Articles ISSN 1313 - 0544

Social security payments, rather than the VAT

Author: Petar Ganev / 21.01.2010
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During the week There was active discussion during the week whether and how to reduce the VAT in Bulgaria: a more drastic 2-percent reduction from the next year or 0.5 percent every 6 months? The news for lowering taxes should sound good, but in case there is an alternative that is far more attractive. If we tear down taxes, then let us focus on the most problematic ones, namely those on labor. 

My focus falls on labor taxes due to the following - taxes on labor fall solely on workers, the taxation on labor continues to be the most burdensome in Bulgaria, unemployment will continue to rise. All this tells us that we must first direct our efforts to this type of taxation. At a time  when unemployment is rising, the best response remains lower taxes on labor. This would mean lower labor costs for employers, i.e. saved jobs. The fact that the tax burden on labor continues to be over 30 percent attracts even more attention.

On the other hand is the VAT levied on consumption and paid by all. Lower VAT could affect prices, but will not save jobs. The price-reduction effect is also controversial - in a smooth reduction of VAT it will perhaps be inexistent, while a sudden reduction to 18% may give some small effect. Either way, the problem facing the country is not prices, but the growing number of unemployed people. 

Trading off labor taxes and VAT is inevitable. It is nice to have lower social security payments and lower VAT, but at the moment this is not very likely.  In 2010, as in previous years, the state will redistribute over 40% of GDP, so that we can hardly expect a sharp setback by the public sector. Lower VAT would mean also less revenue in the treasury, which would most likely significantly reduce the chances for lowering social security payments. Let us not forget that according to the pledged budget for 2010, the government is more willing to accept a small deficit rather than to cut public spending. This means that the choice between tax and social security will be a reality. 

One percent reduction of the VAT rate in 2010 equals (static) to 340 million. Starting from this amount, everyone can play out their scenarios in the 0.5% reduction or 2% reduction in VAT. The fact is that this is a serious amount, which would have far more serious effect if it is directed towards reduction of the social security burden. To this we could add the so-called dynamic effects, which are much more serious in labor taxation than indirect one. Even the most conservative predictions of these dynamic effects, the choice would be between 1% lower VAT and 3 or 4% lower social security burden. If we want more investments, less unemployment and less burden on the workers, the choice is clear.