Economic Policy Review ISSN 1313 - 0544

Tax Freedom Day… late during the crisis

Author: Petar Ganev / 08.02.2010
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June 1 2010 is the day on which we will stop working for the state and start working for ourselves - more precisely at 16 hours and 23 minutes on Tuesday (1 June 2010). In 2010 Bulgarians will work for 5 months to pay various taxes and duties, i.e. to fill state treasury. The so-called "Tax freedom day" in recent years occurs at the end of May but in 2010 it will move to June.

The methodology for calculating this symbolic date is relatively simple - comparing the state budget revenues to GDP. We analyze revenues rather than expenditures, because the former show what is being confiscated from individuals and businesses throughout the year. In 2010, the Bulgarians will earn an average of 174 million per calendar day, measured by GDP expected (budgeted 2010).Therefore, in 2010 almost 152 days are necessary to earn 26.4 billion revenue in the budget. For comparison, last year we worked 3 days less to fill the treasury.

The Tax freedom day answers the following question: "What is the price that citizens pay to the state?" This day is a kind of indicator of the state's role and degree of redistribution in the economy. The later in the year that day comes, the greater the size of the state and respectively - the taxation of businesses and citizens in the country. 

Despite the reduction of certain direct taxes in recent years, the redistribution in Bulgaria is still relatively high - over 40% of GDP. This redistribution is financed by various forms of taxation, which, only taken as a whole give us a precise idea of government intervention. The state does not burden us only through direct taxes and fees - such as profit, income tax or garbage fee. Most of the budget revenues come from social security contributions and consumption taxes (VAT, excise, customs duties). Actually, we work the most in order to fill in VAT revenues - 39 days,  then social security - 29 days, and excise - 26 days. We pay direct taxes relatively quickly, namely income tax - 11 days and corporate tax - 10 days. 

How it is done in the world? 

The Tax freedom day is being celebrated in many countries around the world. Due to differences in the methodologies it is quite difficult to make comparisons between countries. However, we are giving only a few examples * to illustrate Bulgaria's position. Some of the countries celebrating Tax freedom day earlier are the U.S. ** - 13 April, Australia - 22 April and Estonia - 24 April. The countries celebrating in May are Britain - 14 May, Spain - May 21, and Brazil - 27 May. In June: Belgium - 8 June, Czech Republic - 11 June and Croatia - 13 June. The latest, in July, the ones celebrating are Germany - 8 July, France - 16 July. Sweden and Norway - 29 July. 

In countries where the Tax freedom day occurs relatively late, it is normal for people to get more from the public sector, whether in the form of services, transfers (social benefits), etc. This is a typical example of Scandinavian countries. In this respect Bulgaria is falling behind significantly because on the one hand it confiscates a large portion of people's wealth, and on the other, it is not providing satisfactory services and / or results - whether in the form of pensions, security, education, health care or roads. 

The sooner, the better 

The larger size of the state is associated with lower economic growth, because redistribution leads to less economic efficiency of resources used in the economy, and it is common for the state to finance projects of questionable economic feasibility and benefits to the society. Subsidizing loss-making enterprises and public sector activities are de facto paid for by the workers and businesses, which at the same time can put their money in profitable activities to add value in the economy and create jobs. 

High state redistribution reduces the incentive for people to work, take risks, to invest and create wealth, and hence economic and income growth are reduced. 

Despite numerous reforms and changes in the course of economic policy in recent years, state intervention in people's lives does not decrease. The tax burden remains at relatively constant levels, which means that a tax reduction over the years has always been compensated one way or another. Tax exemptions and tax preferences to certain groups of society are not only fair, but they reflect directly on other social groups that fill in the holes. The data clearly shows that the redistribution processes in the country rapidly acquire new forms and dimensions. 

How can we celebrate Tax freedom day earlier? 

We believe that the Bulgarian economy can be developed much faster following the principles of freedom, entrepreneurship, individual initiative, free and competitive market. These ideas are expressed by limiting state intervention in the economy. IME's specific proposals include:

  • Serious reduction in social security burden in the country - still at around 30 percent;
  • Achieving real fiscal decentralization, in which mayors have the power not only to increase and reduce local taxes, but to cancel old or creating new once. The transfer of direct taxes (income and corporate) to the local authority is also an interesting alternative in the medium run;
  • Introduction of zero tax on reinvested profits, the abolition of dividend tax and tax reductions for Sole Proprietor from 15% to 10%.

All these proposals, however, must also go together with a reduction in the expenditure side of the budget through privatization of state enterprises, streamlining of the administration, reform in health and social insurance - switch to a capital pension scheme (personal retirement accounts) and dismantling of the monopoly of the health fund, the introduction of private health funds and allowing private deals in the system. 

If all this happens, it could be expected that the Tax freedom day will come as early as April.

* Examples should be treated with reservations because of different methodologies and data for different years 

** Take into account the state revenues rather than costs. Currently, the U.S. spent more than collected in the form of taxes (and therefore have a huge deficit), but this does not affect the date in question. If we look at the expenditures, the Tax freedom day in the U.S. and Bulgaria will be comparable.