Банкеръ Weekly



POLITICAL PARTIES ASSAULT TAXPAYERS BY PROMISING LOWER TAXES. FEW CHANGES ARE POSSIBLE, THOUGHGeorge Walker Bush once said Read my lips - no new taxes and won the elections. Later, it turned out that his promise had been nothing but a political trick. Still, voters were not given a second chance.Obviously, this is what some Bulgarian political parties hope to do now. They already started furious battles on the tax field. The National Movement Simeon II (NMSII) and the Union of Democratic Forces (UDF) are competing to get more supporters by promising tax reductions. Doubtlessly, the lower taxes will become a popular topic of discussion for all those applying for power. There will be a variety of ideas about how the tax reality in the country may be changed. Some of them will be completely inapplicable, others will sound absurd.On the other hand, there will hardly be someone brave enough to admit thatBulgaria has no chance of becoming a tax heavento those who pay their taxes to the treasury regularly. No one will confess that there are limits for the tax policy manoeuvres. For example, who would dare explain how much the European Union membership will cost and say that this price has to be paid by the Bulgarian taxpayers? Or who will ever admit that the coming excise duties will stop consumers from enjoying the BGN5 or BGN10 they would save from the reduction of the income tax?Of course, explanations of the kind will never be given in the pre-election platforms of the parties. The future tax slogans will rather be remakes of ideas already proposed.That the Government is ambitious to become a kind of benefactor to the real sector and the ordinary taxpayers became clear from the recent statements made by the Minister of Finance Milen Velchev.Surprisingly, he became a defender of the idea to reduce the taxes abruptly. He personally initiated the 2005 tax revolution campaignwhich stipulated reduction of the current 15% tax on profit (down to 10% at most), and reduction of the value-added tax (VAT) rate from 20 to 18 per cent. He also proposed to introduce a single tax rate for the income of individuals and to reduce the insurance burden now endured by employers without additionally burdening the workers. Currently, employers and workers pay health and pension installments in a 70:30 ratio.Then the UDF accused the Minister of plagiarizing its ideas to reduce taxes announced in public back in the summer of 2004. In fact, UDF's irritation is reasonable as the party brought officially similar proposals to the Parliament last August. Later, in December, the UDF defended its tax law proposals again when the 2005 tax rates were discussed. Anyway, the Minister has not yet replied the accusations. Because it is clear that there are not so many logical alternatives for tax reduction. Or maybe because it is not worth uncrowning something that will certainly never become true, especially before elections.In fact, this is the key to the present tax arguments. Minister Velchev will hardly start fulfilling some of the tax proposals before the elections to give his party an advantage.Experts not engaged with the authorities comment that the tax revolution will be postponed once again. Despite his post in the executive power, Milen Velchev will find it very difficult to convince his party fellows and coalition partners of the need to make tax reforms, experts from the Institute for Market Economics (IME) claim. The pessimism of the experts is maintainedby the fact that similar reasons led to forgetting other tax promises that the NMSII gave before the 2001 elections. The movement committed itself to introduce a zero rate on reinvested profit, carry out fiscal decentralisation and reduce the social security burden to workers and employers. Still, IME experts claim that the proposed changes may be adopted quickly and easily, especially considering the expected surplus in 2005. According to the plans as of summer 2005, the treasury will have a surplus amounting to BGN800MN which will be a considerable reserve for possible tax reductions in the future. The reductions are also possible due to the surplus accumulated in 2004. It reached BGN1.3BN which was 3.3% of the GDP. However, the Government is spending that money for everything but tax reduction which, according to the economic rules, makes this tax grow higher. The cabinet allocated BGN263MN for hospitals, schools, and roads, BGN315MN for small infrastructural projects, BGN340MN for the state-owned Public Investment Projects company, as well as certain amounts for extra salaries and pensions. The BGN115MN that remained were added to the fiscal reserve.It turns out that Minister Velchev's financial experts consider direct spending a better solution compared to the long-term effects on the economy that might result from the tax reductions. That the surplus money is actually taxpayers' money is also often repeated in public. Anyway, since there is potential for tax reduction, it is logical that it will happen. But whetherthe low taxes will be the dessert in NMSII's rulingor will give a flying start to the next government is another question.Most probably Minister Velchev will still try to reduce the VAT rate to 18% before the elections, because that will not be a risky move. As it is known, the VAT is a kind of a budget prize source. For example, in 2004 it provided 39.2% of all revenues to the treasury as well as nearly 46% of the tax revenues. Moreover, the overfulfillment of the tax collection rate compared to the 2004 budget forecast is 116.6%, whereas it was 105.4% in 2003. Of course, the rulers consider these figures an achievement of the tax administration in its fight for defeating VAT chains and P.O. Box companies. However, the truth is that the record high revenues were due to a large amount of imported goods resulting from the banks' crediting expansion.The potential 2% reduction of VAT will not reflect on the budget since the treasury enjoys a stable trend towards increasing the excise duty cash flow. The collection of excise duty revenues was overfulfilled by 107.7% in 2004, compared to 102.8% a year earlier. The higher revenues are mostly due to the growing prices of tobacco products and the record leap of fuel prices on the international markets.In the future, the treasury will enjoy stable and growing excise revenues. There will be additional BGN40MN-BGN50MN in 2005 alone, official Government plans indicate. Still, significant excise increaseis expected in 2006. Once Bulgaria joins the EU in 2007, excise duties will also be imposed on imported electricity, natural gas and coals. It has been calculated that by 2007 the direct increase of gasolene and diesel prices alone will reach 20-30% and that will pump the inflation by 5 to 6 per cent. As of 2010, excise duties on cigarettes will cause a real price tsunami for the taxpayers but will also ensure gigantic revenues to the republican budget.The alternative (less probable) pre-election reduction concerns the tax on profit which is 15% in 2005. If the Bulgarian rate falls down to 10%, the country will rank among those with the most attractive taxation in Europe.

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