It's high time we abolished the interest tax

In 2013, GERB introduced one of the most dangerous and illogical taxes – the “interest tax”. The introduction of this tax was also strange from a purely political point of view, because at least in theory a right-wing party should do everything possible to reduce the tax burden on households and businesses. In 2014, the 42nd parliament voted to reduce the tax rate to 8%, with the tax expected to be reduced to 6% in 2015, 4% in 2016 and to be completely abolished in 2017.

In the next parliament, however, GERB attempted to return the tax rate from 8% to 10%, which then did not happen thanks to the votes of the RB. Although the revenues from this tax constitute a small part of state revenues, it sends a negative signal to households, businesses and potential investors. Moreover, from a purely ideological point of view, it does not tie in with the economic policy that a right-wing party should lead.

Why was this tax introduced?

When the tax was introduced in 2013, the government put forward several illogical theses in its support. The most widely circulated thesis in defense of the tax was that it would primarily fight the deep social inequalities in society. Even then, it was not clear what kind of inequality could be at stake given that neither the poor nor the rich paid this tax, that is, we have complete equality. The thesis circulated in defense of the new tax was that it would primarily affect wealthy people, not the poor. That is, the state was completely consciously creating social inequality without any such inequality having existed before. Another widely circulated thesis was that this was the first step towards a European banking system. However, in reality, this tax was introduced for two main reasons.

First, so that more revenue can enter the state budget, which the state can spend. This is a frankly socialist economic measure - higher taxes in order to increase public spending. Another reason why the state imposed this tax was that at that time there was deflation. Deflation is an economic phenomenon that the state hates for a number of reasons. First of all, deflation makes it more difficult to pay off the state debt. Falling prices cause consumers not to consume now, but to postpone their spending until the future, when they expect prices to be even lower. This, in turn, reduces consumption and hence VAT revenues in the budget and leads to a decrease in GDP in real terms.

The introduction of this law was intended to partially reduce the negative effects of deflation on the economy by stimulating consumption. This is naturally a measure that is a gross interference in market economic processes, in which the state should have no place. From a purely ideological point of view, the reasons why this tax was introduced have absolutely nothing to do with the right and represent left-wing politics. This tax damages households by about 80 million leva per year. Money that instead of the state spending in an extremely inefficient way through public procurement could remain with the people and they could decide for themselves what to do with it.

Tax "interest" harms economic growth

Another important conceptual problem with the “interest tax” is purely economic. This tax directly reduces the disposable income of households and businesses. In this way, the state sanctions economic counterparties for generating savings. The amount of savings in an economy is of fundamental importance for its future development. The more savings there are in an economy, the more resources entrepreneurs have available to use to implement their investment projects, through bank financing or investments in equity.

The generation of deposits in the banking system naturally reduces the cost of loans for future investment projects. Low interest rates stimulate businesses to initiate the implementation of new investment projects, which in turn can lead to economic growth, higher employment and increased incomes. This law forcibly and non-market-based forced many people to spend money instead of generating deposits in banks through their savings.

The current context makes this tax completely unnecessary.

In 2012, the government expected to collect about 160 million leva per year from this tax, but that didn't happen either. Banks managed to come up with extremely innovative ways to save their clients this tax. So, from this point of view, the existence of this tax is illogical.

At the moment, the economic and political situation has nothing to do with the situation at the time of the introduction of the interest tax. We already have inflation, and the rulers brag in the media every day that the state budget is operating at a large surplus and we are achieving record increases in tax revenues due to the more effective fight against smuggling. If all this is true, then these approximately 80 million leva are an insignificant amount compared to the entire republican budget and GERB will be able to rehabilitate itself at least partially in front of the right-wing voters by simply abolishing this harmful, illogical and ideologically inconsistent tax.

Image source: Dariknews.bg

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