foreign direct investment, curb the underground economy and boost growth, outweighing the temporary effects of a likely revenue shortfall.
But they also expressed worries over the risk of adding fuel to an already buoyant economy and of a wider budget deficit, which would complicate the campaign to reduce inflation to 7% in 2005 from just under 10% this year.
razvan.voican@zf.ro
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