Labour Taxation in Romania: Revised, but not changed

In 2018 the structure of labour taxation in Romania changed substantially: the social security contributions' (SSC) burden shifted almost entirely to employees, the flat personal income tax (PIT) rate was cut and the PIT-free allowance increased. These changes followed the Unified Wage Law (UWL) adopted in 2017, which significantly increased the wages in the public sector. The government also increased the gross minimum wage and encouraged the social partners to re-negotiate salaries in the private sector, so that net wages would not decrease following the shift of social contributions to the employee side. This economic brief analyses the redistributive and macroeconomic impact of all of these reforms using EUROMOD, the microsimulation model for the European Union Member States, with QUEST, the European Commission’s dynamic stochastic general equilibrium model. According to our simulation results, the cumulative impact of the reforms slightly increases both market and disposable income inequality. Low-income employees gain marginally from the higher minimum wage, while the self-employed would be better off only by opting not to pay the social contributions, i.e. renouncing national insurance protection. In the longer run, the reforms are likely to have a negative effect on GDP and employment due to the wage pressure from higher public sector salaries and increased minimum wages. The general government deficit increases, although by significantly less than the raise that would have happened if the UWL had not been accompanied by the SSC shift.