After the three parties in Bulgaria’s coalition Cabinet agreed on July 30 to introduce a 10 per cent flat tax on individual income from 2008, the media was awash with criticism of the decision. The main concerns are that people earning between 200 and 350 leva a month, together with people working on a freelance basis, would be hardest hit by the new tax rates.

Labour and Social Policy Minister Emilia Maslarova told journalists on August 1 that the flat tax would become a fact only if it did not harm the interests of people with monthly incomes ranging between 200 and 400 leva. She gave an assurance that the Government would not allow the flat income tax to adversely affect freelance professions such as artists, musicians and journalists.

In an interview with daily 24 Chassa from August 8, Prime Minister Sergei Stanishev confirmed that the Government is determined to raise the minimum monthly wage by 22.2 per cent to 220 leva (from 180 at present) as of next year to avoid proportionally higher tax costs for low-income groups. Stanishev said that the Government would compensate those earning less than 350 leva by raising salaries in the public sector. Talks are to be held with businesses in order to encourage them to also raise the salaries of their employees.

For now, it looks like the Government will stick to its plan of scrapping the minimum threshold despite protest warnings from labour unions. Economy Minister Petar Dimitrov recently confirmed these plans by saying that when the flat tax is introduced, the threshold would be removed.

Stanishev said that freelancers would still be able to automatically deduct some of their costs from their earnings so that the flat tax would not lead to a cut in net income for them. He denied rumours that value added tax would also be increased to 22 per cent.

Asked why the Cabinet could not increase pensions by 40 per cent as Romania has done (where the average pension is 300 leva), Stanishev said he understood why Bulgaria was often compared to Romania, but in terms of pensions this should not be done.

In Romania, he said, not only were pensions greater, but also prices in general. “Can you explain why our border areas are flooded with Romanians coming to do their shopping in Bulgaria?” he asked.

According to Stanishev, Bulgaria is going to be the cheapest country in the EU for a long time, and it is not possible to have European salaries together with Bulgaria prices. He said that at the moment earnings are increasing faster than productivity.

Such comments are likely to spur even sharper criticism, for the majority of Bulgarians are neither close to having a European level salary any time soon, nor do they feel that they earn more than they produce or that these days prices in Bulgaria are cheap when compared to the average income – 350 leva a month (175 euro).

Although introducing a flat tax is generally a right-wing policy, democratic opposition parties have criticised the introduction of a “no-exception” flat tax scheme. They have declared that if the flat tax is introduced without preserving the minimum threshold and without a six per cent reduction of the insurance burden, the measure would not improve living conditions in the country, Monitor daily wrote on August 7.

The removal of the minimum threshold is something that economist Georgi Stove from Industry Watch does not recommend. The best option according to him would be to raise the threshold and introduce a zero tax for people who earn below 350 leva a month. This tax system would not change the complexity of tax reporting or the tax inspections, Georgi Ganev from the Centre for Liberal Strategies said, as quoted by Monitor daily.

Many analysts see flat tax as a normally a positive step to fight the grey economy. It is also true that a win-win situation is unrealistic. But at this stage, it seems that the Cabinet has not thought through well enough how not to adversely affect the interest of those earning below 350-400 leva, about two-thirds of Bulgaria’s working population.