Flat Taxation – Key Factor in the Economic Development of Bulgaria?
In the last few weeks there have been serious discussions on the flat taxation role for the economic development of Bulgaria, the effect of its introduction as well as its possible future perspectives in the complex financial and economic situation on a world scale. In the heat of the election campaign in the country and in anticipation of the early parliamentary election were expressed a plethora of opinions “for” and “against” flat taxation as well as different promises and plans for its future in Bulgaria – all referred to by major as well as not so popular political formations.
But what is the actual role of the flat taxation for Bulgaria – is it really that key factor for the economic development of the country?
The truth is that even before the flat tax introduction (which happened in 2008) the level of foreign direct investments in Bulgaria had hit a record number. Of course, this does not automatically stand for the flat tax not having had a positive effect on the future investments in-flows. On the contrary – it is a well-known fact that the proportional taxation system invariably results in economic stimulation and attraction of a larger number of investment projects, especially in economic stagnation and even downturn in the majority of developed economies. We can definitely claim that flat taxation in Bulgaria is still playing a key role in the overall process of ‘promoting’ the country within the European Union as an exceptionally attractive, tax-favoring and still to a great extent not-yet-developed (in terms of economic potential) investment destination.
Is the social price of flat taxation in comparison to the progressive one, however, worth paying?
Doubtless, flat taxation has certain anti-social implications on society due to the fact that it levies income on proportional basis, i.e. the rich pay an equal tax rate as the poor. This naturally causes certain social injustice moods, especially when referring to a state where the percentage of the relatively poor population is that large in the context of the entire society itself. We can, however, hardly claim that flat taxation exacerbates rather than enhance the development of such societies – it would be much more precise to acknowledge its introduction aims at achieving much longer-term and much larger-scale goals instead of shorter-term narrower results.
What is the financial and accounting view of the flat taxation introduction?
From entirely accounting point of view the flat taxation introduction resulted in the tangible facilitation of the income taxation accounting process – with no need for following certain types of scales, graphics and tables. The income taxation was transferred into a much less complex mathematical operation with universal constant number – 10 %. It should also be acknowledged that financially speaking the common tax rate seems quite logical and justified – entirely in conformity with the major financial and accounting principles.
But what is in particular the flat taxation future in Bulgaria?
It is highly unlikely that a party or party coalition whatsoever come to power in Bulgaria at this point instigate efficient measures for the flat taxation abolishment and its replacement with progressive system. That would represent rather a “shock” not only for the local business, but for the foreign investors as well who have already started investment projects in the country or have been planning to do so. Besides, any grand alteration in the tax legislation in such a grave economic situation (especially not business-favoring) would act against the logic and would shatter thoroughly the international business expectation of the country’s investment environment, depriving it of the necessary level of stability and predictability. As a matter of fact, most tax and economic experts opine that even not taking the present world economic situation into account, Bulgaria’s economy status requires the flat taxation preservation, at least for the nearest future, aiming at major competition advantages accumulation. Not surprisingly, the European Commission in its official report, published a few days ago, highly recommended that Bulgaria stick to the existing tax legislation in its present type considering it the most appropriate one possible for the country at this stage.