Economic Policy Review ISSN 1313 - 0544

Social and Economic Impacts of the Proposed New Taxes on Some Foods

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The full text of the analysis is available HERE (in English).


The content of this report aims at reviewing the arguments in favor of the new unhealthy food tax, its goals and the likelihood of them being achieved or compromised as well as at reviewing the possible and probable social and economic impact of the introduction of the tax. The report also aims at contributing to the discussion on the so called Bill on the Taxation of Unhealthy Food which is to take place in September, as promised by the Ministry of Health to journalists.

A tax with unclear purpose and implementation  

It is not clear why the tax would be introduced, what would it be like and what its rate would be. It was first said that the rate would be 10%, then it was said it would be 3%. Despite the change in percentages the expected new revenue has remained unchanged. Initially it was expected that the National Health Insurance Fund would collect BGN 200 million incremental revenue. Later on, however, when the idea of a rate reduction to 3% was introduced the expected revenue was not reduced by 70% but by 25% - to BGN 150 million.

This optimistic budget revenue forecast is based on the intention to tax a broad spectrum of products with a relatively high tax rate. The label unhealthy though is very difficult to apply because of the very simple fact that, on the one hand, it is very easy to find a substitute to different foods and, on the other hand, for people with low income, the supposedly unhealthy food, in as much as they consume it, could be an alternative to not feeding. If this is the dominating argument, then the new tax is not going to have direct impact on human health, but it would be a purely fiscal proposal.

This lack of clarity makes the consequences of a potential price increase on food difficult to forecast. Moreover, if these intentions are serious and consistent, the list of taxable foods would have to be expanded. 

One of the issues is that tax regulation of behavior is the most ill-suited approach possible. Taxes on certain types of products are a kind of price regulation. It is not much different from direct administration of different quasi-prices (tariffs, fees, etc.), from setting pricing formulae and rules and establishing price limits and thresholds. When this does not affect all goods and services the typical issues which arise from that are discrimination, implicit state aid, supply and demand migration to substitutes and increased costs on state control and accountancy.

One can judge about the economic, administrative and political issues which stem from price regulation by the issues related to the tariffs used for freelance professions, the price of electricity on the regulated market, etc.

Foreign experience

This lack of clarity can be observed clearly in plenty independent analyses of foreign experience.

Such a tax, only on foods with saturated fat (such as butter and margarine), was introduced in Denmark for the period October 2011- January 2013, but it was abolished after that. The idea behind it was to: a) curb demand on unhealthy food; b) decrease the number of cases of diseases such as diabetes, cardiovascular diseases, etc.; c) increase life expectancy; d) reduce healthcare costs and e) increase state revenue.

The tax was abolished because none of the initial goals was met. 80% of the consumers did not change their behavior. Consumers used to buy products from neighboring countries where these products were cheaper and at the same time this resulted in a certain decrease of domestic sales. Costs for producers and traders increased and according to some of the most conservative estimates about 1 300 jobs were put to risk. Fiscal goals were not achieved. There was a shift in consumption towards replacement with cheaper products of lower quality and/or with products which did not fall within the scope of the tax. This means that there were no clear prospects of achieving the goals related to health. If taxation had continued it would have even been possible for human health to have deteriorated. Moreover, the price increase of staple products (butter and margarine) reduced the efficiency of the value added chain because it increased the prices of other products.

On top of that in Denmark there was also a tax on soft drinks. It was in force (having been amended a number of times) from 1930 to 2014. The reasons for that are that despite the change in taxation rates there was no change in consumption and prices of both high quality beverages and their low quality substitutes increased. At the same time, despite the fact that this tax was implemented for more than 80 years, in Denmark there is a deterioration of the Body Mass Index indicators.

In Hungary for four years now approximately the same foods and beverages as the ones foreseen to be taxed in Bulgaria plus aromatized beer and spirits, jam and marmalade are already being taxed. The budgetary goals there-with more consumers and higher disposable household income- are humbler and yet have not been achieved and there is no progress or relation to the accomplishment of health-related goals. What a survey conducted by PricewaterhouseCoopers (PwC) in 2013 shows, however, is the following: consumption of taxed foods did not decrease, their prices decreased (of chocolate bars by 3.9%, of confectionary by 6% and of salty foods by 12%), but the consumption of foods containing the same unhealthy ingredients increased. At the same time tax revenue dropped because of non-payment of taxes, substitution of ingredients for nontaxable ones and additional costs both for the administration and control authorities and for producers and traders. It is interesting to point out that registered sales even of substitutes shrank and they shrank even more than the sales of taxable products i.e. consumption retention and increase parallel to decreased sales is a certain proof of the market going grey and it also points to the reason for the decrease of state revenue from the newly introduced tax. According to PwC about 10% of the market went into the grey sector and the loss of VAT revenue amounted to EUR 25.6 million.

Out of the four EU Member States with similar taxes one abolished them and in the other three the taxes show unsatisfactory results, especially in terms of the initially declared health-related goals. The fiscal goals are accomplished in only one of the countries (Finland). For these reasons another four countries have decided against the introduction of such taxes. The claim of the proponents of the reform that experience with similar taxes both in the EU and globally is positive is incorrect. 

Everywhere this tax has led to increased production and sales costs, loss of competitive advantages, substitution with foods of lower quality and higher consumption of the latter in households of lower income (which are eventually the ones to pay the increased prices)[1].

Health-related goals  

It is certain that health-related goals are not going to be achieved.

In the case of foods with salt about 1% of the intake is going to be taxed[2]. The other 99% come from the consumption of bread, cheese, sausages and salami, bought and home-made preserves which are not covered by the scope of the tax.

Energy drinks consumption contributes to about 1% of the average caffeine intake. If there is any health hazard it is related to the consumption of energy drinks with spirits which are already levied with a high excise duty. The new tax will at most stimulate substitutes of lower quality.

If there is any impact on nutritional habits and consumption in terms of foods containing sugar (soft drinks, preserves, ice cream, etc.) at all, this stimulated abstention is going to affect not more than 6% of consumption.

If there is any health-related hazard it is in the 99 % and 94 % of the consumption of sugar and salt respectively and not in the foods which are planned for taxation. It is very likely that there is no such causal relationship at all. According to the food consumption data of the National Statistical Institute (NSI) the peak consumption of foods which are currently said to be unhealthy was in the middle of 1980s. It has been shrinking constantly ever since by up to 20-25 % (depending on the type of food). It is enough for one to check online the global annual comparisons among UN Member States in terms of the Body Mass Index (BMI). According to them Bulgaria does on average more than twice better than the developed countries. 

Moreover, according to studies of the Ministry itself, of the World Health Organization and other reputable sources on the situation with human health in Bulgaria most probably it is other measures, not taxes that are needed in order for the quality of healthcare to improve.

They are pointless as a tool in healthcare. That is why:

  1. According to Eurostat, Bulgaria is among the countries with the lowest average levels of obesity (11-12%) in EU[3]and much below the average for the EU. If there is a problem with human health and the mortality rate it is somewhere else not with the diet or obesity.
  2. According to the global health database of the Institute for Health Metrics and Evaluation (IHME)[4], the level of obesity in our country decreased from 25.3% to 20.1% in the period 1980 to 2013, i.e. there is a clear downward trend in obesity
  3. There is evidence of growth of obesity registered in Bulgaria among people with the lowest incomes in large cities[5], where a major problem until recently was malnutrition and underweight. Easy access to substitutes is going to worsen the consumption of low-income households both in terms of quality and quantity. This effect is observed in countries where  tax such as the one being proposed in Bulgaria is implemented.
  4. Bulgaria is the country with the lowest calorie intake per capita in Europe – 2,760 to 2,900 kcal. This is around the global average, 10% less than the levels in 1990 and about 20-25% less than the average in Europe.
  5. Consumption of sugar and other sweeteners per capita in Bulgaria (as with salt) reached its peak values in the 1980s (1986 - 109 g / person / day) and has been steadily decreasing since then (2011 - 78 g/ person / day).
  6. People with the lowest income do not have the opportunity to consume big quantities the foods and beverages planned for taxation – for them they are luxury goods and their consumption is very limited in this consumer group. People at retirement and pre-retirement age are most affected by heart diseases, obesity, etc. They are also not among the consumers of the foods the Ministry wants to curb. If low-income households and elderly Bulgarians consume more sugar, salt and perhaps fat, this is either due to the substitutes or to home-produced food the so called economy of jars (preserves for winter such as pickles, sour kraut, meat and fruit preserves, jam etc.) 

Substitutes and alternatives (produced and consumed officially or unofficially) will most probably not affect the overall calories intake and ratio between calories in individual foods and their role for shaping the body mass. Here are some measurements of calories

Calories of some beverages[6] 

Selected beverages

Calories per cup

Popular energy beverage


Popular carbonated beverage


Orange juice


Apple juice


Milk (2% butterfat)


Homemade cocoa with low-fat milk


Sweetened lemonade


Chocolate milk


Red wine




(2) http://;,

(3) http://caloriecount.;,

(4); calories-milk-chocolate-fluid-commercial-i1102/,

(5) http://www.thedailyplate.; com/nutrition-calories/food/generic/lemonade/.


The table shows that taxation of some beverages cannot affect the intake of calories with other.

Approach to the formulation of the new tax  

We have already mentioned that that the simplest procedures and techniques for impact assessment, required by the law, have not been abided by. According to the requirements of the simplest principles of the Law on Legislative Acts and the Law on Restricting Administrative Regulation the very idea of the new tax has to be well-grounded i.e. it has to be proven that the benefits surpass the costs and that no property rights or free business initiative are violated. (art. 17 and art. 19 of the Constitution).

The BGN 200 ml state revenue which was initially mentioned by the Minister of Health could perhaps be indicative as an amount of the initial source- in April this year the Ministry of Finance forecasted that the NHIF deficit is going to amount to that.

Later on the NHIF and other sources suggested that as a result of the consolidation of hospital budgets and partial savings of subsidies for medicines the deficit is going to be BGN 50 ml less. It was then that the plan to collect BGN 150 ml instead of BGN 200 ml was hatched, as well as the explanation that the new revenue is going to be used to fund prevention.

Apparently it is preferred not to reform the way in which the healthcare system is funded but rather to come up with a new source of income for the old system. Just as our analysis has shown, this revenue is certainly not going to be collected, but the respective costs in the system are going to be planned, the deficit is going to be generated and it would once again be covered by transfers from the state budget. The belief that this revenue is going to be collected resembles a lot the hunch of the bear who thought that there would be plenty of pears in autumn because it felt like eating pears.

The food and beverages industry has not consulted. Nobody has asked independent experts either. Independent analysis of experience from other countries has not been sought.


What is going to happen with the tax revenue

Price regulation through taxes is the worst possible option for regulation. This idea cannot be implemented without discrimination against some producers and traders; and all of this along very dubious benefits to the public health.

There is precedence in Bulgarian legislation the goal of which is similar. These are the contributions for prevention coming from excise duties on wine, spirits and tobacco products. Neither the Ministry of Health nor any of its units has ever provided a public report on how these funds are spent and how this affects the quality of prevention and treatment of the respective diseases. Perhaps due to the increase in household income after 1997 the consumption with both groups in Bulgaria is growing. The positive changes (i.e. a decrease) in terms of that consumption in other countries are rather due to changes in lifestyle, fashion and increase in income and not a result of taxation.

One of the difficulties law-makers are going to face in terms of the rationale is connected with the estimate of the negative side effects. That is why we developed a special evaluation model for these effects. The assumptions and initial results can be described as follows.

If, being very optimistic, we assume that the main macro parameters remain the same as in 2014, that 100% of the planned taxes are indeed collected with 1% administrative costs, that the shift to substitutes does not decrease VAT revenue and we assume that the tax rate on unhealthy food which is being proposed is 3%, the overall fiscal effect is by far not going to be the one that is assumed.

Despite the optimism the new tax is going to decrease company turnover, value added in companies, gross profits and labor costs (the remunerations fund), the number of people employed and respectively the consumption of the employed. This is going to take place all along the supply chain- with suppliers, industrial consumers, traders and the business, servicing the taxed companies.

If the goal is to collect revenue of BGN 150 ml at a rate of 3%, the sales of these newly taxed foods and beverages have to amount to BGN 5 bl. According to the NSI, however, annually they amount to about BGN 2 bl. Let us forget for a second the real turnover of unhealthy food in the economy.  The results of this calculation experiment are the following:

  • in order to collect excise revenue (tax) of BGN 150 ml a turnover of BGN 5 bl of the taxable goods is needed.;
  • saved costs on interest with a reduced budget deficit amount to BGN 1.3 ml; 
  • this scenario presupposes a loss of approximately 2 950 jobs;
  • the turnover in economy which has been decreased by BGN 150 ml leads to lower gross value added, lower profits, lower overall remunerations fun, lower revenue from social security contributions and personal income tax, as well as to lower consumption as a result of which there are costs for the budget (not collected revenue from the above mentioned taxes) amounting to BGN 19.6 ml;
  • in this scenario the net benefits for the budget are going to amount to not BGN 150 ml, but to BGN 131.7 ml.

This calculation exercise though does not take into account costs on compliance, replacement of taxable products with other goods, replacement import, part of the taxable value chain going into the grey sector, as well as the incremental administrative costs on the collection and management of this revenue, which is expected to be significant.

Let us now take more realistic initial data such as: the new tax being imposed on a turnover of about BGN 2 ml, tax rate of 3% and all of the revenue being collected. The results are the following:

  • the revenue from the new excise duty is going to be about BGN 60 ml;
  • gross revenue is not going to be BGN 150 ml, but BGN 60 ml;
  • the loss of jobs will amount to approximately 1 180 jobs;
  • turnover will decrease by approximately BGN 60 ml which will respectively result in a lower gross value added, lower profits, lower overall remunerations fun, lower revenue from social security contributions and personal income tax, as well as to lower consumption- as a result the revenue to the budget which are not going to be collected will amount to BGN 7.84 ml; 
  • to put it differently- in this scenario the direct net benefits for the budget will amount to BGN 52.68 ml.

This amount is about three times smaller than the estimated deficit of the NHIF and it equals 75-80% of the taxpayers` money which the government spends on a daily basis. If this amount is really to be allocated to the NHIF, the government can provide it by cutting costs.

If we decide to come even closer to reality we will have to take into account the most probable effect of the new tax- the replacement with import from Romania. This is an important factor. The VAT rate on food and other goods and services in Romania has recently been reduced to 9%. The effect on Romania will probably eventually be negative but we are now interested in the impact on Bulgaria.

Taking both hypotheses about the new tax into account, the margin between Bulgarian and Romanian prices will be between 18% and 25%. This is a powerful incentive to look for arbitration. If replacement amounts to 15%, then the real volume of sales would shrink to about BGN 300 ml i.e. the not collected VAT will amount to approximately BGN 60 ml.

In this situation the real not collected revenue in the central budget distorts the planned picture. The real revenue in the first scenario described here will amount to BGN 68 ml i.e. the net revenue to the state budget will not be BGN 150 ml, but BGN 88 ml. In the second scenario the not collected tax will amount to BGN 79.5 ml i.e. as a result of the exercise the budget will be at a loss of BGN 26.8 ml.

If the tax administration works flawlessly and the taxpayers are diligent contributors to the state budget, as usual, the scenarios, on the basis of the planned revenue, would lead to the following consequences.


Estimate of the budgetary and social and economic consequences

Scenarios / indicator

3%/BGN 145.5 mlrevenue

3%/BGN 58.2 mlrevenue

9%/BGN 156.6 mlrevenue 

Social and economic

Loss of jobs

2 864

1 145

3 076

Price increase




Taxes not incurred

- BGN 15.0 ml

- BGN 6.0 ml

- BGN 36.7 ml

Loss for the budget

VAT not collected

- BGN 3.2 ml

- BGN 1.3 ml

-BGN 24.0 ml

VAT not collectedbecause of substituting import

- BGN 60 ml

- BGN 60 ml

- BGN 0 ml

Costs to the business

BGN 4.4 ml

BGN 1.7 ml

BGN 4.7 ml


This calculation, however, does not include the negative effects of the compliance costs with the new tax, with the demand for and migration to non-taxable substitutes of lower quality, as well as costs on working with the government- in cash and working hours. It does not include the impact of the overall shift to the grey sector either, should some of the consumers resort to the economy of the jars- it is part of Bulgarian traditions anyhow.


[1]See: Ecorys, Food taxes and their impact on competitiveness in the agri-food sector (Client: DG Enterprise and Industry),Rotterdam, 14 July 2014, at:

[2] If no other source has been pointed out consumption data comes from the statistics of NSI on household consumption. It does not reflect consumption of food and beverages in restaurants and other public food and beverage establishments. It, however, is valid for the conclusions on the staple diet of the population. We believe that the change in prices resulting from the new tax is not going to have significant impact in the food and beverage establishments and that it would be easier for them to find substitutes, including from their own and non registered production, when price incentives require that. Without a special survey of the matter it is impossible to estimate what the scope and volume of these substitutes would be. Further on, when looking into the fiscal effects, we take into account only macro indicators.

[3]EUROSTAT, Overweight and obesity - BMI statistics, at:  This data refers to 2008.  In 2011 another study (see: ) confirmed the same findings.It is not clear what findings the claims of proponents of the new tax that obesity is an issue exclusively for the healthcare system are based on. Part of the problem consists in the fact that body mass, obesity and the respective indices are most probably the result of the overall caloric content of food and beverages in general and not only of the ones which are foreseen to be subject to the new tax. In relation to that, see the table and sources below.   

[4]See: IHME,  :

[5] NCBI: Prevalence of obesity and overweight among urban adults in Bulgaria:

[6]See: Richard Williams and Katelyn Christ, Taxing Sin, Mercatus Center, George Mason University, No 55, July 2009, at: .  Some energy and carbonated drinks have undergone a change in their sugar content since 2009.