VAT and Social Security in Bulgaria
During the last few days tax issues took again central place in the mass media. Proposals came about reduction of VAT from 20% to 18%, for a significant reduction of VAT on the bread, lower social security payments etc. The best part of it is that all positions are in the direction of reduction of one or another tax, in other words the people are apparently beginning to comprehend that half of what they earn or create at the end of the day is taken away for the "common good of society". Naturally there was another opinion to increase the social security burden, but the author sounded so mixed up that it caused more smiles than sensible comments
It is apparent that the Government is redistributing a very large portion of our wealth (over 40%) and the fact that we generate record breaking budget surpluses speaks for itself. It comes out that regardless of how easy the Government is spending our money it could not spend everything that has been taken from us. This is leading us to the main question: Well, obviously the taxes should be lower, but where do we stat?
Actually we have already started and now we are happier with the 10% corporate tax and 10% personal income tax. These rates are liked by the people, firstly because they are low and second – they are easy to remember easy to calculate and easy to accept. Thus, the issue remains with the other basic forms of taxation: the indirect taxes (VAT and excise tax) and the social payments. With the excise tax things are very tightly connected to the EU and we have to go into the direction of increasing rather than decreasing, so we will not comment on it. Naturally, our Government could comment on them at the European level, but for the time being it prefers mainly to listen and much less to advise the Europeans.
Thus what remains are the VAT and the social security payments. In our case we are talking about reducing VAT on all goods and services (to 18% for example), not only about bread, which would be a very inappropriate measure. Such preference would not only bias the market, but would have a negative effect on the stimuli and expectations in the economy. Immediately there would be pressure for lower VAT for some other goods and services, in other words other sectors would like to get preference or to use the already existing one. To put is simply, with respect to the VAT or the social payments, every change must be in force for all, not only for specific subjects or sectors.
What is the difference between VAT and the social payments? In the first case taxation is indirect (VAT), in other words you are taxed only when you consume (for example when you are buying certain goods). In the second case the levying is direct (social payments), in other words we pay when we receive income. In the second case we have no choice, while in the first if we could reduce our consumption it would not be levied on the savings. Actually the direct taxation do leads to lower savings, less innovation and lower standard of leaving as compared to the alternative, where the savings are not taxes. In other words, taxing labor creates a tendency to consume at the moment, thus reducing savings and future consumption.
One should not forget that taxation of labor (social payments + income tax) is much higher than that on consumption (here we do not include goods with very high excise tax). With the revenues to the budget things are different, but that could be explained by the fact, that taxes on consumption are paid by everybody, while the taxes on labor are paid only by the working, or about 1/3 of the population. Thus, if we have to choose between VAT and social payments at present we definitely have to pay more attention to the social payments.
Clearly the current state of the country allows reduction of both social payments and VAT. However, keeping in mind that the Governments rarely make radical changes in the tax system, it is more likely to witness the reduction of just one of those two taxes. In our opinion lower taxation of labor is a greater challenge to the fiscal policy in Bulgaria; hence the social payments would be prioritized.
