What We Wanted and Whta We Got

AIM Sofia, October 22, 2001

Only four months ago, young experts from the Simeon II National Movement were boldly promising a new tax policy, adapted to the present reality. Today, now that the new government is about to mark its first 100 days in office and these same yuppies have become part of Simeon of Sax-Cobourg's economic team, reality looks entirely different, at least the part of it directly affecting businesses and individual taxpayers.

The promises of an adequate and consistent tax policy that was to boost economic growth and reduce direct taxes are now a thing of the past. Now it appears that plans for boosting income to increase demand, while causing a surge in investment and economic activity, was merely dust thrown in the voters' eyes.

Under pressure to sign a new agreement with the International Monetary Fund (IMF) and put its 2002 budget in order, the cabinet of Simeon of Sax-Cobourg decided to pursue the same tax policies used by the government of Ivan Kostov. Its visions had to yield to the demands of a concrete budget, and the choice between higher taxes and greater economic efficiency coupled with more purchasing power had to be postponed again.

The government deviated from its campaign promises for the first time during negotiations with the IMF mission. At the start of the negotiations, Finance Minister Milen Velcev was unyielding, but after a subsequent visit to Washington he betrayed almost every promise given to the voters. He said that plans to not charge profit tax on reinvestment would have to be postponed for at least one year, despite the fact that in his inaugural address to the nation, Prime Minister Simeon II announced the project would start on Jan. 1, 2002. The IMF mission, headed by Gerald Shiff remained firm and uncompromising.

Another election promise -- that a public debate on reforms would be held -- had the same fate. Deputy Finance Minister Atanas Kacarov listed some fifty novelties that were surprising, to say the least. The tax reform project contained none of the promised measures for boosting economic growth. There was no reduction of direct tax to increase citizens' purchasing power either. This promise was instead supplanted by a host of complex measures that not only will fail to increase the income of the average Bulgarian, but will even further deplete his already desolate wallet.

Business circles which supported the ruling party because of its reform-minded ideas and platform, now have no reason for enthusiasm. The new tax policy's positive effects are less than few. Corporate taxes are lower for companies whose profit exceeds DM50,000, but only from 28 to 23.5 percent. This was meant to make up for the abandoning of the idea of charging zero profit tax on reinvestment. The deadline for reintroducing VAT is now three instead of four months, but this does not simplify or speed up the procedure. Corporate tax is not charged on the securities' trade, and software exporters are eligible for tax loans. And that is all.

The government has introduced radical measures to curb capital flight -- financial transactions with off-shore companies are subject to a 25 percent tax. "The idea is to keep money from leaking to the off shore zone," said Deputy Finance Minister Atanas Kacarski.

As far as small businesses are concerned, satisfaction with the new measures is equally low. Many fees have been increased, such as those charged for licenses to sell alcoholic beverages and cigarettes. Kacarski said the reason was that many such stores had sprouted, but failed to explain why the government sees this as negative.

Ordinary Bulgarians are not satisfied either, and will certainly not revel in the prospect of spending their extra cash on luxuries. If they survive the winter and manage to pay their higher bills for heating and electricity, in the spring they will have to pay a series of higher taxes -- local, on cars, and some other goods. Their income tax will also go up from 15 to 20 percent, and if they are lucky enough to win in lottery, they will also have to share that with the state, at a higher rate.

Car owners will in the future pay two types of taxes -- one linked to the age of their car (the older it is the less they will pay), and the other for roads. This measure is a typical example of shortsightedness because it is boosting the purchase of used cars. Appeals from car importers that the purchase of new cars should be encouraged given that the average vehicle in Bulgaria is 20 years old, remain unanswered. Therefore, Bulgaria stands a good chance of turning into a car graveyard.

The additional burden should be compensated by a lower income tax rate. The effects of this measure, however, will be minimal because the reduction is 2-4 percent.

After everything it is only logical to ask: how is the loudly announced economic growth to come about? Businesses, obviously, have not been given a singe incentive, and nothing has been done to increase the population's purchasing power. What is it, then, that makes the ruling party's young economic experts any different from their predecessors?

Georgi Filipov

(AIM)