Банкеръ Weekly



FORECASTS COULD HARDLY BE SO GLOOMYThe introduction of an unified rate for all taxes, or the so-called flat tax was one of the hot economic topics, discussed in 2004. Krassen Stanchev, Director of the Institute for Market Economy, was one of the most ardent supporters of its quick introduction. The main argument was that it would bring to the light a great part of the grey economy, encourage the development of production and exports, and result in a two-digit growth of GDP. As of the beginning of 2005, however, the advocates of the flat tax have a serious opponent in the face of the state-run Executive Agency for Economic Analyses and Forecasts (AEAF). Its experts have undertaken to study the effects of introducing the flat tax, but came to conclusions that reject it almost completely. The research was made on the assumption that an unified 10% tax rate is introduced in Bulgaria on the profit, natural persons incomes, and insurance instalments to be entirely paid by employees and workers. Currently 70% of them are undertaken by the employer, and 30% are paid by the employee. The study points out as well that as a result of the introduction of a 10% flat tax for the above-described items, the expenditure side of the 2005 budget would be 7.2% less than the planned one. The analysis points out that it is impossible to assess what part of the grey economy would come to the light. For that reason the effect of the flat tax is completely vague. Moreover, no institution can undertake at present the responsibility to say how much money circulated within the grey economy. Various analysts point out that its turnover is between 40% and 70% of GDP. But nobody can quote specific figures. And without them it is impossible to make any forecast whatsoever about the effect on the grey economy of the flat tax introduction. According to AEAF experts, a 10% flat tax in 2005 would result in a 7% reduction of revenues into the Treasury than projected in the budget. The analysts admit that would encourage consumption, but it would lead to a huge budget deficit as well. They pre-estimate it at BGN2.25BN for 2005 and at about BGN1.4BN during the first three years after the introduction of the flat tax. Logically comes the warning that such a budget deficit would result in a drastic growth of the deficit in the current account of the payment balance. That means that the forex going out of the country will be much higher that the inflow. As a result of these processes the forex reserve is expected to begin melting down and the currency board would be jeopardized. The AEAF analysis underlines that such risks would be undertaken without knowing for certain that the introduction of the flat tax would lead to a two-digit increase of GDP. The agency's experts claim that GDP's growth will continue to be expressed by a one-digit figure. The AEAF points out that the figures for proceeds in its research differ by almost BGN1.2BN from those of the Institute for Market Economy. Government analysts believe their colleagues have over-estimated by 6%-7% the budget's capability to accumulate revenues. They point out that if an unified 10% rate is introduced for the profit tax, income tax and social insurance, in order to achieve a flat budget deficit non-interest expenditures of the Treasury should be cut down by some 20% (about BGN3BN) from the planned amount for 2005, and this target is almost unfeasible. Of course, the AEAF analyses should not be accepted without reservation. It does not make an assumption that the revenue side of the budget could be over-fulfilled. It's a fact that the 2004 budget surplus amounted to BGN1.3 BN. And if that situation is repeated in 2005 and the flat tax is introduced, the budget deficit would not be BGN2.3BN, but only BGN1BN.

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