Friday, November 28, 2008

The Flat Tax May Soon Spread to Bulgaria

August 1, 2007

By Alvin Rabushka

Bulgaria is on the brink of joining the flat-tax revolution that has swept throughout Central and Eastern Europe. Most of its neighbors, including Albania (flat rate of 10% in 2008), Romania (16%), Slovakia (19%), Serbia (14%), Macedonia (10% in 2008), Montenegro (9% in 2010), Georgia (12%), Ukraine (15%), Russia (13%), Estonia (18% in 2011), Latvia (25%), and Lithuania (24% in 2008) have adopted a flat tax in one form or another since 1994. The Czech Republic is currently proposing a unified 15% flat tax on corporations and individuals.

The politics of the flat tax in Bulgaria combines the left and right The ruling coalition in Bulgaria consists of three main parties. The largest is the Bulgarian Socialist Party. The other two are liberal (market-oriented) parties, the National Movement Simeon II and the Movement for Rights and Freedoms.

In 2006, Bulgaria reduced its corporate tax rate from 15% to 10% to enhance the country’s attractiveness to investors. Over a year later, on July 29, 2007, Bulgaria’s Finance Minister Plamen Oresharski announced that the leaders of the three main parties had decided at a cabinet meeting to propose a 10% flat-rate tax on personal income beginning in 2008. It would replace the current three-bracket personal income tax system which exempts the first 2,160 in annual Bulgarian Levas (US$1 = BGL 1.43), followed by a rate of 20% on income between BGL 2,161-3,00l, 22% on BGL 3,001-7,201, and 24% on income exceeding BGL 7,201.

Two days later, on July 31, 2007, Prime Minister Sergei Stanishev stated that the flat tax would increase revenue by reducing the underground economy, bringing this income to light and making it subject to taxation. The philosophy underlying the proposed flat rate of 10% is to apply a low tax rate to a broader base of income, replacing the current higher rates with numerous deductions that narrow the tax base. When the 10% flat tax on personal income is in place in 2008, the country will have a unified 10% income tax on corporations and individuals.

The government plans to introduce the proposed reform in parliament by the end of September after the summer recess. It appears likely to pass since the socialist-liberal coalition government enjoys a comfortable majority in Bulgaria’s parliament.

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