The proposed tax amendments generally paint a mixed picture, but unfortunately the negatives prevail.
Some of the positive ideas in the package actually seem very similar to ideas that we from the EKIP proposed in the spring. This is good, but along with them, a bunch of nonsense has been introduced that almost renders them meaningless.
Let's start with the positives.
- The threshold for VAT registration is being raised by almost 50%. Very good, positive for small businesses.
- Tax breaks for families are being increased. A good measure, extremely necessary in view of demographic realities. Bulgaria needs more targeted policies to stimulate the birth rate. The design of the changes looks relatively good (at least at first glance).
- Property tax assessments will be updated, something that is nearly 20 years late. If anyone argues here, they are simply not aware of the matter, there is not a single rational argument against updating tax assessments.
And unfortunately, with this short list we have finished with the positives. Among the other proposals, not all are actually 100% bad. There are some that are of a mixed nature, i.e. they could make sense, but if they were implemented in a different way.
A very obvious example of this is the changes regarding food vouchers. It is very good that they will practically double. This is exactly what we proposed a few months ago as a social compensator for more ambitious cuts in government spending (which we are still waiting for).
But why is a 7% tax imposed on them? This sends a confusing and mixed signal to business and largely renders the very idea of food vouchers meaningless. Not to mention that if the changes are adopted in this form, if an employer decides not to increase the vouchers for its employees to the new limit, their net income will fall. And the positive fiscal effect of these 7% will be negligible.
The introduction of an additional excise tax on powerful cars is a curious idea, although it is also unlikely to have a particularly large fiscal effect. I am not against it in principle, but in its current form, as far as I understand, there is no exception for electric cars. In electric cars, the peak power is relatively high even for small models. Not to mention that they are obviously not as polluting to the air and are much quieter. Another obvious flaw.
But the most problematic, of course, is the proposal that has already provoked the greatest controversy - a tax on "excess profits". I actually have a nuanced opinion here, because in my opinion such a measure makes sense, specifically as far as banks are concerned. And it is even very late - banking activity these days is almost entirely rentier (according to the strict economic definition) and rent always makes sense to tax aggressively (and is even advisable, according to Henry George). But for the other sectors that are included, I think that a "excess profits" tax is a bad idea.
Maybe there is some argument to talk about "excess profits" in telecoms and even in retail chains, but there the case is more about the lack of sufficient competition for purely structural and other reasons. This is the bigger problem to solve and it cannot be addressed with tax changes. Rather, with greater and better supervision. And what worries me, from a consumer perspective, is that imposing a tax on these sectors could lead to higher prices.
And let's not talk about the other sectors. Insurers? Exchange offices? I have no idea on what principle they are targeted for "excess profit". Exchange offices, if they have had "excess profit" in recent years, it may have been in 2025, due to the currency change. But for 2027 (when this tax will apply) I don't see where it will come from. For a large part of these sectors, I am not at all sure what money and why the state expects to collect for 2027. I am sincerely puzzled by what principle they were selected.
But beyond the unclear sector selection, perhaps an even bigger problem is the methodology itself. "Excess profit" is defined as any profit 20% higher than the average for the period 2020-2025. But there are several very big problems here.
1. The financial dynamics of enterprises in so many different sectors during this period were different. Is it adequate to measure how "excess" their profit is by the same criterion? Without any differentiation?
2. Looking at bare profit by itself is a bad idea. Its (nominal) increase could be due purely and simply to accumulated inflationary dynamics. At least the Ministry of Finance had chosen to look at real profit adjusted for inflation. Is it too complicated?
3. But even if you look at the profit after inflation, it is still a very bad idea to try to compare such diverse sectors. Banks and telecoms are very different businesses. Not to mention retail. Apples and pears..and oranges. In financial analysis, it is no coincidence that not only do other metrics (for return) besides the profit itself are looked at, but DIFFERENT metrics for DIFFERENT sectors are also looked at.
In general, it seems that the government was wondering how to both raise revenues and fulfill its promise not to raise direct taxes and to implement a more progressive (of course) social policy. And they sucked out of their fingers some measures that were not well thought out at all.
This putting such diverse sectors into one bucket for taxation of "excess profit" in the simplest possible way, it's downright amateurish. The Ministry of Finance could at least ask ChatGPT for ideas and it would most likely have given them better ones.
Here, by the way, the problem may not be mainly in the new leadership (the minister himself) but in the experts under him and especially the deputy ministers, all of whom, by the way, were in the previous few governments. And it is unclear why none of them were replaced. We remember what "brilliant" fiscal ideas we were flooded with in recent years.
I am also waiting to see the changes in the expenditure side. Because I am worried that this poorly planned additional revenue could be a signal that the cuts in the expenditure side of the budget will not be enough to control the deficit.