Romania’s tax system increases poverty especially for rural households and for families with children, as direct cash transfers to poor households are not large enough to compensate them for the burden of indirect taxes, according to a recent World Bank study, according to Business-Review.eu.
The results of the study, called “The Distributional Impact of Taxes and Social Spending in Romania”, suggest that the combined effect of taxes and social spending in Romania help to reduce inequality, although less so than in other EU countries.
The government has recently reduced the rates for personal income and value added taxes with the objective of encouraging private investment and reducing the tax burden on citizens, and consequently, to contribute to the improvement of living standards.
The combined fiscal effect of these changes is estimated to lead to a 5.4 percent reduction in total revenue and a substantial increase in the primary deficit, holding all other economic variables constant.
“On the distributional side, our simulations show that these changes have likely led to an increase in inequality, as most of the tax relief accrued to the top of the income distribution. Moreover, the reform was a very expensive way to achieve what is actually a very small decline in the poverty rate,” World Bank experts indicate.
“In fact, our simulations show that higher and better targeted social assistance spending could have achieved much better distributional results at a much lower fiscal cost,” they added.
Experts warn that these results are problematic, not only because Romania engaged in procyclical policies that could put is sustainability at risk, but also because much of this fiscal effort was not used to efficiently reduce poverty.
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