Friday, November 28, 2008

The Flat Tax is Likely to Spread to Bulgaria in 2008

August 29, 2007

By Alvin Rabushka

Bulgaria’s income tax system consists of a corporate income tax of 10% (reduced from 15% in 2006) and personal income tax of three graduated rates of 20, 22, and 24%, which puts personal rates above many of its neighbors. The last four countries to enact flat tax legislation, Macedonia, Montenegro, Albania, and the Czech Republic, have set rates, when fully implemented over the next few years, between 9 and 12½%.

Confirming earlier statements in late July of the prime and finance ministers that Bulgaria would move to adopt a flat tax to enhance the country’s economic climate, Economy and Energy Minister Petar Dimitrov said on August 15, 2007, that Bulgaria will definitely adopt a uniform flat tax on both personal and corporate income to take effect in 2008. The rate, as yet undecided, will be set at either 10 or 12%. The lower rate would match those in Albania and Montenegro. A personal allowance will exempt some income from tax, but the level has not yet been determined.

Bulgarian proponents of tax reform cite the success of Slovakia, which introduced its 19% flat tax in 2003. Slovakia has attracted billions of euros in investments, including Korean car-maker Hyundai and consumer electronics giant Sony, which, in turn, have attracted dozens of Hyundai and Sony subcontractors to the country.

Proponents of the flat tax emphasize its simplicity, with less red tape and time and money expended in filing tax returns. In simplifying its personal income tax, Bulgaria will also satisfy European Union complaints that Bulgaria is a nation with a cumbersome tax administration. Other anticipated benefits of the flat tax include a reduction in personal income taxes for a majority of the population, and bringing income out of the underground economy into the open market, thereby enhancing its efficiency for investment and increasing the base of income subject to tax. At 10%, individuals have less incentive to hide income compared with the current 24% top rate.

Bulgarian opponents object to the flat tax on the ground that it disproportionately benefits the more affluent population, which goes against their social principles of equity. However, a majority in Parliament believe the need to attract investment and create jobs requires that the country’s income tax system be competitive with its neighbors vying for the same investment.

If enacted, Bulgaria will join the bandwagon of thirteen other countries in Central and Eastern Europe that have enacted flat taxes since 1994: Estonia, Latvia, Lithuania, Russia, Ukraine, Slovakia, Serbia, Georgia, Romania, Macedonia, Montenegro, Albania, and the Czech Republic. If the territory of Pridnestrovie is treated as a country (rather than an integral part of Moldova), the number of flat-tax countries in Central and Eastern Europe would stand at fifteen.

Outside of Europe, other countries that have recently adopted a flat tax include Iraq, Kyrgyzstan, Mauritius, Mongolia, and Iceland (though Iceland’s 35.73% rate violates the principle that the flat rate should be low, preferably below 20%).

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