Alternative Budget With Low Taxes For 2008

Author: Georgi Angelov / 10.12.2007
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Main objectives

The idea of alternative budget with low taxes is to show that, it is possible to significantly reduce taxation and at the same time improve the quality of public services. As in previous occasions, the alternative budget with low taxes for 2008 aims at:

  • - Reduction of the tax burden and the redistribution through the budget (a larger portion of the income remains in the hands of people and companies).
  • - Improvement of the effectiveness of the government spending and public services.

As a result of that we expect:

  • - Acceleration of investment, enterprising and economic growth,
  • - Increase in the growth of income.

Tax reform

This year again the main tax proposals in the alternative budget are related to the introduction of the 10% flat tax rate for each of: social security, income and corporate profit. Specifically, we propose:

  • 10% flat income tax (20 - 24% at present);
  • 10% profit tax (already in place);
  • 10% social security contributions (33.7% at present);

Including:

  • 10% tax for sole entrepreneurs (20 - 24% at present, 15% proposed by the government)
  • No tax on dividends (7% at present, the government proposes 5%)

In addition:

  • The local municipalities should have the right to determine the rates of the local taxes, and not only to increase, but also to reduce the current levels (for the moment, the government allows the municipalities only to increase the local taxes);
  • One tenth of the income tax to become a local tax - respectively to be part of the local (municipal) budget and the municipality to be able to reduce it.

The reduction of all direct taxes to 10% each will complete the tax reform and will establish a very good climate for economic development and increasing of the welfare of Bulgarians. In addition, the budget also will benefit from the reduction of rates, as this will lead to economic flourishing and eliminate some of the incentives for tax evasion, and as a result, the state revenues will even grow.

We believe that the municipalities should have the right not only to increase, but also to decrease the local tax rates and at the same time to get the right to receive and to determine one tenth of the income tax (1% of the 10 percent flat income tax to be available to municipalities). This is important not only as an addition to the budget revenues of the municipalities, but as a direct connection to their efforts to improve the business environment and the budget revenues. Also, the municipalities will have the opportunity to influence the levying of taxes and thus, to influence the labor market and the dynamics of the economy.

The greater freedom of the municipalities is related to greater responsibilities and the possibility of financial problems. Although this will be a very rare event, it is better to have very clear procedures for municipal bankruptcy. It should be clear what happens to a municipality, which is not meeting its financial obligations - whether or not the court should appoint a receiver or this is done by the regional governor and the Minister of Finance. The procedure is important in order to stimulate the local municipalities to behave in a responsible manner, and if they are not, they will be punished accordingly.   

The social security contributions of 10% must go to private pension funds, and the monopoly of the state healthcare fund must be abolished so that a person could select a health fund where to put his money aimed at health insurance. This will make the contributions not only significantly less, but will link them directly with the services provided and a person will have the right of choice. As a result the stimuli for tax evasion will be significantly less.

Budget reforms

In order for such large decreases of the taxes to take place, it is necessary to use more effectively the state expenditures, including a reduction of part of the non-effective expenditures. Here below are some realistic reforms for 2008:

  • 20% reduction of the staff in the budget sector - the state officials and budget employees are too much for a small country like Bulgaria, while at the same time in the private sector there is a shortage of personnel.
  • 25% increase of the salaries in the budget sector - the savings resulting from staff reductions will be more than sufficient to cover that increase in salaries. Thus, the remaining employees in the budget sector will get a good increase of their income, without any requirements to the budget for more funding (as it is done every year).
  • Decrease of the expenditures by 14% - together with the reduction of the budget staff, it will allow for significant savings from the collateral expenditures.
  • The introduction of real program budgeting - to finance only programs , which utilize more effectively the funds provided, have clear goals and specific indicators to measure success/failure.
  • Reduction of subsidies for loss-making companies and activities by one third - gradually the state must complete the reforms in the unreformed sectors of the economy and to step aside from those sectors. The State Railroad Company is a typical example for a company, which rather than paying money to the budget every year, receives generous funding from it even though the quality of service is low.
  • Evaluation and termination of the ineffective employment programs - with such a sharp drop in the unemployment rate and lack of workers it is not possible to justify the financing of programs for artificial employment. They must be terminated.
  • Covering the expenditure for infrastructure by the private sector through open tenders - a significant part of the infrastructure could be financed based on market principals (airports, ports, highways) and to bring income to the budget rather than the budget to finance its construction and maintenance.
  • Reforms of basic budgetary systems by increasing their effectiveness.
  • Reducing the expenditure for interest payments on loans through:

                   1. Stop taking new state loans;

                   2. Reduce the size of the state dept;

                   3. Rarely providing state warranties.

  • 25% increase of the pensions - as a result of the optimization of expenditure, reduction of the tax burden and growth of the economy and increased employment it will be possible to set a side a larger amount of money for pensions.

Structural reforms

Completing of the retirement program reform:

  • The entire social security payment of 10% is paid to a chosen private pension fund;
  • The pensions of the existing pensioners will be financed entirely by the state budget.

Through these two changes it is possible to warrant the long term stability of the system as well as adequate financing for the pensions of the existing retirees.  The 10% pension installment in a private retirement fund is sufficiently low to avoid burdening the working people, but on the other hand provides sufficient savings for financing the pensions after retirement. In addition, in this way are accumulated savings, a large portion of which could be invested in the economy and that will increase additionally the growth of productivity and personal incomes.

Completing the health reform:

  • Breaking the monopoly of the state health fund - every person to decide by himself/herself where to insure against illness;
  • Competition between the various health insurance funds - to offer better healthcare packages and prices;
  • The state to define the minimum healthcare package, which should be offered by the funds;
  • The state to finance the payments for the retired people, children, unemployed and the poor;
  • Market negotiation between the healthcare funds, the hospitals and the medical professionals.

Through such a system, on one hand, the administrative approach is removed from financing of the healthcare and on the other, a state healthcare system is proposed for the vulnerable groups of society. Thus, we could use the advantages of the competition even in the sphere of healthcare services in order to enhance the efficiency of the sector without government interventions.

Everyone who is not satisfied with the chosen health insurance fund could change it. In this way the competition between funds will lead to the supply of a large number of different services and coverage packages, while the insured will have the opportunity to influence what they get for their money. The hospitals and the healthcare funds will negotiate according to market principals, which will eliminate the current problems of defining the prices of the different clinical paths.

Improving high school education through:

  • Decentralization of school management;
  • Delegated budgets for all schools;
  • Voucher system - the money follows the student, including in the private schools;
  • Competition between the schools to attract students;
  • Teachers' labor market - the competition will create a market for the teachers' labor, such labor markets already exist in most sectors of the economy, and
  • External evaluation - of the educational results.

Research indicates that decentralization together with competition and external evaluation leads to better results with respect to the quality of education. In that respect a similar system could improve the level of education, which shows significant downfall in the last few years. 

Reform of university education and science

  • Autonomy of the universities - allowing them to define their own tuition fees and the number of students;
  • Providing scholarships and credits to the students, not subsidies to the universities;
  • Removing the obstacles to open a foreign university in the country;
  • Financing science on a project basis rather than subsidies to such organizations as the Bulgarian Academy of Science;
  • More science at the universities.

All of these will foster competition between the universities to attract more students and to improve the quality of training. It is also important to foster scientific research in the universities where the students could implement their ideas and to have real results from financing of science.

Alternative budget - effect on the economy

In the alternative budget are foreseen the following revenues and expenditures:

-         Revenues: 24 billion lev (27.2 in the government draft)‏

-         Expenditures: 22.3 billion lev (25.4 in the government draft)‏

As a share of the GDP this is:

-         Revenues: 39% (44.1% in the government draft)‏

-         Expenditures: 36.2% (41.1% in the government draft)‏

The reduction of the tax burden will lead to:

  • - higher economic growth
  • - more investments - local and foreign
  • - reduction of the gray economy
  • - increased incomes due to the lower taxes
  • - increased incomes due to the higher growth of the economy

As a result from the tax and budget reform Bulgaria will be able reach growth rates which are closer to the Baltic States, including Estonia that is the fastest growing economy in Europe in recent years.    The convergence to income levels and the standards of living in Western Europe will be much faster and will not require 50-100 years to take place.

What is next

During the subsequent years, the policy of tax decreasing should be maintained with a possible level of the flat tax on profit and incomes of about 5%, as well as zero tax on the reinvested profits.

This continuous reduction of direct taxes is possible due to two reasons:

1.       Increased growth of the economy and of the revenues to the budget  as a result of the tax reform and the reduction of the tax burden. 

2.       Increased revenues to the budget due to the EU requirement to harmonize the excise tax rates. 

 

 

Table 1: Revenues - comparison between the official government and the alternative draft budget (mln. levs)

 

2008

2008

Comparison

 

Official

Alternative

Total revenues

27,192.3

24,067.7

-11.5%

   Tax revenues

22,098.9

18,853.0

-14.7%

     Direct taxes

9,251.3

5,011.3

-45.8%

       Corporate taxes

2,261.8

2,364.5

4.5%

       Income taxes

2,190.0

2,646.5

20.8%

       Social security and healthcare contributions

4,799.5

0,0

-100.0%

         Contributions for the State Pension Fund

3,831.9

0,0

-100.0%

         Healthcare contributions

967.6

0,0

-100.0%

     Indirect Taxes

12,102.7

13,091.7

8.2%

       VAT

8,110.0

8,128.3

0.2%

       Excise Duties

3,797.7

3,990.1

5.1%

       Customs fees and duties

195.0

223.3

14.5%

     Other Taxes

744.9

750.0

0.7%

   Non-tax Revenues

3,193.3

3,314.6

3.8%

   Subsidies

1,900.1

1,900.1

0.0%

 

Table 2: Expenditures - comparison between the official government and the alternative draft budget (mln. levs)

 

2008

2008

Comparison

 

Official

Alternative

Total Expenditures and contribution in the EU budget

25,370.9

22,340.0

-11.9%

Total Expenditures

24,711.0

21,680.1

-12.3%

    Total non-interest expenditure

24,042.9

21,180.1

-11.9%

    Current non-interest expenditures

19,091.0

16,700.1

-12.5%

      Compensation (salaries and scholarships)

3,610.5

3,200.0

-11.4%

      Social security contributions

1,021.2

400.0

-60.8%

           Maintenance and operating

4,775.6

4,100.0

-14.1%

      Total Subsidies

1,342.6

900,0

-33.0%

        Subsidies

1,139.7

900.0

-21.0%

           Social expenditures

8,341.1

8,100.0

-2.9%

        Pensions

5,276.8

6,000.0

13.7%

        Social assistance

1,578.0

1,300.0

-17.6%

        Health Insurance fund

1,486.3

800.0

-46.2%

        Other social security expenditures

   

    Capital expenditures

4,257.9

4,000.0

-6.1%

    Contingency

694.0

480.0

-30.8%

      - structure reforms and fiscal stability

409.0

300.0

-26.7%

      - budget

205.0

100.0

-51.2%

      - natural calamities

80.0

80.0

0.0%

  Interest

668.1

500.0

-25.2%

 Contributions to the EU Budget

659.9

659.9

0.0%

Balance

1,821.4

1,727.7

-5.1%