Eastern salaries, Nordic taxes, Balkan public services

Every salary tells a story. Not just about the economy, but about life. Behind a sum listed on a payslip are years of education, experience, physical effort, and intellectual effort, time, and a legitimate hope that work will produce a better life. A salary is not just money. It is time transformed into value. That is why the way a state taxes work says something essential about its economic philosophy.

Romania needs a new order of prosperity, and this discussion has become urgent. A recent analysis based on Eurostat data for 2025 shows that, for a single employee without children and with an average salary, taxes and mandatory contributions represent 41.5% of gross salary, compared to 29.1% for the EU average. Thus, Romania has the highest share among member states for this indicator. This figure must be read carefully. It does not mean that Romania has the highest salary taxation in the sense of OECD methodology, where comparisons also include employer contributions and are constructed differently. However, it does mean something very important economically: the part of the gross salary that does not actually reach the employee's pocket is unusually high in Romania. And this reality must be placed alongside the other.

Romanian salaries are still among the lowest in the European Union. In the most recent Eurostat comparison available for gross median hourly earnings, Romania had 5.6 euros in 2022, compared to 14.9 euros for the EU average. Even after adjusting for price differences between countries, the hourly earnings of Romanians remain among the lowest in the Union. Moreover, 23.9% of Romanian employees were in the low-income worker category, one of the highest shares in the EU.

Here lies the Romanian paradox: still Eastern European incomes. A heavy tax burden on labor. And the state needs more and more revenue.

It is legitimate to ask ourselves whether this equation can produce prosperity. Romania must strengthen its public finances. There is no serious alternative to fiscal discipline. The OECD is very clear: consolidation must be based on improving spending efficiency and broadening the tax base. At the same time, the OECD warns that high taxation of labor at the base of income distribution discourages formal employment and can fuel undeclared work. This is the problem that the Romanian fiscal debate often misses. It is not enough to ask "how much do we collect?" We must also ask "what incentives do we destroy to collect that money?"

Romania needs more people in the formal economy (taxed), higher salaries, higher productivity, and companies capable of climbing the value chains. However, if formal work becomes too expensive for the employer and too little attractive for the employee, the informal economy (the "grey" or even "black" economy) gains ground. The OECD estimates that undeclared work represents about 22% of private employment in Romania, well above the OECD average and higher than in most Central and Eastern European economies. In another indicator, the informal economy is estimated to account for 27.1% of gross value added, the highest level in the European Union.

This should change our perspective. When you tax work, you do not just collect taxes and duties. You build pensions, insurance, social protection, and the tax base for the future. But if taxation pushes part of the work outside the formal economy, the state may end up losing exactly what it tries to maximize. Excessive taxation can become a fiscal handbrake. That is why reducing labor taxation should not be seen as a gift to employees or companies. It is an investment in the future tax base.

The OECD actually formulates a remarkably close recommendation to this logic: reducing the tax burden for low incomes could be financed by greater progressivity in taxing high incomes, so that the reform can be, at least in certain configurations, revenue-neutral. This is the discussion that Romania should take seriously.

Not more taxes on the same base. But a broader tax base. Not more pressure on those who already pay. But more taxed work. Not just more aggressive collection. But smarter collection.

But beware, the problem is not only fiscality. It is also what the state does with the collected money. Romania has had one of the fastest periods of economic convergence in the OECD area. Between 2004 and 2024, GDP per capita at purchasing power parity rose from about 43% of the OECD average to 71%. Labor productivity has increased on average by 3.6% per year over the last two decades. But the pace of recovery is slowing, and labor productivity decreased by 1.2% in 2024. The OECD warns that Romania needs to transition from a cost-based growth model to one based on higher added value. This is where the real stakes lie.

Romania can no longer build competitiveness just by having a cheaper labor force than in the West. It must become more productive. And productivity cannot be commanded by law. It is built through capital, technology, education, infrastructure, competition, and efficient institutions. The state has an essential role here. But its role is not to take a bigger slice of the created value. Its role is to create the conditions for that value to grow.

This is, in essence, the "order of prosperity." First, you create value. Then you tax it. Then you transform taxes into public goods. And if the state does its job well, public goods allow the economy to create even more value.

When the order is reversed, a vicious circle appears: modest productivity, low incomes, need for higher budget revenues, tax pressure, weaker incentives for formal work, informal economy, and, ultimately, a tax base that does not grow sufficiently.

Romania does not need a smaller state at any cost. It needs a more efficient state for every collected leu. This should be the new measure of public efficiency: not just how much the state collects, but how much public value it produces from what it collects. In a mature economy, the taxpayer should not be treated just as a source of income. He is the "captive mandatory investor" of the state. And any investor has the right to ask what the return on his investment is.

We cannot ask Romanians to accept Nordic taxes for still Eastern European incomes and, at the same time, offer them "Balkan" public services that do not meet the standards aspired to by a mature European economy. It is a matter of social contract. The state needs money. The citizen needs the state. But the relationship works only if both parties deliver.

That is why the next major fiscal reform in Romania should not start from the question "can we tax more?" It should begin with a more uncomfortable question: "How do we make Romanians able to earn more?"

The answer is not complicated, but it is difficult to achieve with populist governments: more productivity, more private capital, more taxed work, less informal economy, and a labor taxation that stimulates, not penalizes, climbing the ladder of prosperity.

And the state should be the main architect of this paradigm. That is where true reform begins.

And, perhaps, true prosperity.