Bulgaria’s flat tax goes flat

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I'm delighted to see that enthusiasm for Bulgaria's new flat tax is underwhelming. I've read a lot of Bulgarian material on this over the last week. The follwoing is typical, and comes from the editorial columns of the Sofia Echo:

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.

It goes on to say:

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.

It's clear that the paper does not believe this.

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.

So, as is usual, a flat tax is actually increased tax on the poorest in a community and a tax cut for the rich. There's no surprise in that. Alvin Rabushka, who designed flat taxes, believes that the poorest in a country have a duty to support the richest within it. He's told me so. See the quote from him here.

But there's more to the paper's objection than this. As it says:

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.

It's conclusion? :

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.

Quite so. Flat taxes do not solve these issues. But they could make the problems much harder to handle.