Shadow economy stood at 28.4 pc of GDP in 2013

Tax evasion is one of the largest obstacles in the way of increasing budget revenue in Romania, says Florin Georgescu, First Deputy Governor of BNR.

The underground economy in Romania accounted for 28.4 percent of GDP in 2013 (equivalent of approximately EUR 39.5 billion), thus reporting one of the highest figures in Europe, only surpassed by Bulgaria with 31 percent of GDP, according to a study conducted by AT Kearney consultancy firm. According to the absolute value, Romania’s 2013 amount was higher than in 2012 (EUR 38.3 billion) and 2011, when tax evasion levels indicated EUR 38.8 billion.
“Initiatives aimed at encouraging participation in formal economy are still a powerful mechanism, as many countries have either implemented social contribution cuts to discourage evasion or introduced the flat tax. The matter of fact is that Slovakia, one of the first countries to adopt the flat tax removed this mechanism in 2013 after nine years. Even though Slovakia’s model has not been implemented elsewhere yet, discussions are being had with regard to reintroducing the progressive tax system in Bulgaria and Romania. Constructions, retail, and tourism are some of the industry sectors most severely affected by tax evasion,” the study shows. The size of the shadow economy in Europe reached a 10-year low in 2013, and is now estimated at EUR 2.15 tln. On average across Europe, the shadow economy is as large as 18.5 percent of economic activity. Almost two-thirds of the shadow economy is concentrated in Europe’s five largest economic powers—Germany, France, Italy, Spain and the United Kingdom. However, in Eastern Europe the shadow economy is much larger in relation to the size of the official economy than in Western Europe.
On the other hand, tax evasion is one of the largest obstacles in the way of increasing budget revenue in Romania, despite ever harsher tax evasion penalties. Florin Georgescu, First Deputy Governor of BNR, made a statement recently saying tax evasion undermines financial stability, inflation, and the external equilibrium. “There are many tax evasion methods. It’s a dangerous virus,” Georgescu stated. He admitted this phenomenon accounts for almost 30 to 40 percent of Romania’s GDP.
“Tax evasion is a very harmful phenomenon, primarily because of its negative influence on budget revenue. Tax evasion does not include only smuggling cigarettes or tobacco, but also fixing accounting records, transferring incomes through foreign accounts, such as engineers or architects, let’s say, who claim they’ve had a major project and have earned 8 million registered to a company in Cyprus, when in fact they’ve drafted one or two pages,” Georgescu added. He went on to say tax evasion depends on management and public finance quality, in general, as well as the implementation factor. “Zero percentage tax evasion does not exist, the same way countries with no flue or Hepatitis A cases do not exist, yet the percentage of these two diseases are indicative of the development stage and degree of civilization of the respective country,” the First Deputy Governor of BNR stated further.
People who do not pay the required taxes and fees benefit from public goods and services to a greater extent, Georgescu believes. “Someone who uses tax evasion and has a lot of money because he has not paid the required amounts can afford cars and villas; he uses public roads more often than a worker whose wage has been cut and walks to work in tennis shoes. The worker’s tennis shoes do no harm to infrastructure, but the other’s Jeep does,” he concluded.

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