REVIEW #12: Against the Flow: Can Bulgaria Survive Progressive Counter-Revolution in Labor Taxation?


During the late 1990s and most part of the 2000s, Central and Eastern European countries reformed their tax systems with two key characteristics: reducing the relative burden of direct taxes and – probably more distinctly, at least for the rest of the developed economies – introduction of single personal income tax rates.

The last decade, however, saw a policy shift in the opposite direction – the so-called “flat tax” was undermined by various adjustments or abolished altogether in the region.

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While some observers focus on income tax rates alone, the broad picture necessarily includes all other levies on labor, along with self-employment.

As a deeper look reveals, the composition of the tax base, the structure and size of various deductions, allowances, or exemptions, as well as the types of income that are subject to tax or different social security and health contributions play, in fact, an even more important role in determining the actual effective tax burden.

At the same time, Bulgaria stands as an odd case of a country which changed the ruling majorities several times, but maintained its tax structure for labor incomes relatively intact for more than a decade. From the point of view of the discussion on the future tax policies in Bulgaria, the following overview of different recent reforms in other countries and their impact might provide some useful lessons.

How the Flat Tax Was Introduced and Preserved So Far in Bulgaria

A brief overview of the history of Bulgarian tax reforms might be helpful. In the late 1990s, Bulgarian businesses and workers faced corporate and personal income tax rates at around 40% each, with the social security contribution rate totaling 37% for the most common types of employment.

Since 1999-2000, the policy direction shifted towards a reduction of rates, combined with measures to increase tax base and compliance. The corporate income tax rate was gradually reduced from 32.5% in 2000 to 15% in 2016, and finally – to 10% in 2017, where it has remained since.

Social security contributions were reduced by 9 percentage points between 2005 and 2017, and the top marginal income tax rate was reduced from 40% in 2000 to 24% in 2007.

The step to introduce a single-rate personal income tax was the logical next step. It should be noted that it was a part of a wider set of tax changes, which in effect broadened the tax base while reducing rates.

For example, since 2002, Bulgaria has applied a system of minimum social security thresholds differentiated by the type of activity and employment to combat undeclared work1. These thresholds were raised on average by almost 90% between 2007 and 2010. The minimum threshold for self-employed was raised by more than 60% in 2010 alone.


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1 A common practice in the 1990s was to have all workers in a company employed at the minimum wage and pay additional amounts in cash, thus avoiding social security and tax payments. The system of minimum threshold by occupations and economic activity effectively made employers pay social security (all contributions including healthcare) based on an income level pre-determined by the administration, which was typically higher than the minimum wage.