Economic Policy Review ISSN 1313 - 0544

2013: We Will be Working for the Government until May 1st

25.01.2013
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Bulgarians will be working till the 1st of May to pay up their taxes for 2013. Figuratively this is the day when taxpayers will stop working for the government and start earning money for themselves. The date marks the time when state coffers will be full if everything produced in the economy is instantly confiscated by tax authorities – we call this day Tax Freedom Day (TFD). This year’s TFD bears a certain irony because it coincides with Labor Day – traditionally a non-working holiday. Usually in Bulgaria the Tax Freedom Day is in May and in the last 4-5 years it was in early May – the main reasons for this being the crisis, slow economic growth and the budget deficits that we have experienced lately. In other words it looks as if the government spends less but there isn’t much difference between now and a couple of years back. If we go a little further with our symbolic account, taxpayers will be released from paying for the state between May 1 and May 5 because the corresponding public spending will be financed with borrowing – this is the planned deficit in the state budget act for 2013. These five days will have to be sooner or later “worked off” and the product produced – “delivered” to the state.

Methodology

The methodology for the calculation of TFD is relatively simple – we compare consolidated government revenue with the country’s GDP. For the purpose only official government data and forecasts are used. We use revenue and not expenditure because it shows how much has been taken away from individuals and businesses during the year. Transfers are not included because they don’t come out of taxpayers’ pockets – these are mainly from the EU.

In 2013 Bulgarians will produce around 223 million BGN each day, measured by the expected GDP (as assumed in the report accompanying the state budget act for 2013). Therefore for the current year, 120 days will be needed to produce the27 billion BGN revenue for the consolidated budget. The five additional days in May are there because of the 1.1 billion BGN deficit.

Although the use of official government forecast is the most methodologically sound way to make this calculation it does not mean that these forecasts always properly represent reality. For example in 2010 the drop in revenue and the appearance of deficits shifted the day to an earlier-than-expected date. The budget act for 2012 can bring surprises as well.

What does all of this mean for Bulgarians?

The calculations we have just described represent averaged values and bear little information for individual citizens. The tax burden in Bulgaria is different for different people but most substantial for working Bulgarians who pay their taxes – income tax, social security payments, VAT and excise taxes. For those Bulgarians who can be described as “middle class” the Tax Freedom Day might come in the summer. They will also bear the burden of the so-called tax on bank interest because the large chunk of deposits belongs to the middle class. On the other hand for Bulgarians who don’t work or are a part of the grey or informal economy TFD might come much earlier.

Is there a reason to celebrate?

The focus on government revenue brings a false sense of increased freedom in the last couple of years. During the crisis VAT and excise taxes, as well as corporate taxes were the hardest hit which moved TFD earlier. Only revenue from labor taxes remained unchanged. If we ignore revenue and focus more on the tax rates the picture is different – we have no change in VAT, corporate tax and income tax rates, but an increase in the (legally binding) social insurance income thresholds, some excise and property taxes as well as introduction of some new ones (tourism, insurance premium and interest income taxes) as well as a substantial quasi-tax burden. All of this comes to show that law-abiding taxpayers are losing their freedom, often at the expense of others who forget to pay what the government wants from them.

In any case every Bulgarian citizen contributes one way or another. We will spend most of our time next year to work out the revenue from VAT – 35. For excise tax revenue we will need 19 days. For social security payments and health insurance we will work 27 days – 19 for social security and 8 for health insurance. Revenue from income tax will take us 11 days, and corporate taxes – 7 days. Another 7 days will be needed just to come up with the money to pay for state and local fees. Property taxes will cost us 3 days of work.

The graph above shows Tax Freedom Day in the last couple of years (in blue) as well as the days we need to work to pay for the deficits. If there is a surplus, taxpayers will have over-worked for the state, meaning they paid taxes and the revenue from those taxes was not immediately used by the government – these are represented by a red line in the negative values.

If there is a deficit, the taxpayers sooner or later will have to work for what was spent in advance – these are the positive values of the red line. If we look at both lines we can see that there has not been much change in the last few years, we have not experienced increased freedom from the government, despite a change in the date.