EKIP– Expert Club for Economics and Politics A Different Opinion
Last week, the Confederation of Bulgarian Trade Unions (CITUB) announced a proposal to restructure the tax system in Bulgaria, which includes 9 measures for “fairer” taxation. Of course, coming from their side, “fairness” means an increase in the tax burden. The unions are proposing a number of reforms to the system, most of which are the introduction of new and increases in old taxes – a “wealth” tax, a financial transaction tax, a “digital tax”, along with a non-taxable minimum.
With these proposals, the Confederation of Bulgarian Trade Unions not only ignores the immorality and harm of the new taxes, but also shows ignorance of the principles of taxation. The unions propose increasing the tax on dividend income (the so-called "dividend tax") from 5% to 10% "in order to follow the same logic as that of corporate taxation."
Dividend tax and double taxation of businesses
Dividend tax, as it is better known, however, has a completely different meaning from corporate taxation. It is a tax on the income of individuals. It is applied in parallel with the corporate tax and is regulated in the Personal Income Tax Act (PITA).
The basis for this tax is the funds distributed as dividends as a result of ownership of shares or stocks. These funds are distributed from the company's net profit. Before the distribution, however, the profit is already taxed at 10% corporate tax. The additional taxation of dividends with a 5% tax results in the same money being taxed twice. This double taxation means that the final amount received by the shareholders is already taxed at 14.5%.
As a result of the CITUB proposal, shareholders' income would be taxed at a total of 19%. It is not clear where the logic here is the same as that of corporate taxation.
A proposal without any economic logic
The logic of the unions is also missing in their attempt to defend the proposal. The President of the Confederation of Bulgarian Trade Unions Plamen Dimitrov is trying to push the ridiculous thesis that by taking more money from the dividends of the owners of capital, they will have more motivation to reinvest the money, instead of distributing it. This, of course, is not a valid argument, since the ultimate goal of investors is to get money for themselves. By taking additional money from them, not only will we not increase investments, but on the contrary – we will demotivate them to invest in the first place.
Another argument of the Confederation of Bulgarian Trade Unions in defense of an increase in the dividend tax is that company owners prefer, instead of paying high salaries to employees on whom over 30% taxes are due (in the form of personal income tax and social security contributions), to report low salaries and hand over the remaining amount from their personal profit from dividends, taxed at 14.5%. This is, of course, a problem. But it is not a problem of taxing dividends. And it will not be solved by increasing the tax. The motivation of employers and employees to pay in the gray sector comes from insufficient control, as well as from the too high tax burden for the ordinary worker.
In addition, this measure from the trade unions' program would not have the desired effect. Revenues from dividend tax in the state budget are less than 70 million leva per year. Even if we assume that these revenues were to double, they would not have a significant effect on the treasury and would not achieve the trade unions' goal - to fight inequality through more redistribution of funds from the state.
The proposal has completely the wrong focus
And here again we see the wrong focus of the unions. It should not be a fight against inequality for its own sake. People with low incomes will not live better if the state takes more of the money of people with high incomes. The only way to increase their well-being is to create conditions for economic development and new investments in the country. And for this, a stable, predictable environment for business is necessary. Because investors are not attracted only by low taxes (as we see from the data for Bulgaria), but by the ability to predict them.
Over the past decade, taxes in our country have been increasing almost annually. Another one, proposed by the Confederation of Bulgarian Trade Unions, would clearly prove the uncertain situation for business and would continue to drive investors out of the country. The tax system should stimulate investment and entrepreneurship, and taxation of dividend profits has the opposite effect - it punishes people for taking risks and investing.
An option to stimulate investment, increase people's well-being, and increase economic stability is not to play with a dividend tax, but to eliminate the corporate tax on companies' retained earnings, which is the reform we proposed from the EKIP.
