Bulgaria DOES NOT have the lowest taxes in the European Union

Author: Stefan Stoyanov

It is widely believed that Bulgaria has the lowest taxes in the European Union. This perception is formed by comparing the rates, especially of Corporate Tax and Income Tax, with the corresponding rates in countries such as Germany or Denmark. However, neither these countries are representative of the entire European Union, nor is the tax burden formed solely by these two taxes.

The opinion about the lowest taxes in the EU is reinforced among people by the constant repetition by the government that this is true. The latest statement came personally from the Prime Minister, who confirmed this perception in the context of the topic of excise duty on smokeless cigarettes.

To verify whether this general understanding is a fact, we must, of course, turn to statistics. What do they show?

Bulgaria DOES NOT have the lowest tax burden on workers

The taxes that concern most people are those that are directly taken from their income each month. The real tax burden that each of us bears includes social security contributions (those "at the expense of the employer" and those "at the expense of the employee"), income tax, and value added tax.

The Belgian Institut économique Molinari (IEM) has compared the real tax burden in the 28 EU countries. The results of the comparison, depicted in Chart 1, show the following – workers in Cyprus, Ireland, the United Kingdom and Malta are taxed less heavily than those in Bulgaria.

In our country, the total income tax is calculated at 38.39%. For comparison, in Cyprus it is 23.40%, and in the UK – 35.08%. Denmark, known for its high taxes, has a slightly higher tax burden than ours – 41.41%.

Chart 1. Tax burden of an ordinary worker in EU countries for 2017.

Source: „The Tax Burden of Typical Workers in the EU 28—2017“, Institut Économique Molinari, Paris‐Bruxelles, July 2017

Everyone can check their personal tax burden on the website developed by IME https://www.kolkodavam.bg/.

Bulgaria DOES NOT have the lowest VAT

Another widespread misconception is that we pay the lowest value added tax here. This is again not the case. Chart 2 shows a comparison of standard VAT rates in EU countries. Five countries have lower value added tax rates, and another five have rates equal to Bulgaria’s – 20%.

Chart 2. Standard VAT rate for EU member states as of January 1, 2018.

Source: European Commission

But the standard rate does not show the whole picture of taxation. Bulgaria (together with Denmark) is the country with the lowest tax rate differentiation – the only reduced rate in our country is that of hotel services – 9%. In all other EU member states, reduced rates are applied to different categories of goods, which makes the actual taxation even lower.

Here are a few examples: Belgium – 6% VAT on food, pharmaceuticals, books, etc.; Germany – 7% VAT on food, social services, passenger transport, etc.; France – reduction to 2.1% VAT on food and pharmaceuticals, up to 5.5% for books and water supplies, etc. For various goods and services, rates can be reduced to 3% in Luxembourg, up to 4% in Spain and Italy, 5% in Hungary, the UK, Ireland, Romania, and others.

Bulgaria DOES NOT have the lowest corporate tax

Our corporate tax is indeed one of the lowest in the European Union, but, again, there are lower ones. Since 2017, Hungary has introduced a 9% corporate tax rate. However, Estonia offers the lowest rate. There, since 2000, the corporate tax on retained earnings has been 0%. In the Baltic state, tax is levied only on the part of the profit that is distributed to the owners.

Taxation of companies in Bulgaria has another dimension, besides corporate tax. Business is taxed with a large number of fees, which are defined by experts as “hidden taxes” because they do not meet the requirement to be in an amount that covers costs, but are many times larger. The Chairman of the Bulgarian Economic Chamber – Bozhidar Danev estimates the amount of these hidden taxes paid in 2016 at over 1.2 billion leva to the state budget and another 1.2 billion leva to the municipal budgets, which is more than the state revenues from corporate tax. According to information from Danev, confirmed by the then Prime Minister Ognyan Gerdzhikov, for the period 2014-2016. the increase in these fees was 40%, and in 2017 over 7%.

Bulgaria DOES NOT have the lowest excise taxes

In recent weeks, the debate over excise taxes on tobacco products has been raised again – this time on the taxation of smokeless cigarettes. But what about regular cigarettes?

In its report on excise duties in the EU, the European Commission calculates the tax rate on cigarettes using the following formula:

When comparing this coefficient among EU member states (Chart 3), it is seen that Bulgaria not only does not have the lowest taxation, but on the contrary – it is among the highest – 68.69%. Only 5 countries have a higher rate than the one applied in our country.

Chart 3. Excise duty on cigarettes for EU member states as of January 1, 2018.

Source: European Commission

The EC report on excise duties also includes a comparison of alcohol taxation. The Commission publishes the standard amounts that are taxed per 1 hectolitre of alcohol. These amounts are fixed in euros, but for the purpose of comparing them between countries, they are equated in Chart 4 using purchasing power parities. It can be seen that six countries have lower taxation than here.

Chart 4. Excise duty per 1 hectoliter of hard alcohol (in euros, equivalent to Bulgarian purchasing power)

Source: European Commission

In summary, statistics show that taxes in Bulgaria are not the lowest in the European Union. The constant repetition of this statement shows either ignorance of the data by country or a purposeful insinuation that they cannot be lower.

And whether taxes can really be lower depends on the ability to form a state budget, on the control of state spending, and ultimately - on political will.

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