When Boredom Leads to Economic Research

You know those days when you've got nothing urgent to do and random curiosities start popping into your head? Not the "let me see what's new on Reddit" kind, but the kind that requires several hours of serious research and way too much Excel.

Today was one of those days. I woke up with a question stuck in my head that just wouldn't leave me alone: "What would be the impact on Romania if we implemented zero taxes on minimum wage?"

The question isn't new. I keep hearing it in various places, especially when we get near the end of the month and people look at their payslip and realize that from 4,050 RON gross, only 2,574 RON actually makes it to their account. The difference? Goes to the state. Income tax, social contributions, health contributions - the whole package.

So I did what any reasonable person would do on a slow day - I sat down and did the research. The full academic paper is here: Zero Tax on Minimum Wage - Romania Analysis

But because I know not everyone wants to wade through 20+ pages of academic analysis, let me break down what I found. And I'll tell you upfront - the results surprised even me.

The Numbers That Actually Matter

Let's start with reality. Romania has one of the most burdensome tax regimes for low-wage workers in the entire European Union. Not just high - the highest among 26 EU and EEA states.

Here's what minimum wage workers face right now: gross minimum wage of 4,050 RON per month gets hit with a 45% combined tax burden. That's 10% income tax, 25% social insurance (CAS), and 10% health insurance (CASS). After the current 300 RON exemption, workers take home just 2,574 RON net.

Want to put that in perspective? Romania's tax burden on minimum wage workers "substantially exceeds rates in neighboring countries (17-33% in comparable economies)." We're not just a bit worse - we're catastrophically worse.

What Zero Taxation Would Actually Do

For Individual Workers: Real Money, Real Fast

Eliminating that 45% tax burden would increase monthly net income from 2,574 RON to 4,050 RON - the full gross amount. That's an increase of 1,476 RON per month, or 57.3%. Not next year, not eventually - immediately, in every single paycheck.

For someone on minimum wage, 1,476 RON per month isn't pocket change. It's rent for a studio apartment. It's utility bills for the entire winter. It's groceries for 2-3 weeks for a family.

We're talking about 1.06 million minimum wage earners getting 18.8 billion RON more annually. Expand that to the 2.6 million workers at or near minimum wage, and you're looking at 46.1 billion RON annually - that's 2.6% of GDP going directly into people's pockets instead of the tax system.

Poverty Reduction: Not Just Numbers, Actual People

Here's where it gets serious. This policy would lift between 850,000 and 1.3 million people out of poverty. Read that again - over a million people.

Romania's at-risk-of-poverty rate currently sits at 19.0% (3.59 million people). Zero taxation on minimum wage would drop that by 4.5 to 7.0 percentage points, bringing it down to 12.0-14.5%.

Child poverty - currently at 26.2% - would decrease by 5-8 percentage points. That's hundreds of thousands of kids who would suddenly have enough to eat, warm homes in winter, and supplies for school.

Severe material deprivation affects 17.2% of Romanians right now. With zero taxation, that drops by 3-5 percentage points. These aren't just statistics - they're people who can finally afford unexpected expenses, a week's vacation, adequate heating, basic appliances.

Labor Market Effects: Actually Good News

"But what about jobs?" - I hear you already. Here's where the research gets interesting.

Employment effects are estimated to be neutral or positive. Not negative. The usual scare stories about job losses don't apply here because we're reducing costs, not increasing them.

Why? Romania has 25-27% of its labor force working informally - that's over a quarter of all workers operating under the table. These people aren't paying taxes anyway. Zero taxation makes formal work dramatically more attractive.

The research projects 10-20% reduction in informal employment. When working formally gives you almost the same take-home pay as working under the table, plus you get a contract, sick leave, and pension rights - the choice becomes obvious.

Labor force participation would increase by 2-3% among potential minimum wage workers. These are currently inactive people - especially women, youth, and discouraged workers - who would enter the formal labor market because it finally pays to do so.

Economic Growth: Not Just Redistribution

This isn't just about moving money around. It's about growing the economy.

Short-term GDP impact: +0.5 to +0.8% from increased consumption. Low-wage workers have a high marginal propensity to consume - about 80% of any income gain gets spent immediately. That spending creates demand, which creates jobs, which creates more spending.

Long-term GDP effect: +1.0 to +1.5% over 5-10 years through productivity improvements. How? Workers upgrade to more productive firms, formal work experience builds human capital, firms invest in complementary capital and technology, and the economy allocates resources more efficiently.

Romanian microsimulation models project up to 20% increase in industrial sector turnover indexes following minimum wage policy reforms. That's not a rounding error - that's transformative.

The Fiscal Reality: It's Actually Affordable

Now for the part that makes politicians nervous: what does this cost?

Direct revenue loss: 19.4 billion RON annually, or 1.1% of GDP.

Sounds like a lot? It is. But here's where static analysis misleads you. That's the gross cost. The net cost after dynamic effects is much lower.

Why? Because money doesn't disappear into a black hole:

Increased VAT revenues: Higher disposable incomes mean more consumption. At an average VAT rate of 16-18%, that brings back 2.5-3.0 billion RON.

Reduced social assistance spending: When people earn more, they need less welfare. Savings: 1.9-2.9 billion RON.

Formalization revenue: As informal workers move to formal employment, they start paying taxes on other income. Additional revenue: 5.0-9.0 billion RON.

Increased labor force participation: More people working formally means more tax revenue. Additional: 2.0-4.0 billion RON.

Corporate income tax: Either from reduced employer costs (if their contributions also eliminated) or from increased consumer spending boosting corporate revenues. Additional: 0.5-1.5 billion RON.

Net fiscal cost: 0.4-0.6% of GDP. Not 1.1%. Less than half the static estimate.

That's the real number. And it's entirely manageable, especially if implemented gradually.

Implementation: Do It Smart, Not Fast

The research recommends a phased approach over 3 years:

Year 1: Eliminate the 10% income tax on minimum wage. Cost: 0.1% of GDP. Simple, immediate, visible impact.

Year 2: Cut CAS (pension contribution) in half, from 25% to 12.5%. Additional cost: 0.3% of GDP.

Year 3: Eliminate remaining CAS and all CASS. Additional cost: 0.3% of GDP.

Total by Year 3: 0.6% of GDP net fiscal cost, fully absorbed through dynamic effects and integrated with broader fiscal consolidation.

This gradual approach allows the economy to adjust, lets you monitor impacts at each stage, and gives politicians time to see the positive effects before committing fully.

Inequality: Toward an Actually Fair Society

Romania's Gini coefficient currently sits at 28.0 for disposable income. Zero taxation on minimum wage would reduce that by 0.8-1.2 percentage points, moving Romania closer to the most equal EU countries (Slovakia, Slovenia, Czechia at 23-25).

Wage inequality would drop by 3-4 percentage points on the wage Gini coefficient. The bottom of the wage distribution rises substantially while the top remains unaffected - textbook compression of inequality.

This isn't just about numbers on a chart. Lower inequality means higher social trust, better institutional legitimacy, reduced political polarization, less crime, and greater social mobility. These are the foundations of a functioning society.

Why This Actually Makes Sense

Look, I'm not saying this is the only reform Romania needs. We have a ton of problems. Corruption, weak institutions, brain drain, regional disparities - the list goes on.

But zero taxation on minimum wage hits multiple targets simultaneously:

Effectiveness: Addresses in-work poverty directly, not through complex programs with layers of bureaucracy.

Efficiency: Almost zero administrative costs. Just change the payroll calculation formulas. No new agencies, no means testing, no forms to fill out.

Equity: Benefits go exactly where they're needed - to the most vulnerable workers. Not to the already well-off.

Growth: Pro-employment, pro-formalization, productivity-enhancing. Not just redistribution.

Fiscal responsibility: Net cost of 0.4-0.6% of GDP is modest and compatible with EU consolidation requirements.

Political feasibility: Workers get more money, employers get lower costs (if their contributions also reduced), progressives get poverty reduction, conservatives get reduced informality and smaller welfare state.

Everyone wins something. That almost never happens in policy.

The Question Nobody Wants to Ask

So why hasn't this been done already?

Honestly? I don't know. Maybe it sounds too simple. Maybe politicians think voters won't believe them. Maybe special interests benefit from the status quo. Maybe nobody actually looked at the data until now.

Or maybe - and this is what I suspect - policymakers underestimate how much better evidence-based policy performs compared to ideology-driven hunches.

What Happens Next

Romania is at a crossroads. We have the highest budget deficit in the EU (8.65% of GDP in 2024), massive emigration (3-4 million Romanians working abroad), persistent poverty (19% at-risk-of-poverty rate), and one of the lowest labor force participation rates (66-67%).

We can continue pretending these problems will solve themselves, or we can implement policies proven to work.

Zero taxation on minimum wage won't fix everything. But it would:

• Lift nearly a million people out of poverty
• Reduce inequality to among the lowest in the EU
• Formalize 10-20% of the shadow economy
• Generate 0.5-0.8% additional GDP growth immediately
• Cost a manageable 0.4-0.6% of GDP net

For 0.6% of GDP, we could fundamentally transform the lives of 2.6 million workers and their families. We could demonstrate that Romania is capable of innovative, evidence-based policymaking. We could become a regional leader instead of a cautionary tale.

The research is done. The evidence is clear. The path is obvious.

The only question is whether anyone has the courage to actually do it.

P.S. - The full academic research paper is available at this link. It includes all the methodology, data sources, international comparisons, and detailed calculations. If you think I'm wrong, read it and tell me where. If you think I'm right, share it with someone who can actually make this happen. Of course, this is only the result of my research. It could be wrong. You should do your own due dilligence to make sure what you chose to believe is true.

This isn't about politics. It's about making life better for over a million people who work hard every day and deserve to keep more of what they earn.