Three fiscal ideas for Budget 2020

With the arrival of autumn comes the budget season in the country. The draft budget for the next year (or at least its final touches) is always prepared in October and published towards the end of the month, and every time we at EKIP evaluate it ... with great disappointment. This time we decided to take matters into our own hands and propose some fiscal measures that would improve the quality of the government's policies for the coming year.

It is high time for the government to stop irresponsibly spending its fiscal surpluses and invest them in policies that can stimulate sustainable and long-term economic growth in Bulgaria. Such policies are especially needed now in view of the inevitable approaching recession in Europe, which is already manifesting itself in countries such as Germany and Italy.

1. Raising the ceiling for VAT registration to BGN 250,000.

Small businesses are crucial to any economy. Although individually small businesses are insignificant compared to large companies, together they form the foundation of Bulgaria's economy. Many politicians often complain that small businesses have a hard time competing with the big corporate giants coming from the West, and the state should do more to support them. Well, this is the easiest way for the state to do something about it.

Businesses are always most vulnerable when they are in their earliest stages of development. It is in these early stages that the burden of taxes and their administration is felt most severely and can cause the greatest damage and even lead to bankruptcy. If we want to see more Bulgarian entrepreneurship, the easiest way to stimulate it is to lighten the tax burden that the state imposes on it precisely in the most vulnerable early stages of development.

If the state starts taxing businesses only after their annual turnover exceeds 250,000 leva, this will allow them to grow undisturbed, at least in the initial stages of their existence. This, in turn, will lead to more businesses being started and more of them surviving beyond the initial "small" stage of their existence. There is no need to worry about the effect of such a reform on the state treasury. First of all, since this only applies to businesses with a small turnover, the losses to the budget will not be serious at all. Moreover, these temporary losses will be compensated in the long term due to the increased economic activity that the reform will lead to.

2. Abolition of corporate tax

The abolition of corporate tax is a reform that we at EKIP proposed last year, with the publication of Stefan Stoyanov's analysis on the topic " Proposal for corporate tax reform in Bulgaria - 0% rate on companies' retained earnings ". As we explained then, there are several very serious problems with corporate tax - it is unfair, inefficient and hinders economic development. Companies in our country are victims of double taxation on profits. What we call "corporate" tax is the withdrawal of 10% of their retained earnings. Beyond that, however, there is also a tax on distributed earnings ("Dividend" tax), which is 5%.

It is unfair to have both taxes because retained earnings are not actually income for anyone. The individual owners of a business only benefit from its profits when they are distributed. Therefore, there is no point in taxing them before that point.

The part of the profit that is not distributed to the owners is reinvested in the business - this helps its growth and leads to more jobs and higher activity in the economy. That is, when we tax retained earnings, we punish businesses for investing - a clearly economically destructive policy.

And after all, what is the point of such a complex system when corporate tax revenues are only about 5% of total tax revenues and less than 2% of GDP? Absolutely insignificant amounts – for comparison, the budget surpluses that the treasury has been regularly accumulating over the past few years were not much lower than the revenues from this tax. This shows that the tax is extremely inefficient and the treasury would lose almost nothing from its abolition.

Big businesses are apparently finding a way to largely avoid it, and currently its burden falls mainly on small and medium-sized enterprises. Accordingly, its abolition would provide another incentive for the development of small and medium-sized businesses. In addition, the experience of Estonia (where corporate tax was abolished back in 2000) clearly shows that such a reform does not lead to a decline in tax revenues, but rather to higher economic growth and, hence, higher revenues for the treasury.

3. Pension system reform according to the Swiss model

Another reform that the EKIP has been calling for for some time. As we have repeatedly said - the state pension system is practically bankrupt. If we want the current young (and future) generations to have hope for a decent retirement, the system needs urgent reform. As we proposed in our " Pension Reform for the Young ", due to demographic trends, a transition to a system in which every working Bulgarian is insured in an individual pension account, which is invested with the aim of preserving and increasing the value, as private funds operate.

The first step towards such a reform is to reduce contributions to the Pension Fund (to the National Social Security Institute) by 5% and double contributions to private mandatory funds from 5% to 10% of the insured income. Unlike the state pension fund, private funds, for the last two decades since they have existed, have at least managed to preserve the purchasing power of insured persons and generate some profitability beyond that. However, the savings that accumulate in them are too low for citizens to rely on them at retirement age. Therefore, a strong increase in contributions is necessary, which will be compensated by a reduction in those to the state fund. This will avoid a deterioration in the business environment in the country and damage to the income of workers.

We call this "Swiss-style reform" because, as we have previously written, in Switzerland, private pension funds have a greater weight in insurance than the state. The greater influx of contributions to pension funds will also help with the development of financial markets in Bulgaria, because these funds are the main large institutional investors in the country. If we want to help the development of the capital market and business in Bulgaria, this is one of the easiest ways to do it.

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