Axing Flat Taxing in Bulgaria?

By MILENA HRISTOVA   February 25, 2014


The tax drama has returned to Bulgaria. Six years after the introduction of the flat tax, the debate over its economic and moral merits has been rekindled as parties try to capitalize on it ahead of the elections in May.


The new round of partisan debate will hardly bring any changes, but at least offers a chance for supporters and opponents to make strong their cases in a country torn apart by economic crisis and social inequality.


If you want to understand the nature of the Bulgarian crisis – take a walk in downtown Sofia. Ferraris and horse carts share the road in a snapshot of Bulgaria's transition. In between, an employee is waiting for the bus. What they all share is the flat tax.


Bulgaria has the lowest personal and corporate income tax in the EU at 10%, which was introduced at the beginning of 2008, replacing the previous system, which combined several different tax rates - between 20 and 24%, depending on income. The 10% flat tax is applicable for all income levels, i.e., there is no non-taxable income threshold.


Low taxation has clear advantages for an emerging market as Bulgaria. Many Bulgarians however remain doubtful about how helpful the flat tax is for their personal finances and for an economy still in tatters more than two decades after the collapse of the communist regime.


Is the flat tax a success to celebrate or a a failure to lament?


It is only natural that the government chooses to keep the direct taxes unchanged as it strives to make Bulgaria competitive in the battle for the shrinking flow of foreign investments. The state budget gets over BGN 2.3 B in revenues thanks to the flat tax, which at this moment it can't afford to lose.


True, ever increasing taxes and social contributions across the European Union make low tax jurisdictions like Bulgaria a more attractive country.


But, taxes have never been the only key reason for choosing the right place to do business. Consumer markets, legal framework, corruption and working skills are also top elements that are being considered by investors.


In a bid to build a strong case for keeping the flat tax, experts also point out that massive tax evasion among Bulgaria's richest people eroded any positive impact progressive taxing could have had back in the 90s.


Besides, they add, the unemployed and socially disadvantaged, in short – the poorest of the poor - do not pay taxes.


When Bulgaria jumped on the flat rate bandwagon, it touted its attractive features - equality, lower tax burden, solid budget revenues as companies leave the "grey economy".


But the country has notoriously failed in its fight against corruption and organized crime, which weakens the power of the flat tax to crack down on the grey economy.


Small wonder the flat tax hurts the emotions of the average Bulgarian.


Remember the former rulers' surprising decision to levy tax on bank deposit interest – in theory just an extension of the flat-rate tax base?


It affected mainly those 75% of deposit holders in Bulgaria with BGN 1000 in their accounts. Because they were reminded that namely a flat tax is imposed on their miserable incomes - BGN 500, for ex.


Why not introduce a non-taxable threshold?


It is because being uptight about the human cost does not pay off, unlike being good to the rich back-seat rulers.