In 2007, it was introduced in Bulgaria flat tax from 10% on the profits of the companies, and in the following year on the income of natural persons. At that time, the current Prime Minister of the country, Plamen Oresharski, was the Minister of Finance.
Many economists and businesses supported this tax reform, as it was associated not only with the unification of rates, but also with a significant reduction in direct taxes. Just a year after the introduction of the flat tax however, the country's economy went into recession. According to everyone, the global financial crisis was to blame. Over the next few years, the economy continued to stagnate without registering a rapid recovery from the recession. The crisis in the Eurozone must be to blame for this.
However, the facts show a completely different picture. In 2010, when the eurozone crisis began, Bulgaria's exports to the European Union grew by 25%, and in 2011 they increased by another 34%, according to NSI data. It is obvious that the effect of the Eurozone crisis on the Bulgarian economy was minimal, if any. This is because the production of Bulgarian enterprises is well integrated in the process of processing products in Europe. In 2012, there was a decrease in exports to the EU by 3.6%, but such a correction is normal after the strong increase of the previous years and in view of the negative effects of public spending savings in the countries of the monetary union, which led to an increase in unemployment and eroded household spending power.
The effect of the European crisis can be found in the sharp drop in investments. Gross capital formation in fixed capital has decreased every year since 2008, when it reached 37% of Bulgaria's gross domestic product.
But investments are not decreasing because of external factors, but because of the contraction of consumer demand in the country. Companies invest somewhere because of the prospects for sales growth. If consumption falls, so does investment.
This is where the influence of the flat tax. To compensate for the decline in direct tax rates, the state has done much in the past few years to increase collections, but has also increased additional costs to businesses and consumers by raising the minimum wage, minimum insurance thresholds and the rates of health and pension payments .
Basically, the decrease of the taxes on profits and incomes is a stimulus for the economy in the short term. The reason is that lower rates on profits support investment and those on income support consumption and saving.
But in the medium term, the multiplier effect of these measures decreases. Thus, some phenomena can be easily explained. The flat tax it was certainly one of the reasons why the crisis in Bulgaria came a year later and for the large influx of investments in 2008.
In the following years, however, it was one of the reasons for the stagnation of the economy. Why? Essentially the flat tax is regressive, i.e. its relative burden on lower-income households and companies is greater than on those in higher ones. Thus, the fiscal policy of the state became one of the factors that led to the growth of poverty in Bulgaria and to the bankruptcies of small and medium-sized enterprises, which in turn caused the growth of unemployment and the decline of consumer demand. At the same time, household savings grew to record levels, exceeding BGN 35 billion, because the low direct taxes do not stimulate spending, at high rates on consumption.
Like the currency board is a rejection of monetary policy, as well the flat tax is a waiver of a fiscal one. The problem is that this way the state does not fulfill its role as an anti-cyclical factor. It does not counteract the negative trends in the domestic market, does not stimulate consumption, does not support small companies, which are the main engine for increasing employment. Instead, the government is teetering on the brink of a budget deficit, looking for ways to realize planned revenues and emptying the fiscal reserve.