The agreement announced by the three parties in Bulgaria’s ruling coalition to introduce a flat tax system in 2008 has had a mixed reception.
The idea is to tax all individual incomes at 10 per cent, scrapping the current three-bracket system.
Prime Minister Sergei Stanishev and his lieutenants, including Economy Minister Petar Dimitrov, say that they believe that the new system, along with a cut in social security contributions, will bring more revenue into the system. They say that they believe that the new system will encourage a higher level of compliance.
State Administration Minister Nikolai Vassilev, a member of the National Movement for Stability and Progress (formerly the National Movement Simeon II), says that a flat tax will encourage people to work harder and to earn more because only a tenth of their income would go to income tax. Bulgaria would have one of the world’s lowest tax rates and so people would have no reason not to declare their true incomes, Vassilev says.
Other commentators have said that a flat tax system would mean more disposable income for taxpayers and less time spent on meeting their tax obligations.
However, the proposal has its detractors. Podkrepa labour federation says that everyone up to a gross monthly income of 450 leva will be hard hit. The federation says that a move that in effect will make people in lower income brackets be required to pay more tax is a negation of the Government’s promises to lower the tax burden for low and medium-income bracket earners.
What is not yet clear is what will become of a number of rebates. According to media reports purportedly based on leaks from those close to the debate about the new system, a number of tax breaks will be eliminated. Among these, again reportedly, is the rebate given to families with children. If this is true, it would in turn seem to be a negation of Government promises to ease the financial burden on those with children, a step that it undertook to encourage people to have children and so move against Bulgaria’s deepening demographic crisis.
It has been suggested that the flat tax proposal is a populist move designed to get votes in the run-up to the municipal elections scheduled for this autumn. If this is true, the attempt has not been entirely successful, given some of the negative media reports about the flat tax proposal.
There are some valid concerns to be raised about the proposal. It is well known that lack of tax compliance is a serious problem in Bulgaria. It is difficult to imagine that the cut in social security contributions, along with an effective substantial income tax reduction for higher-income individual earners, will be enough to encourage defaulters and those recalcitrant about being honest about their earnings to suddenly go over to the side of the angels.
Further, if it does prove true that the flat tax system will put an additional burden on lower-income earners, this may be a reverse incentive, for them to conceal whatever income they have.
It would seem that the flat tax proposal may not offer any guarantees of improved compliance, and in fact poses the risk of reduced revenue.
Before any further consideration is put into restructuring the rates of tax, the best course of action would be for the Government to devote energy and resources to ensuring that tax authorities have the will, capacity, skill and personnel to perform effective enforcement of tax compliance. This, along with a campaign to eliminate waste in public spending, and to be seen doing so, along with a positive campaign to explain the benefits of compliance, would seem to be essential actions to be taken before tinkering with any other aspect of the system.
