Economic Policy Review ISSN 1313 - 0544

Tax Breaks: Equal to the Sailors

Author: Velin Peev / 17.12.2009
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"Taxes are as prices - When they are high no one pays them, or one go where it's cheaper."
 - Anonymous

In principle, people are equal (as it comes to law or the state), but again it appears that some are more equal than others. Just this week quite unexpectedly the Parliament adopted the reduction of income tax for the seafaring profession, particularly from 10% to 1% of the income.

The problem, say people from industry and advocates of this amendment, is that traditionally Bulgarian seamen are held registered under flags of countries where they pay lower taxes in the range of 1-2%, and thus the Bulgarian government is loosing millions of tax revenue. The goal of reducing our tax to the same levels (namely 1%) is to make Bulgarian shipping "more competitive", while generating revenue to the Treasury. Seafaring profession even now ask to additional reduction of health and pension contributions for them

First, such preferences provoke extremely acute sense of injustice in society. It is unacceptable that any builder, baker or seller to pay 10% income tax and more than 30% social contributions* to the state, and sailors to pay 1% income tax and lower contributions (if they manage to successfully lobby for it). If it is considered that the tax cuts will make a sector "more competitive" at the international market, let all sectors in the country be made "more competitive" with the equal tax cuts for all.

Another fact that this case makes clear is how high taxes act. Because of its apparent mobility, sailors can very easily select the country where they are registered and that high mobility stimulates tax competition. But there is something that is more mobile than sailors - foreign investment. Global capital can change its destination much faster than the sailors, but for people that is not so visible to the naked eye. It is therefore extremely important that any country creates an environment that will attract business and therefore investments. And as high taxes and social security led sailors to choose Malta or Cyprus, so the same tax and social security prevent much greater investment in Bulgaria. And since the 10 percent flat tax on income in Bulgaria is apparently low level (in comparison to other countries), the biggest obstacle to investment and growth is the level of social contributions. More seriously, however, the reduction goes hand in hand with reform of the pension system, which they finance.

* Massive perception exists that if the employer pays part of the social contributions (18.1 percent in Bulgaria), thus being easier to employee, and therefore often insisted "to increase the portion paid by the employer". This understanding is wrong, because employers make an account just how is the total cost per worker. If the total cost per worker is 1000 levs., for the employer has absolutely no meaning if he give all to the worker without paying contributions, or provide clean 700 and 300 for contributions, or 100 and 900 for contributions.. So the notion that the employer "pays any portion of the contribution, thus helping the worker" is a myth. Money for contributions, which they pay, come from money that otherwise would be paid as salary. Thus, in practice the full weight of the contributions falls on the worker entirely.