Economic Policy Review ISSN 1313 - 0544

Payroll Taxes

29.01.2007
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Government policy concerning payroll tax could be supported. Reducing the pension contributions by 6 percentage points and increasing the share of insurance in private pension fund (capital-based) from 3% to 4% of wage is a positive development. Still, the payroll tax is one of the highest in Europe leading to high taxation of labor and discouraging persons to supply their labor as well as employers to hire them formally. It is too early for making assessments of the lower rate effects (the available data are for only six months) but the long-term influence will undoubtedly be positive.

In 2006, there was a suggestion budget to pay half of the employers’ contribution which is equal to 35% of total contribution. This would be positive too but could threaten the stability of state pension system in longer-term because the revenues would reduce relative to expenditures. The direction that should be followed is to increase the share of the second pillar (in individual accounts on capital basis). According to the Institute for Market Economics estimations, the contribution in private pension fund should reach at least 8% of insurance income to provide enough amounts for retired persons.

The introduction of so-called “Silver fund” collecting 50% of privatization revenues and 10% of budget surpluses would be a step forward. The accumulation of funds should last for 10 years and after that it should be utilized for covering state pension system deficits. Money would be invested similar to the fiscal reserve in liquid low-risk securities.

State pension system should cover minimum needs of every person while the regular pension should be funded by the capital-based system. This is the only sustainable way to reduce the contributions in long term providing enough income to people.

The overall insurance tax rate is still too high at level of 36% in 2006. It is unfavorable for the economic development and searching ways for reducing it is necessary. The pay-as-you-go model should be changed and the number of risks compulsory for insurance in state system should be decreased. There are many successful examples from all over the world where the withdrawal of the state leads to positive results. The task of the government is to apply this practice in Bulgaria.