Strong and Weak Points of the Interest Tax Introduction

The interest tax was introduced into the Bulgarian tax system on 01/01/2013 following severe public disputes in which government representatives, businessmen and ordinary people put forward a plethora of reasons “for” and “against” this new tax. At a point of heavy financial and economic crisis the government made the surprising decision to levy the interest income of all bank deposits with a tax of 10 % corresponding to the existing corporate income tax (flat tax) as well as the 10 % personal income tax.

There were a lot of disputes and especially critics towards this unpopular step taken by the government.

But how particularly could the strong and weak points of the interest tax be defined about three and a half months after its actual introduction?

Strong Points:

• More fair taxation patterns

Many local tax specialists opine that every single income generated out of a certain activity even investments of money into bank deposits is to be levied with one and the same tax rate. In this context it is often claimed that the interest tax balanced this ensuring the same tax approach towards the personal and corporate income as a result of a certain activity as well as of the practically riskless investment – bank deposit.

• Economic Stimulus Effect

Doubtless one of the main goals of the government with the interest tax introduction was stimulating the people with certain savings to “move” their funds and use them eventually in the economy as different types of investments. However, this is not happening at least for now as for the first few months since its introduction the tax did not specifically change the existing status quo. What actually happened was the diversion of bank deposit savings into other tax-free bank products – saving accounts, mutual funds, etc.

• Fiscal Revenue Increase

The fiscal effect of such a tax should not be disregarded as a consideration for its introduction. Many specialists opined that the tax itself is mostly aimed at its turning into an important income source for the already rather thin national budget compensating the increased expenditure. What we see for the first three months of the year completely lives up to the government’s expectations and the tax collectiveness is indisputable.

• Following the European model

A purported advantage of this tax is the fact that similar and, on many occasions, even heavier taxes exist in almost all European states. However, this barely convinced the hardest critics of the idea.

Weak Points:

• Financial resources deprivation

The weakest point of the interest tax and generally any other tax is that it results in people’s financial resources deprivation which leads to the actual impoverishment of the population. There are a lot of disputes on how the crisis should be handled but certainly the introduction of new taxes and additional burdens for ordinary people and the business is not the best possible solution that might be found since it undoubtedly causes decrease in consumption and hence – economic downturn. The interest tax took away (although very little) a certain amount of income from every person in possession of bank deposits.

• Deprivation of a personal anti-inflation instrument

On most occasions bank deposits are supported in an effort to preserve the value of money through compensation of the inflation effect with the help of an additional income. This money actually represents the so-called “last resort funds” and everything the ordinary person aims at is to preserve it secure as both availability and value. Unfortunately, some of the instruments to accomplish this practically disappeared following the interest tax introduction.

• Distrust in the current economic situation and pessimism concerning the implementation of further similar measures

The tax on bank deposit interests is actually having a much more psychological impact than monetary or fiscal one. It seems to have made people more cautious about the future, pushing them to even increase their saving rate. At least up to that moment no movements of savings have been detected in regard to the money being back into the active economic life.

Taking into consideration the review of the main characteristic features of the newly introduced interest tax, we can summarize that doubtless it provokes a lot of controversial reactions due to both the local tax tradition and the circumstances of the particular moment of its appearance. Nevertheless, having in mind that many European states increased the tax burden on their residents to a much greater extent referring to that as an anti-crisis measure with no alternative, we can certainly claim that the introduction of a tax on bank deposit interests in Bulgaria doesn’t seem illogical. And we should not forget that its rate fully corresponds to the tax tradition and the existing tax norms regarding income taxation – 10 %. Not less important is the fact that through this tax two essential goals are likely to be achieved – the movement of savings (although not in the expected scale) and the increase of public revenue. In other words – the interest tax is mostly aimed at the households and business saving rate reduction stimulating investments and consumption and simultaneously distributing the additional income in a more fair social proportion.