tag:blogger.com,1999:blog-918478938386753900.post1683161431991936553..comments2009-04-03T16:40:04.198-07:00Comments on Romania Economy Watch: Romanian Central Bank Raises Rates AgainUnknownnoreply@blogger.comBlogger2125tag:blogger.com,1999:blog-918478938386753900.post-11075842665278754292008-01-12T07:48:00.000-08:002008-01-12T07:48:00.000-08:00hello Emili,And Happy New Year."Do my questions ma...hello Emili,<BR/><BR/><BR/>And Happy New Year.<BR/><BR/>"Do my questions make sense ?"<BR/><BR/>Yes. They do. I am sure there are all sorts of "book-keeping" issues like this all over the place. The US has its own issues here, which lead to the so called "dark matter" debate, basically that the US curent account deficit didn't matter, since a lot of it was companies moving around profits - for example to Ireland - to take advantage of low tax laws, and pày less profit. As a result Ireland has, for example, a large goods trade surplus, which turms into a negative CA balance due to a high volume of income payments.<BR/><BR/>"The profits are then repatriated as "foreign investments"."<BR/><BR/>This is less likely, income payments would be more likely, or intellectual property royalties, since "foreign investments" constitute a debt, and at some point this has to be repaid, and with interest. Of course, we need to distinguish here between tax avoidance and money laundering. The latter obviously takes places, but is covered under a diffent set of legal criteria.<BR/><BR/>But from the macro economic point of view all of this has very little interest when you come to assess the sutainability of the finances of a government or a nation. <BR/><BR/>Take Italy. The government in Italy may at some point go bankrupt. But it is no argument to say that Italy is much richer than it seems to be because of the large informal economy, since this informal economy by definition does not pay tax, and hence can't be used to stop the government from going bankrupt. Of course, if you can legalise the activity, then the taxes come in, but often it turns out that such activities cease to be viable once they become visible.<BR/><BR/>The same sort of thing goes for irregular capital flows and national viability. Basically the CA deficit at the moment is being paid for by money coming in to lend to Romanians in foreign currency. When this stops then the deficit will have to be covered from the reserves of the national bank. But that cannot go on forever. So either you can create a situation where enough people are generating (or declaring) enough of their income in Romania to make the nation solvent (reagrdless of why they are not doing so at present), or you can't, and if you are insolvent.....<BR/><BR/>I'm not sure how a sales tax would help this, since this might slow consumption, and reduce government debt, but doesn't directly affect the international trading position.Edward Hughhttps://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-918478938386753900.post-59838558152181478442008-01-10T17:43:00.000-08:002008-01-10T17:43:00.000-08:00"current account deficit"The first comment to this..."current account deficit"<BR/><BR/>The first comment to <A HREF="http://www.hotnews.ro/economie/finante_si_banci/articol_2073678/romania_are_un_deficit_comercial_cu_peste_doua_miliarde_euro_mai_mare_decat_in_2006.htm" REL="nofollow">this </A> article attempts to explain away at least a part of the "current account deficit". Here are the arguments presented, in my adaptation:<BR/><BR/>Companies involved in import or export use tax heavens within EU in order to reduce the amount of taxes they have to pay: supposedly, they export to the tax heaven at a very small profit, then reexport from there to the final buyer and benefit from the smaller profit tax; when importing, they use companies registered in the tax heaven to buy the product at lower prices, then sell it to the company registered in Rumania, once more allowing for only a small margin. The profits are then repatriated as "foreign investments".<BR/><BR/>As the text I sent you to suggests, the current account deficit would be more relevant for measuring fiscal evasion than for measuring trade imbalances.<BR/><BR/>Now, I wonder if that guy or gal might be right. Do you think that such schemes might work ? <BR/><BR/>Unlike novyi ruski (the new Russians - Russian nouveau riches), the "new Rumanians" have managed to avoid public extravagances, so I wonder, if indeed the scheme described above works, how much of the 8 billions in foreign investment could be repatriated profit, how much more of exiled profits could exist, and what would have happened to the current account deficit if the government would have decreased the profit tax even further, compensating for the lost revenue with increases in the sales tax, the way they promised in 2004 ?<BR/><BR/>Do my questions make sense ?Emil Perhinschihttps://www.blogger.com/profile/10710579823013077273noreply@blogger.com