A sentence taken out of context caused (another) media storm – the European Commission, according to some, recommended the abolition of the flat tax. Let's leave aside the fact that income taxes are a national competence, not a policy that is subject to harmonization in the European Union, and still see what the EC actually writes. The reading comes from the economist from IME Lachezar Bogdanov, quoted by FOCUS.
Along with the report recommending the launch of an excessive deficit procedure against Bulgaria, the EC also published the annual report within the framework of the European Semester, analyzing the socio-economic development and challenges facing each member state. The Commission discusses, in general, two aspects of the country's tax system - on the one hand, its ability to generate revenue in the budget, and on the other, various aspects of the distribution of the tax burden.
To begin with, why is there any talk of more revenue in the budget at all?
The need follows the increased spending ambitions - from which it logically follows that if the growth of expenditure is controlled, there is no need to start a debate on how to collect more revenue in the budget and the whole topic of raising taxes falls away.
If the Bulgarian government still wants to increase spending, the EC experts mention - without going into an analysis of the potential effects - many different ideas for new taxes or raising existing ones. The list includes raising the ceiling for social security income or removing it, updating (i.e. increasing) property tax assessments, higher taxation of transport and the extractive industry, higher taxes for environmental pollution; along with this, it is discussed that efforts are needed to limit the shadow economy and to collect overdue tax liabilities, and a reduction in the limit for cash payments is proposed. And among all of them - the idea of \u200b\u200b&ldash; introducing a non-taxable minimum, combined with an increase in the (single) tax rate“. In other words - again a flat tax, but with a higher amount above the non-taxable threshold; there is no proposal for “progressive taxation“.
But, as it became clear, decisions on income taxation in Bulgaria, and in general - on the structure of the tax system - are a sovereign issue that will be decided by the rulers elected by Bulgarian taxpayers. And that is why it is important what the arguments are in the national public debate. Taxing income at a single rate of ten percent - the so-called "flat" tax - is perhaps the most frequently discussed political choice in the country's economy in the last two decades. Let us recall, however, what the role of tax is in the national context and what the options for change mean.
Bulgaria has to close a very large gap with the most developed countries in Europe and the world. This is achieved with rapid economic growth, and it, everywhere and always, is the result of a lot of work, a lot of investment and an environment that encourages innovation and entrepreneurship. To this end, the tax system must tax the income of the economically active relatively lower, at the expense of a relatively higher taxation of consumption and property. This is a conscious and rational choice for a society that wants development, economic dynamism and high employment.
Moreover, the most important long-term factor for success is human capital
Therefore, labor must be encouraged, including through low taxation. As we have seen in recent decades, the labor force is mobile, which is greatly facilitated by the open labor market in the EU. If labor is limited, the natural model for continued growth is for it to become more productive – with education, the introduction of technology, structural transformation and dynamism, more investment. The most enterprising, educated and able must be stimulated, not punished – to continue creating value here. Therefore, it is right to seek the most sparing tax and social security burden on declared ("in the open") employment, and indeed on any income from labor and personal efforts.
In general, no tax should be considered in isolation, which is why the taxation of individual income must be consistent with the taxation of corporate income, i.e. corporate tax. Simply put, the system should tax similar activities and income in the same way, and not allow arbitrage/avoidance of taxation solely because of the legal form.
Is anyone openly proposing an increase in corporate tax?
Advocates of abolishing the ten percent proportional tax and introducing a progressive scale with higher upper rates are trying to gather public support with several arguments. First - now there is no non-taxable minimum, every income is taxed and this, in search of emotional empathy, is presented as unfair. But is it so? To begin with, Bulgarian income taxation currently excludes huge categories of income - pensions, social security payments, social transfers, income from renting agricultural land, income from capital gains on regulated capital markets in Bulgaria and the EU, etc. are not taxed. Separately, the tax base is reduced by 10 to 60 percent (i.e. the tax effectively becomes between 4 and 9 percent) for various types of income, for example from freelance professions or agricultural activity. To this we add tax breaks, which also reduce the tax base - some of them significantly. They are very diverse, for example, for non-cash payments, donations, repairs or voluntary provision and insurance, and some - for example, for children, for children with disabilities or for people with reduced working capacity - are significant. In fact, tax breaks for children and for people with disabilities are a kind of non-taxable minimum for hundreds of thousands of households. In short - neither all incomes nor the entire income of all taxpayers are taxed.
Is the flat tax to blame for social inequality, does it harm the poorest?
A large part of the inequalities in Bulgaria are actually formed beyond the labor market, with the most risky groups not actually receiving labor (taxable) income. A huge share of the poor do not pay tax, so no progression in the taxation of taxes or non-taxable minimum will increase their well-being. Who are the poor in Bulgaria? These are mostly elderly people - pensioners, especially those living alone, or people with disabilities who cannot work, or are unemployed at all, or inactive in the labor market, or large families, or single parents. These categories of households either have no income at all, or receive tax-free income such as pensions or social assistance, or benefit from a significant tax relief for children. The tax does not weigh on them at the moment anyway, that is, simply put - if a general tax-free minimum is introduced, their disposable income will not increase.
Not only the poorest do not pay income tax, but almost all of the richest do not. Because the richest either realize profits from business activities - i.e. the corporate income of the companies they own is taxed, or the so-called passive income from investments - and as mentioned, capital gains in Bulgaria or the EU are not taxed. A completely separate category are those who have become rich through illegal activities or undeclared ventures; gambling is also taxed in a different way. Inherited assets within the family are also not taxed. For all these groups of "rich" it does not matter how much the income tax will be, it does not "catch" their high incomes.
And what happened to the goal of collecting more money in the budget?
By the way, one of the reasons for preserving the tax model under a variety of governments - left, right or frankly populist - is the stable behavior of tax revenues even in the most severe crises, from the global financial, through the debt in the eurozone to the pandemic and the subsequent period of political instability. Predictability is not only for business, it is also for the finance minister.
Can the state collect more revenue from this tax?
Maybe, but inevitably with an increase in the burden on the emerging middle class in Bulgaria - all those who earn their living with highly qualified labor, with personal skills and entrepreneurship, far from falling into the common understanding of “rich”. The introduction of a non-taxable minimum reduces budget revenues, without, however, significantly helping those most in need. There is an option in which the government maintains the proportionality of the tax by simply increasing the amount, but in a way that does not increase the burden on the majority. Which achieves exactly nothing - for the same money in the budget, a small number of households, but not the most needy, have received a minimal increase in income, a large number have not felt anything, a small number will pay more and will be dissatisfied. Political and fiscal nonsense.
The government actually has no rational and useful move to revise the flat tax. If it wants to protect the middle class, it will have to maintain the current rate up to a fairly high income threshold. However, this will leave very few taxpayers above the threshold, so in order to collect more tax revenue, it will have to introduce an extremely high rate. Statistics and arithmetic - since the tax for three million taxpayers should not be increased, then for several tens of thousands it should be increased by a lot if the goal is to increase budget revenues. This sounds good in a media "class war", except that these several thousand wealthy active people, threatened by taxes of 40, 50 or more percent (such as we had in Bulgaria in the 1990s) have plenty of opportunities to organize their affairs so that they do not pay any income tax. And we have already commented that a large part of the imaginary enemy - – "the rich" - in fact, they do not receive their income in this form at all.
Then it remains to "hit" a large part of citizens with higher taxes. It is unlikely that people with a salary of, for example, 1,500 euros are perceived as particularly rich – but in search of more income through progression, they will pay more than now. Which brings us back to what was said above – there is no way to collect more revenue in the budget, which is supposedly to be spent on social policies, without the burden being borne by the average taxpayer. And all this – for a not particularly impressive fiscal effect, comparable or lower, for example, than the increase in salaries in the Ministry of Internal Affairs for a year or the construction of one highway lot. But at the cost of long-term destruction of trust among both investors and employers, and among the vast majority of citizens.