1. Summary
For the second time the Institute for Market Economy prepared an alternative government budget. In the 2005 alternative budget we envisage revenues totaling 34.5% of GDP (39% in the government draft) and expenditures amounting to 32.8% of GDP (39.3% in the government draft). The main reforms supporting the budget are:
· 10% flat rate for all direct taxes – corporate tax, income tax, social security tax
· Public expenditure cuts – through decrease of public sector staff, optimization of the maintenance expenditures, decrease of the subsidies for lossmaking activities, reducing the inefficient meddling in the labor market, transfer of activities to the private sector and faster privatization.
· Using the budget surpluses for pension reform (privatization of the pension system), capitalization of the social security and other structural reforms.
As a result of the 10% flat tax rate:
· The taxation of the companies and individuals will be cut by half
· The incentives for work, entrepreneurship, risk-taking, saving and investment will increase
· The distortions, caused by the taxation will decrease (deadweight loss)
· The economic development will be faster and the wealth will increase
· The incentives for tax avoidance and tax evasion will diminish as well as the gray economy
· The net incomes of the taxpayers will increase by 30-40%
In addition to that, we propose a 3-year budget reform, including additional reforms for 2006 and 2007:
· Zero corporate tax
· Private competitive health funds and hospitals, pension reform, voucher system in the education
· Program budgeting, continuing reduction of the public service staff and the subsidies
The proposed reforms will ensure a stable double-digit economic growth and corresponding rapid increase of the incomes of Bulgarian citizens. In addition, the reforms will increase the efficiency of the public spending and the quality of the public services, healthcare and education.
2. Alternative budget: taxes and revenues
Tax Reform
The main goal of the alternative budget for 2005 is to show that it is possible to achieve a considerable reduction of the direct taxes and at the same time to maintain a balanced budget or even budget surplus. We propose the following reforms in the tax system:
· Decrease of the corporate tax to 10% (19.5% in 2004)
· Decrease of the income tax to 10% (12-29% in 2004)
· Decrease of the social security tax to 10% (42.7% in 2004)
· Abolition of the dividend tax (15% in 2004)
Revenues in the consolidated budget
The total revenues in the alternative budget, prepared by the Institute for Market Economy, are 14.4 billion levsor 34.5% of GDP (see table 1 below). The revenues in the budget prepared by the government are about 16 billion levs, i.e. 39% of GDP. These revenues, however, are underestimated by about 1 billion levs, therefore we assume that expected revenues are about 17 billion levs, i.e. more than 41% of GDP (like in 2004). Therefore the alternative budget seizes 6.5% of GDP less resources from the economy than the budget of the government.
Table 1: Revenues in the alternative government budget, prepared by IME
