Catch VAT 22%: the Taxation Conundrum of Bulgaria's Borisov Government:

Editorial |Author: Ivan Dikov | March 22, 2010, Monday // 23:12|  views

Taxation issues are a really big deal – history books say they can even lead people to rebel against the greatest colonial empire and to go about setting up the most powerful nation on earth.

Of course, in the case of Bulgaria and its current government of the GERB party, the scope is much more modest. However, over the last couple of years Bulgaria has become a sort of a “tax paradise”, and some are already starting to be concerned that this paradise might be lost.

Bulgaria currently has some of the lowest taxes in the world – 10% flat rates of income and corporate taxes. Its value-added tax is relatively high, however, set at 20%.

As the Bulgarian economy is still in a dire situation over the global economic crisis, the Borisov government is struggling in order to find the funds to put out public discontent, to keep big infrastructure projects going, and to carry out crucial reforms that have dragged on for ages.

Thus, over the last few weeks (and days) the government appears to be taking a step back from its proclaimed intentions to reduce taxes even further. What is more, as it is considering its options, it appears to be failing in being firm, to the extent that it comes up with unpopular measures, renounces them, but still manages to antagonize entire social groups.

The first such indication came as the Borisov Cabinet decided to increase the universal health insurance fee from 8% to 10% in order to raise about BGN 300 M to fill an emerging deficit in the National Health Insurance Fund.

This raised hue and cry among the general population so the government gave it up, and decided instead to make state employees pay for their own health insurance. This in turn created further outrage, and the government figured the military and the police should be exempt from this new measure.

The end result is that the general population got appalled at the prospects of seeing health insurance prices go up, and the woefully inefficient bureaucracy started to dislike the government a great deal. Even the “privileged” groups of the military and police remain dissatisfied – the latest evidence for that being a police protest over benefits and equipment where the very Interior Minister who stood up for the policemen was booed by them.

Then, over the past weekend Labor Minister Totyu Mladenov detonated a taxation bomb by arguing that Bulgaria should renounce the flat corporate and income tax rates and switch to progressive rates for the duration of the economic crisis.

Luckily, this idea was repudiated quickly enough – virtually several hours later, the next morning – by Bulgarian Prime Minister Borisov and Finance Minister Djankov. However, they came up with a new brainchild – a “luxury tax”- taxing the wealthy for their yachts, limos, penthouses, etc.

While many may see this as a measure upholding social justice, it is a move antagonizing the most powerful strata of the Bulgarian society which achieves rather negligible benefits for the state budget – only BGN 160 M are expected to be raised in 2010 from this new tax. This is not to say that the government should not impose taxes in order not to create powerful enemies – but a more careful cost-benefit analysis of the “luxury tax” probably would not be in its favor.

It is rather interesting how the Bulgarian Chamber of Commerce and Industry objected to the new tax – it argued that while the government created the impression that the luxury tax will be for the “corrupt oligarchy”, there are many Bulgarians who got rich over the recent years in legal ways…

One key thing to note about this entire weekend episode of the taxation saga of the Borisov government is the surprising statement of the Labor Minister, which was then quickly rejected by the Finance Minister. This is actually the second times this happens in such a disturbing fashion. The first time was in the fall of 2009 when the two ministers fell out over the raising of the retirement age. One wonders why Mladenov and Djankov don’t discuss such important issues in private rather than embarrass the entire government by arguing through the media.

Finally, the latest taxation news which was broken by a syndicate leader, Mika Zaikova, after she was handed the draft package of anti-crisis measures of Finance Minister Djankov is that the government plans to up the VAT from 20% to 22% for a period of year, thus expecting to raise additional BGN 540 M. Zaikova’s quick reaction was that such a measure will lead to stagflation. If what she revealed is true and even if it is only a temporary measure, this means that the government is going against Djankov’s promise to reduce the VAT down to 16% by 2013.

What are the major conclusions of the taxation conundrum of the Borisov government? First, Bulgaria’s state finances appear to be in a pretty bad state as far as the raising of revenue is concerned. This seems to be due both to the economic crisis and to the gross mismanagement – and potentially the alleged violations (still not proven in court) – by the former government of Sergey Stanishev.

Second, the Borisov government is losing a lot of ground by being inconsistent about its measures. While Prime Minister Borisov himself gives the impression of a very firm man, somehow the situation slips out of hand and the Bulgarian society sees his ministers arguing back and forth in public over the best course of action. Thus, while the Cabinet eventually backs out of the most unpopular measures, this is no good as the very intention to affect the interests of certain social groups is antagonizing enough in itself.

This leads to the third conclusion – that the government is not very good at the cost-benefit analysis of its decisions designed to raise revenue – as it might end up raising negligible sums at the expense of tremendous damage to its social capital and credibility all the while also winning powerful enemies. Bulgarians will welcome a government which is bold and doesn’t shy away from taking unpopular measures – but only as long as it is firm and determined enough about them.

Fourth, the hesitant behavior creates plenty of opportunities for the opposition – mostly in the face of the Bulgarian Socialist Party – and the President – to strike at the government nibbling at its public support.

This is being done in a number of ways – ranging from populist rhetoric about the “social protection of the population” (I for one fail to see how the Stanishev government “protected the population socially” – perhaps by failing to build a single highway but giving the pensioners Christmas bonuses of BGN 100, spending the budget surplus generated largely thanks to the real estate bubble… ) – to very dirty tricks – such as “leaking” to the press intended draft anti-crisis measures of Finance Minister Djankov including cutting the maternity leave in half and taxing further the pensions of the retirees – things that no sane Bulgarian politician would think of implementing but which nonetheless scared the heck out of millions.

Then there is also the President with his ingenious ideas about generating a budget deficit of some 3% in order to be able to increase the public spending thus supposedly stimulating the economy. This argument is being put forth just as the state finances of neighboring Greece have collapsed.

It is probably safe to say that the Bulgarian cabinet is in a "Catch VAT 22%" situation - if it goes for upping the tax, it is not only going to spur public resentment but might well exacerbate the economic crisis, even leading to stagflation, as the trade unions were quick to warn; however, if it doesn't raise the VAT, it faces the prohibitively hard task of finding our means of raising badly needed state revenue in the underperforming Bulgarian economy.

Perhaps the best thing to do for the Borisov government in the current situation would be to focus in a very categorical way on a couple of reliable measures for raising state revenue, and to stand behind them as firmly as possible, without intra-government squabbles, without succumbing to populist pressures, and without juggling all the time with controversial ideas that instill fear and tensions in the people, and turn Finance Minister Djankov in the favorite scarecrow of the government’s enemies.

We need your support so can keep delivering news and information about Bulgaria! Thank you!

Tags: luxury tax, progressive tax, flat tax, health insurance, value-added tax, VAT, taxation, taxes, Labor Minister, Totyu Mladenov, Simeon Djankov, finance minister, Prime Minister, Boyko Borisov, Bulgarian Socialist Party, Sergey Stanishev, former PM, Bulgaria President, Georgi Parvanov, anti-crisis measure, anti-crisis program


» Related Articles: