Journal "Annals – Economy Series", No. 16 / 2013
COMPARATIVE STUDY ON THE INCOME TAX
IN ROMANIA AND EU MEMBER STATES
Economist Marioara PRALEA
"Drăgan" European University of Lugoj
Faculty of Economic Sciences
Lugoj, Romania
E-mail: [email protected]
Abstract: This paper aims at presenting the necessary information for
conducting a comparative study on the income tax in Romania and in
the EU member states, between 2007 and 2012. Due to the fact that
we are witnessing a continuous evolution of the income tax in the
context of a global economic crisis, a transparent study on the income
tax in the EU member states is needed. In the context of this global
economic crisis, the analysis of tax income rates could aid both states
with a developed economy, and states with a less developed economy,
such as Romania. The conclusions present opinions regarding the
income tax in Romania, as an EU member state, as well as in the
other member states.
Keywords: taxation, income tax, tax payers, tax quotas.
JEL Classification: E63.
1. Introduction
This paper, Comparative Study on the Income Tax in
Romania and EU Member States, presents an analysis of the
income tax and offers examples from Romania and the other
European Union member states.
The importance of the subject comes from the
significance of taxation for the economic development of each
country. This is more important since the paper focuses on EU
member states which have different tax income quotas.
The topicality of the subject lies in the identification and
emphasis of the differences between tax quotas in the European
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Union, during a timeframe which starts before the economic
crisis and runs to the present date.
Currently, direct tax has expanded considerably and
represents a majority in the public income of developed
countries. The income tax is a key factor which determines how
much people work, save and invest.
In Romania, the tax system is developing. Therefore, it is
necessary that the tax legislation in Romania is harmonised with
the legislation in the EU. Romania must discard the previous
unsuccessful reforms and attempt at creating an optimal tax
system.
For the purpose of creating a comparative approach in
this paper, we decided to take all EU member states into
account. On the one hand, we studied the states with a
developed economy and a clear taxation system, such as
Germany, France and Great Britain (which adopted the income
tax in 1799). On the other hand, we studied the states with a less
developed economy, similar to the Romanian one, such as
Bulgaria and Hungary.
This comparison of the income tax is meant to identify
the models to be followed by our country and the mistakes of
other states which Romania could avoid in the future.
The first effects of the tax incomes and of the global
financial crisis were felt in 2008. The economic growth of the
EU member states became negative the following year.
2. Theoretical research
Direct tax - general concepts
This section analyses the concepts and terms used in the
paper, as well as the characteristics of direct tax, the definition
of income tax and the tax payers of the income tax.
Direct tax has evolved rapidly. It has evolved in the same
pace as the economic development, since direct tax is based on
income, wealth or goods. The need for public financial resources
is permanently growing. This situation led to creating new direct
and indirect tax categories, as well as to transforming some
taxes in permanent tax income.
Direct tax is represented by payments performed by
people who have an income. This involves a large array of
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taxation instruments based on the mechanism of imposing the
subject of taxation. The main and most important characteristic
of direct tax is the fact that taxation is individualised. This
represents the oldest form of imposition practiced in the early
times.
Direct tax is paid by natural persons or companies which
obtain an income, practice activities or have wealth. The
payment deadline of direct tax is well establishes. This fact is
important and convenient both for tax payers, and for the tax
administration.
Some of the characteristics of direct tax are mentioned
below:
- Individualised;
- Paid by tax payers;
- Progressive;
- Differentiated, based on the contribution capacity of the
subject;
- More effective;
- Represent the oldest form of imposition.
Taxes represented the voluntary participation of all
citizens which had an income. The purpose was to obtain the
common wellbeing, not an individual one. These taxes are a
necessity for the state because they provide income to the
budget. Moreover, they represent an important instrument of the
economic, financial and social policy. Taxes are nonreimbursable payments since tax payers cannot request or
receive from the state any direct reimbursement of the payment
or any service in its account.
The income tax
In our case, the income tax is placed in the direct tax
category. From the point of view of the efficiency, this type of
tax is more stable and more equitable than indirect tax.
In the work entitled Impozitul pe venitul anual global.
Ghid practic, which discusses the global annual income tax,
Petre Brezeanu defines the income tax as an amount of money a
natural person must pay in account for the income realised in a
fiscal year (Brezeanu, 2000: 11).
The income tax is differentiated by its wide incidence
and by the controversies it generates. Income tax is applied to
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natural persons or companies, based on the tax quotas
established by legislation. This tax applies to the income of tax
payers and in seen as a central element on the fiscal system.
The taxation of the income of natural persons is a widely
used form of obtaining money which is available to the public
authorities. Once these taxes were introduced, the fiscal systems
entered a new evolution stage. This stage accentuates the need to
respect the principles of imposition in order to improve the
efficiency of fiscal systems.
There are also some categories which are exempt from
paying income taxes: royal families, sovereigns, foreign
diplomats, public institutions or natural persons with incomes
under a minimal level which exempt from taxation.
The income which is subjected to taxation is the income
available to the person after paying some other taxes such as:
production costs, National House of Pensions and Social
Insurance quota, and unemployment insurance quota.
The setting up and evolution of taxes is considered a
complex process which continuously evolves in time. This
process started with the breaking up of the primitive
communities. In Romania, the oldest forms of financial sources
for the state were tithes (a contribution which valued a tenth part
of any form of income), later replaced by imposts.
The introduction of the global income tax generated
dissatisfaction, especially due to the way in which incomes from
various sources are calculated and to the fact that a person can
have several income sources. The domain of personal income
has continuously expanded and this meant that almost all types
of income of natural persons are included.
In Romania, the income tax was adopted once a
differentiation of incomes of different social categories was
effected. This moment is marked by a positive evolution of the
number of workers which had an income. The first attempt to
introduce this tax was in 1909 by means of a bill belonging to
Costinescu. This bill became a law in 1921 as part of the fiscal
reform and was initiated by Nicolae Titulescu.
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Tax payers. Applicability of the income tax
Any person who has an income and must contribute to
the resources of the state with a quota of the income is
considered a tax payer.
The tax payers in the case of the income tax are (Ţâru et
al., 2010: 147):
- Resident natural persons who have their domicile in
Romania, for the income obtained from any source, both
in Romania, and abroad;
- Resident natural persons who do not have their domicile
in Romania, only for the income obtained in Romania
(this income is taxed based on each income source);
- Non-resident natural persons who have an independent
activity by means of a permanent headquarters in
Romania, for the net income attributed to the permanent
headquarters;
- Non-resident natural persons who have a dependent
activity in Romania, for the net salary income based on
the independent activity or for other income categories
from dependent activities.
In the current circumstances, natural persons can obtain
several types of income from different sources. These incomes
can be subjected to taxation for each source separately, or as a
global income of the same person.
The income tax covers incomes in the form of money, as
well as the equivalent of the incomes in other forms. This tax
applies to the following incomes obtained by natural persons
(Moşteanu, 2008: 94):
- Incomes from independent activities;
- Incomes from salaries;
- Incomes from concession, lease and rental of immovable
property;
- Incomes from investments;
- Incomes from pensions;
- Incomes from agricultural activities;
- Incomes from prizes and gambling;
- Incomes from the transfer of immovable property;
- Incomes from other sources.
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The obligation to pay taxes is imposed by law and
applies to all natural persons and companies which have
activities and obtain income, or which have certain wealth. All
these tax payers must pay taxes to the state. The right to
introduce and collect taxes belongs to the state, by means of the
Parliament and of the local authorities.
The fiscal practice uses two systems for calculating the
due taxes based on the income of natural persons:
a) The separate imposition system - one unique tax applied
to each income category;
b) The global imposition system - all incomes obtained by
one person are cumulated and only one tax is calculated.
This system is used in countries such as Germany,
France, Italy and Great Britain.
Natural persons which obtain incomes from different
sources have an advantage since they are not subjected to
progressive imposition.
In order to calculate the income tax, two quotas are used:
proportional and progressive. The latter is the most common.
The level of tax quotas applied to the income of natural persons
differs in various countries.
The following income categories are exempt from
taxation:
- Any type of pensions;
- Social insurance aids;
- Child allowance offered by the state;
- Students’ scholarships;
- Sums received as donations or inheritance;
- Sums received as compensation following natural
disasters;
- Sums received as sponsorship.
3. Applicative research
In all European Union member states the income of
natural persons is subjected to the taxation by the state. The
structure of the tax system is similar in all states. The
differences can be noticed in terms of the taxation quotas
applied.
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In the last decade, the EU member states conducted
fiscal reforms or adjustments of the fiscal system. The main
issues targeted by these reforms were direct taxes, especially the
income tax applied to natural persons. In some states, these
measures led to the increase of the income tax, while in other
states the income tax applied to natural persons was reduced.
The lowest level of taxation in the EU member states
was in 2007, before the economic crisis appeared. After the start
of the economic crisis, the lowest level of income taxation was
in 2009.
In 2010-2012 the fiscal policy was strongly influenced
by the effects of the crisis which started in 2008. Therefore,
most EU member states adjusted the income tax. Some states
reduced the level of the tax quotas (Bulgaria, Finland, Lithuania,
Poland, Hungary). Most states, however, decided to increase the
tax quotas (France, Greece, Ireland, Great Britain).
Table no. 1. The evolution of the maximal marginal income
tax quota in the old EU member states 2007- 2012
%
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
2007 2008 2009 2010 2011 2012 +/–
State
Austria
50
50
50
50
50
50
–
Belgium
50
50
50
50
50
50
–
Denmark
59
62.3 62.3 55.4 55.4 55.4 – 3.6
Finland
51
50.7 49.8 49.6 49.2
49
–2
France
40
40
40
40
41
45
+5
Germany
45
45
45
45
45
45
–
Greece
40
40
40
40
45
45
+5
Ireland
41
41
46
47
48
48
+7
Italy
43
43
43
43
43
43
–
Luxemburg
39
39
39
39
42
41
+2
Great Britain
40
40
40
40
50
50
+ 10
Netherlands
52
52
52
52
52
52
–
+
4.5
Portugal
42
42
42
45.9 46.5 46.5
Spain
43
43
43
43
45
52
+9
Sweden
56.8 56.7 56.7 56.6 56.6 56.6 + 0.2
EU 15
46.12 45.31 46.58 46.43 44.91 48.56 + 2.47
average
Source: KPMG’s Individual Income Tax and Social Security, Rate
Survey 2012
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The data presented in Table no. 1 reveals that the income
tax of natural persons in the EU 15 countries was slightly larger
(2.44%) in 2012 as compared to 2007.
Many EU member states increased the income tax back
in 2009 in order to accelerate fiscal consolidation. The increase
in income tax quotas for natural persons is a consequence of the
lack of economic measures to address the high level of public
debt. Many member states considered increasing the maximal
income tax quotas as a solution for reducing the budget deficit.
The increase was performed either by adopting a new quota, or
by temporarily introducing new taxes.
The income tax for natural persons in Austria, Belgium,
Italy and The Netherlands was stable during the entire analysed
period (2007-2012), both during economic growth, and
recession.
In the Northern countries the income tax is important for
the state. Therefore, in 2008 in Denmark the 59% quota
increased to 62.8%. However, Denmark opted for measures to
stimulate the economy, hoping for a growth in consumption. In
2010, Denmark lowered the maximal income tax quota to
55.4%, a 7% decrease. This quota is maintained in 2013.
In Germany, the maximal income tax quota applicable to
natural persons is 45%. This level was maintained during the
economic crisis; therefore in 2012 the maximal quota remains
45%.
The reforms in France led to a growth of the income tax
for people with large incomes. This led to a 1% growth of the
maximal quota in 2010 and a 4% growth in 2012. Therefore,
since January 1st 2012, the maximal quota in France is 45%.
In Great Britain, the income tax for natural persons was
40% between 2007 and 2009. On January 1st 2010, the income
tax was increased which led to a maximal income tax quota of
50%. This level was maintained in 2012.
On January 1st 2011, Spain increased the income tax
quota from 43% to 45%. In 2012 the income tax was increased
again, leading to a maximal income tax quota of 52%. These
modifications aim at lowering the public deficit.
Sweden is the global leader as far as the income tax
quota is concerned. The maximal tax quota in Sweden is 56.6%.
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This quota is applied since 2010 when it decreased 0.2%. The
56.6% quota is maintained during 2012.
Table no. 2. The evolution of the maximal marginal income
tax quota in the new EU member states 2007 – 2012
%
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
State
2007 2008 2009 2010 2011 2012 +/–
Bulgaria
24
10
10
10
10
10
– 14
Cyprus
30
30
30
30
30
35
+5
Czech Rep.
32
15
15
15
15
15
– 17
Estonia
22
21
21
21
21
21
–1
Latvia
25
25
23
26
26
25
–
Lithuania
27
24
15
15
15
15
– 12
Malta
35
35
35
35
35
35
–
Poland
40
40
32
32
32
32
–8
Romania
16
16
16
16
16
16
–
Slovakia
19
19
19
19
19
19
–
Slovenia
41
41
41
41
41
41
–
Hungary
36
36
36
32
16
16
– 20
EU 12
28.91
26
24.42 24.33
23
23.3 – 5.58
average
Source: KPMG’s Individual Income Tax and Social Security Rate,
Survey 2012
As far as the new European Union member states are
concerned (EU 12), the average maximal income tax quota in
2012 was 5.61% lower than in 2007.
The income tax for natural persons in Poland was 40%
between 2007 and 2008. It should be noticed that since 2009 the
maximal tax quota was lowered by 7%. The maximal income
tax quota during the economic crisis was 32%. Poland was the
only country in the European Union which recorded economic
growth during the recession period.
In Romania the income tax has changed since 2005 by
means of the unique tax quota (16%). This quota replaced the
progressive quota system used before which involved four tax
stages (between 18% and 40%). The 16% quota is applicable to
income from independent activities, goods, author rights,
interest rates. Since Romania maintained the 16% unique quota,
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Journal "Annals – Economy Series", No. 16 / 2013
the fiscal burden of tax payers with high incomes is much lower
than in other EU member states. The income tax quota in
Romania remained at 16% during the five years analysed in this
paper. This is one of the lowers tax quotas in the European
Union.
The income taxes for natural persons in Slovakia (19%)
and Slovenia (41%) maintained their levels during the analysed
timeframe, both during the economic crisis, and during the
recession.
Hungary used a progressive quota tax system with
maximal quotas of 36% between 2007 and 2009, and 32% in
2010. Since January 1st 2012, the progressive quota system was
replaced by a unique quota system. The 16% unique quota
applies to all income categories which are a subject of income
taxation.
Table no. 3. The evolution of the average maximal marginal
income tax quota in the EU member states 2007 – 2012
%
No.
1.
State
UE 27
average
2007
2008
2009
2010
2011
2012
+/–
38.47
36.65
34.9
36.61
35.17
37.35
– 1.10
Source: Personal data processing
The average of the 27 EU member states recorded a
positive evolution since there was a 1.12% drop as compared to
2007.
During the analysed timeframe (2007-2012), the old EU
member states with the highest tax quota were: Sweden (56.6%),
Denmark (55.4%) and The Netherlands (52%). The new EU
member states with the highest quotas were: Romania and
Hungary (16%) and Bulgaria (10%).
During the analysed timeframe, the most significant
decreases of the maximal income tax quotas were in Hungary
(20%), The Czech Republic (17%) and Bulgaria (10%).
4. Conclusions
The analysis of the income tax reveals the tendency of
the European Union member states to increase the quota of the
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Journal "Annals – Economy Series", No. 16 / 2013
income tax. This tendency is accentuated in the old EU member
states where most countries decided to adjust the level of the
income tax for natural persons.
By studying the income tax quotas in Romania and in the
other EU member states, it can be concluded that there are
significant differences between the maximal quotas applied to
the income of natural persons in the 27 EU member states. The
highest income tax levels are found in Sweden (56.6%),
Denmark (55.4%) and The Netherlands (52%). The lowest
levels of the income tax are present in Bulgaria (10%), Lithuania
(15%), Romania (16%), Hungary (16%) and The Czech
Republic (17%).
As far as Romania is concerned, there are no cases of
excessively high income tax quotas. However, tax payers
perceive the taxes as being high due to the lower incomes,
compared to the much higher incomes in the other EU member
states.
In Romania, the maximal imposition quota during the
analysed timeframe (2007-2012) was 16% and was maintained
during the recession. In other countries, such as Poland, the
maximal quota is 32% since 2010. In Hungary the maximal
quota between 2010 and 2011 was 32% and was reduced on
January 1st 2012 to 16%.
The existence of an income tax closer to the ideal level
would require a wider tax base and greater personal deductions
so as to ensure that low income tax payers have the possibility to
be exempted from paying income taxes.
In the case of the income tax of natural persons,
differentiated income imposition according to the level of
income should be considered.
References:
[1]. BREZEANU, P. (2000). Impozitul pe venitul anual global. Ghid
practic. Bucureşti: Editura Economică;
[2]. EUROSTAT, Statistic Database, Government Finance Statistics,
http://epp.eurostat.ec.europa.eu/portal/page/portal/government_financ
e_statistics/data/database;
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[3]. KPMG’s Individual Income Tax and Social Security Rate Survey
2010,http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPub
lications/Documents/Individual-Income-Tax-oct-2010.pdf;
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