07.06.2023

EC: THE TAX BURDEN IS HIGH FOR THE POOR IN BULGARIA

Bulgaria's tax revenues are relatively low compared to its GDP, with the largest contribution coming from consumption taxation. A low direct tax environment favors economic activity as it encourages investment and labor supply.

This is stated in a working document of the EC services to the Report on Bulgaria for 2023.

It reports that Bulgaria's tax revenue as a percentage of GDP was significantly lower than the EU total in 2021 and almost the same as in 2020. The share of consumption taxes as a share of total tax revenue is significantly above of the EU aggregate (45.8% compared to 27.5%), but revenue from labor taxes was significantly lower than the EU aggregate as a share of both GDP and total taxation. Environmental taxes represent 9% of total taxation in 2021, the highest rate in the EU-27. This is mainly due to energy taxes reflecting the application of the "polluter pays" principle.

Property tax revenue is relatively low as a percentage of both GDP and total tax revenue. Therefore, there is scope for them to be increased to address potential fiscal sustainability challenges. However, no significant reforms of the taxation policy are foreseen. The only initiative that can be mentioned is the public consultation on a law proposing amendments and additions to the Tax-Insurance Procedure Code.

Bulgaria has a system with a single tax rate, which is not progressive, unlike the usual one for the EU, the report also says. However, according to the EC, Bulgaria has a flat rate tax system with one of the lowest personal income tax rates in the EU (only 10%). "Unlike some Member States with a flat income tax rate, there is a lack of basic tax relief, which further limits the progressivity of the tax system. As a result, the tax burden is relatively high for low-income earners and relatively low for high-income earners. This may reduce labor demand for low-skilled workers."

According to the analysis, the lack of progressivity of the tax system also contributes to the low ability of the tax system and the benefit system to redistribute income. The tax and benefit system reduce the Gini coefficient (a measure of income inequality) in 2021 by just 4.7 percentage points, well below the EU average of 7.8 percentage points. Simulations based on the EUROMOD model show that a basic annual tax relief of EUR 2,800 for low incomes, financed by an increase in the statutory tax rate, could reduce relative poverty by around 0.6 percentage points and inequality by 0.8 points per Ginny.

The maximum monthly social security contribution is for an income of BGN 3,400 (EUR 1,739), which means that the marginal tax rate is regressive, and then the tax burden is relatively high for low-income earners. However, the tax base of employed persons can be deducted by BGN 6,000 (EUR 3,069) per child, up to BGN 12,000 for two children and BGN 18,000 for three children. The tax relief for children with disabilities is BGN 12,000, the report states.