The Security Burden is the Biggest Issue Before Business and Citizens

Paying social security charges is considered to be the highest issue before business and citizens. This hypothesis has been confirmed and sustained in several research projects of IME and other NGOs ( link ). However for the time being the social security burden has not been recognized as an issue of high priority and therefore no significant reforms have been planned. The state owned ‘National Center for Study of Public Opinion' revealed additional facts regarding the scale and the scope of the problem interviewing 800 working adults. According to this survey only 41% of employed in the private sector fully comply with social security payments, at the same time 22% declare to work without a contract. This actually means that 59% of employed in private sector at least partially conceal their incomes.

Conclusions and effects :

1/ IME experience shows that when respondents are directly asked whether they comply or not to tax and social payments answers might be misleading because people are afraid to respond. For this reasoning I believe that the result of 41%, which fully pay social payments, might be overestimated and should be considered as upper threshold of compliance in the private sector.

2/ So I can generally argue that the scale of non compliance is huge. Currently, social security payments are the highest “tax” (42% of the gross wage) and imply the chief burden in environment. My argument to consider social payments as taxes is that there is no direct link between the size of payment and received services.

3/ For instance if firms pay profit tax and then tax on dividends (21% all together) they can afford paying higher net salaries and can save some money, which makes this option preferable for both employers and employees because the former lower their costs and the latter increase salaries.

4/ The important issue is what would happen if the government decision is to cut social security payments to 10%? If 90% of employees decide to comply revenues would decrease only twice while the social security burden cut is four times (this estimation relies on data from the survey of the ‘National Center for Study of Public Opinion'). Besides, there would be strong positive effect on business activity that will increase the tax base and subsequently collected revenues. Environment would be inductive for higher economic growth and increase in employment.

5/ There are a lot of people in Bulgaria, which argue that social security cuts would not lead to improvement in tax collection. Their main argument is that it is a question of mentality not to pay taxes. However they miss the point that operating in the ‘shadows' is expensive. Informal firms have worse financial standing before the banks, which increases the interest for financing activities. Moreover contractors and clients are also obliged to perform ‘informal activities', because a firm cannot issue invoices for ”inexistent operations”. It is generally expensive to conceal incomes because it requires payments to highly qualified accountant and recruitment and maintenance of fake documentation. An informal firm should also consider the risk to be penalized by tax authorities, which comes to be an additional cost.

Informal operations influence the organizational structure of a firm. Managers and employers are personally involved in all stages of production because it is difficult to control without official records. It hinders specialization and flexibility. We should also bear in mind that informal operations exclude firms from receiving so-called public services like state contract enforcement.

The above reasoning gives me grounds to argue that firms (or at least the majority of them) will be willing to pay 10% social security payments and to formalize their activities because that will be less expensive than non-compliance.

The survey of the ‘National Center for Study of Public Opinion' is an additional argument that social security payments are the more pervasive and damaging burden in Bulgaria. Therefore prospective measures should aim large-scale effects. All tailor-made shortsighted decisions will not be able to improve existing constellation.