Bulgaria's Socialists: Ax the Flat Tax, Tax the Rich More

As of 1 January 2008, Bulgaria introduced a 10% flat tax applicable for all income levels, i.e., there is no non-taxable income threshold. Photo by Sofia Photo Agency

Four years after introducing the flat tax in Bulgaria, the country's Socialist party has made a U-turn with calls for scrapping it.

"The flat tax, which my government introduced, yielded good results for making the economy more transparent and boosting budget revenues. But at the moment it is not adequate. Bulgaria is witnessing an abominable social stratification and abominable injustices," Socialist leader Sergey Stanishev commented.

As of 1 January 2008, Bulgaria introduced a 10% flat tax applicable for all income levels, i.e., there is no non-taxable income threshold. It replaced the previous system, which combined several different tax rates - between 20 and 24%, depending on income.

Now the Socialist Party is calling for the return of a progressive income tax so that the upper-income households as well as the rich are taxed much more than the poor.

Petar Dimitrov, who served as economy minister in the Socialist-led coalition government of Sergey Stanishev, proposed a simple, three-tier scale.

"Zero tax for the poor, 10% for the incomes of the average Bulgarian and 20-30% taxes for income, which exceed a certain threshold."

According to Rumen Ovcharov, who fathered the economic project, it is only logical that in the current situation the Socialist Party asks the rich to bear the heavier burden of the crisis. He stressed that low incomes should be tax exempt.

The opposition party however is still not ready with the estimates of the project and can not offer concrete tax rates or levels of taxable income.

Bulgaria's finance minister has repeatedly denied reports that a removal of the flat tax rate may be looming after the government scrapped its plans for a VAT increase in a bid to plug a budget gap that has thwarted the new EU member's euro efforts.

According to Finance Minister Simeon Djankov the introduction of the flat tax is one of the success stories of Bulgaria's economic and tax policy.

Bulgaria's 10% flat rate makes it the country with the lowest personal tax rate among European Union member states. Bulgaria also has the lowest social security rates, which coupled with a 10% flat rate, makes it very attractive for physical entities, employers and potential investors.

Over the last decade and a half, a number of countries introduced flat-rate taxation and Bulgaria jumped on the bandwagon in 2008.

The policy has a number of attractive features - equality, lower tax burden, the general trend to raise budget revenue as more companies leave the "shadow economy", just to name a few.

What made the debate in Bulgaria different is the fact that the proponents of the measure were the Socialists as it is usually the center-right parties that are aggressively pushing tax reforms.

Part of the reason why the flat tax has been an efficient tool in diminishing the "grey economy" in other countries is the willingness of governments to couple it with draconic measures to crack down on tax evasion.

Even though it is a long-term goal, this kind of measures give the foreign companies the feel that things are going in the right direction and makes them more likely to invest their money in those economies.

Bulgaria, on the other hand, has notoriously been sluggish with its fight against corruption and organized crime.

Bulgaria is among the top ten countries in the world with the lowest effective rates and is preceded only by Hong Kong, tax havens like the Bahamas Islands and petro-states like Saudi Arabia, according to an analysis by KPMG consultancy.

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