SYNOPSIS OF THE FLAT TAX RATES IN THE REGION OF SOUTH EAST EUROPE – SEE

SYNOPSIS OF THE FLAT TAX RATESIN THE REGION OFSOUTH EAST EUROPE – SEE Contributors: Prof.K.Petkov, University of Sofia, Bulgaria, kr.petkov@unwe.eu Asst.Prof.A.Vladikov, University of Plovdiv, Bulgaria, avladikov@gmail.com Presented by: Prof.K.Petkov, University of Sofia, Bulgaria 01.09.2008 Budapest, Hungary

Introduction 1. Origins: ISCOS/EU project for CEE TU’s; FES Round table 2. FTR model- mainstream of taxation reform in CEE :leaders and followers; 3. Impacts on social partners: lack of experience; deficit of information; 4. First effects on budget revenues, investments, income distribution etc. 5. Informal Economy Trap- FTR as a response; 6. EU position: ambiguous; mixed.

The Idea Behind Taxes • A rational person (or enterprise) will try to generate more money (incomes, or sales) from a certain “Present Value-PV” to a certain “Future Value – FV” for a certain period /Graph-1/. • However, the role of a state is to distribute national wealth, so that the overall standard of living of all individuals is higher and they enjoy greater levels of happiness. • Distribution of wealth in most countries around the world is according to the so-called “Progressive Tax Systems”, that is tax systems with “Income Tax Brackets” /ITB/- “the greater the generated income, the greater the level of taxation” /Graph-2/.

The Idea of the Flat Tax • Flat Tax – an economic agent (individual or legal entity) is taxed at just one rate – a Flat Tax Rate /FTR/; • A FTR may be applied to “Personal Income Taxes” /PIT/ and “Corporate Income Taxes” CIT/; • If two economic agents – (A) and (B) started from the very same level (Present Value –PV of their money) and worked a period of 1 year (time), at the end of the year they will have generated different Future Values – FV of their money. • Due to the FTR, the FV(B)> FV (A); the AFTER TAX INCOME of (B) will be greater • Therefore, FTR stimulates those who MAKE MORE MONEY in a given period of time.

FTR-Application in the Region of South East Europe - SEE • SEE in this presentation: • Albania • Bosnia & Hertzegovina (BiH) • Bulgaria • Croatia • Kosovo • Macedonia • Montenegro • Romania • Serbia • Slovenia • Greece (not included in this research)

Characteristics of SEE-states • Most of the SEE-states are classified as “developing countries”, not “developed countries”; Therefore, these states lag behind in their economic growth, compared to the EU-states. • Most of the SEE states have used for a long period of time “command-administrative” or “centrally-planned” economic systems; Thus, their administrations now are subject to intensive re-structuring processes and there are too many “gaps” and too many “faults”, which can actually be “WIPED OUT” through introduction of an “all pay system”, i.e. an FTR-system. • Most of the SEE-states have demonstrated intentions to equalize PIT and CIT to a single FTR. • This transfers the burden of taxation to SALARIED INDIVIDUALS, because their incomes are OFFICIALLY REGISTERED, while BUSINESSES remain at a large part NOT FAIRLY TAXED for their huge turnovers.

Marginal Tax Rate /MTR/ • MTR is such a tax rate that the Tax Burden becomes so large that individuals/corporations prefer to stay at the lower tax brackets and have a greater share of disposable income /Graph-4/. If FTR is applied, virtually MTR stops to exist for individuals/corporations. (The greater the generated income, the greater the will to pay taxes, because taxes become asymmetric and non-proportional to the generated income in absolute values). • FTR is mainly capital-driven approach. • FTR-application is a pure capitalistic mechanism, applied in “developing countries”, suffering from post-Soviet economic trauma.

Tax Brackets System vs. FTR System • First, “tax brackets” themselves represent “automatic stabilizers” to wealth distribution of a society, because they “normalize” the processes of this distribution. In a FTR System such “stabilizers” do not exist. • Second, MTR stops to exist, in practice, in a FTR System, and the main incentive TO NOT PAY HUGE TAXES is to generate HUGE CAPITAL FORMATION. This is a capital-oriented approach, not “society-oriented” approach, and directly affects the primary function of the state – to provide decent economic welfare to all of its citizens. • Third, individuals “in economic difficulties” suffer more from the FTR as this is a system, where “everybody pays”. Thus, more disposable income is “seized” by “poorer individuals” of a society.

Gini Index /estimates-2008/ Distribution of Households’ Incomes is measured through The Index of Gini. The greater the Index, the more unequal the distribution of wealth in a country is. * SEE-states (colored in blue)FIT the general picture of the EU, but this may change with a long-term use of a FTR-System.

1.Albania • Population – 3,2 million people; • GDP – €8 billion; • GDP per capita – € 5,370; • Gross Wage of Salaried Workers per month - €280; • Annual unemployment – 13%-15%; • Employed Individuals – 1,1 million people; • Tax Rates & Wage Flows: • PIT – 10% for individuals (from 01.01.2007); • CIT – 10% for companies (from 01.01.2008); • Aggregate level of gross salaries in the official economy – €3,4 billion (2007); • Only 140,000 are registered as unemployed; • No legal way exists, up to the present moment, to provide decent life to 2 million people, dependent on official labor force;

2. Bosnia & Hertzegovina (BiH) • Population – 3,8 million people; • GDP – €11 billion; • GDP per capita – € 6,300; • Gross Wage of Salaried Workers per month - €480; • Annual unemployment – 30%; • Employed Individuals – 1 million people; • Tax Rates & Wage Flows: • Tax Brackets – 0%, 10%, and 15% for individuals (under regulations); • CIT – 10% for companies (from 01.01.2008); • Aggregate level of gross salaries in the official economy – €4 billion (2007); • Corporate taxation is different for different entities of the Federation. • No official statistics exists about the volume and mechanisms of channeling taxed money back to economy; Majority of people rely on non-official cash payments;

3.Bulgaria • Population – 7,7 million people; • GDP – €28 billion; • GDP per capita – € 9,500; • Gross Wage of Salaried Workers per month - €250 • Annual unemployment – 6%-8% • Employed Individuals – 3,5 million people; • Tax Rates & Wage Flows: • PIT – 10% for individuals (from 01.01.2007); • CIT – 10% for companies (from 01.01.2008); • Aggregate level of gross salaries in the official economy – €10,5 billion (2007); • A great gap between officially declared wages (ODW) and actual wages (AW), because AW > ODW, but actual taxes are less, because they are paid on ODW; • Huge discrepancies between salaried workers in public sector and private sector; • Taxes paid by individuals EQUAL TO taxes paid by corporations (2006,2007,2008);

4.Croatia • Population – 4,5 million people; • GDP – €37,5 billion; • GDP per capita – € 13,500; • Gross Wage of Salaried Workers per month - €1,000 • Annual unemployment – 10%-12% • Employed Individuals – 1,5 million people; • Tax Rates & Wage Flows: • Tax Brackets – 15%, 25%, 35%, 45% for individuals (from 2003); • CIT – 20% for companies (considerations for change); • Aggregate level of gross salaries in the official economy – €18 billion (2007); • Croatia is NOT inclined to introduce FTR, but a Progressive Tax System; • ~240,000 legal business entities registered to do business in Croatia;

5.Kosovo • Population – 2 million people; • GDP – €2,7 billion; • GDP per capita – € 1,350; • Gross Wage of Salaried Workers per month - €90 • Annual unemployment – 40% • Employed Individuals – 0,5 million people; • Tax Rates & Wage Flows: • PIT – n.a. (7% - suggestion by the American Chamber of Commerce – ACC); • CIT – n.a. (10% - suggestion by the American Chamber of Commerce – ACC); • ~30% of Kosovo’s GDP is formed through Foreign Assistance; • ~70% of Kosovo’s GDP is formed through VAT; • No official statistics for tax collection exists and very few are paying taxes indeed; • Estimates show that about 6% of Kosovo’s Budget-2006 of € 700 million was due to taxes collected on levied individual incomes;

6.Macedonia • Population – 2,1 million people; • GDP – €5,5 billion; • GDP per capita – € 7,300; • Gross Wage of Salaried Workers per month - €400 • Annual unemployment – 30% • Employed Individuals – 0,6 million people; • Tax Rates & Wage Flows: • PIT – 10% for individuals (01.01.2008); • CIT – 10% for companies (considerations for change); • Aggregate level of gross salaries in the official economy – €3 billion (2007); • About 600,000 people are considered poor, according to Macedonian standards of living, and about 400,000 people are illiterate; • Only 11% of Budget-2008 will be due to taxes on individuals and corporations (6,7% from PIT and 4,3% from CIT);

7.Montenegro • Population – 0,6 million people; • GDP – €2,5 billion; • GDP per capita – € 13,500; • Gross Wage of Salaried Workers per month - €500 • Annual unemployment – 15% • Employed Individuals – 0,2 million people; • Tax Rates & Wage Flows: • PIT – 9% for individuals (will be introduced in 2010); • CIT – 9% for companies (will be introduced in 2010); • Aggregate level of gross salaries in the official economy – €1 billion (2007); • Budget-2007 estimates show that about €30 million were due to PIT; • Montenegro demonstrated strong will to introduce a FTR System in near future;

8.Romania • Population – 22 million people; • GDP – €121 billion; • GDP per capita – € 10,000; • Gross Wage of Salaried Workers per month - €450 • Annual unemployment – 4%-5% • Employed Individuals – 9,5 million people; • Tax Rates & Wage Flows: • PIT – 16% for individuals (from 2005); • CIT – 16% for companies (from 2005); • Aggregate level of gross salaries in the official economy – €50 billion (2007); • Proceedings in the budget increased; • Romania FTR System has certain “loopholes” • preferential regimes for small enterprises; • those engaged in the agricultural sector – “merely taxed”;

9.Serbia • Population – 7,4 million people; • GDP – €30 billion; • GDP per capita – € 8,700; • Gross Wage of Salaried Workers per month - €480 • Annual unemployment – 20% • Employed Individuals – 2,4 million people; • Tax Rates & Wage Flows: • PIT – 14% for individuals (from 2003); • CIT – 14% for companies (from 2003); • Aggregate level of gross salaries in the official economy – €14 billion (2007); • Proceedings to Budget constantly increasing; Budget-2007: surplus of € 165 million; • About 11% of Serbian Budget is due to PIT;

10.Slovenia • Population – 2 million people; • GDP – €33 billion; • GDP per capita – € 22,500; • Gross Wage of Salaried Workers per month - €1,300; • Annual unemployment – 5% • Employed Individuals – 0,9 million people; • Tax Rates & Wage Flows: • Tax Brackets– 16%, 27%, 41% for individuals (present system); • CIT – 22% for companies (considerations for change - 20% in 2010); • Aggregate level of gross salaries in the official economy – €13 billion (2007); • No plans to introduce FTR System; • Special regime of taxation – 10% for all which invest in its business zones;

Regional Economy of SEE • Size of the SEE-Economy (SEE-GDP): €280 billion; • Population: 73,3; but Employed Individuals: 21 million, or 29%; • Average annual cash flow of wages in the official SEE-Economy: €120 billion or 43% of SEE-GDP;

Real GDP growth of SEE-countries Although there are different tax regimes in different states, and different economic indicators (high/low employment, high/low real and nominal wages, and others), all states demonstrate a comparable real GDP growth of about 5,5%, excluding Serbia. Therefore, it is worth looking at the REAL number of tax payments and time to comply with the tax system in each SEE-country.

Number of Tax Payments in 2007 *without Kosovo Tax Systems of SEE-states are still TOO COMPLEX. Those SEE-states, which introduced FTR-System or plan to introduce it are TOO FAR AWAY from applying a SINGLE TAX RATE.

Number of Hours Needed to Comply with the Tax System • The time to comply with the Tax System of each country is HUGE; • If an individual needs to fill his Tax Papers, he will need between 4,5 days (Macedonia) and 36 days (Bulgaria) /if hours are converted into days of a 8-hour shift/; • If a company needs to fill its Tax Papers, it will need between 2 days (Montenegro) and 15 days (Albania) /if hours are converted into days of 8-hr shift/;

Total Tax Rate Burden • The Total Tax Rate Burden is decomposed to four components: profit tax burden, labor tax burden, other taxes burden, and statutory profit tax burden; These are estimated on the basis of overall “income seizure” by central and local institutions entitled to collect taxes on income and corporate proceedings; • SEE-states have actual burden of taxation on income and proceedings GREATER than the declared flat tax rates;

Conclusions: • On microeconomic level, the FTR System is advantageous for rich people and companies, as they are left with more disposable income/proceedings. The FTR System exacerbates the economic situations of low-paid workers, as well as salaried ones. • It has been demonstrated that the ACTUAL level of tax burden for all economic agents (individuals and corporations) is greater than the officially announced; • On macroeconomic level, countries will accumulate budget surpluses due to the greater basis for tax collection. • State budgets will accumulate, such tax proceedings from PIT and CIT which will tend to equalize in time, due to the greater share of collecting taxes from individuals and the less share of collecting taxes from companies (absolute numbers taken into consideration). • Introduction of FTR System itself is not a panacea for the SEE-Economies, but only a tool from a greater set of mechanisms for wealth distribution in a society.

Challenges for Trade Unions • 1. TU’ s-not included in the decision making • 2. Low paid and socially week group suffer • 3. Inequality grows • 4. Turn back to progressive TR- difficult/impossible • 5. Tax dumping: CEE neo-liberal reforms versus EU social model /national tax dawn-word competition/ • 6. Lack of TU national actions /except Slovenia/ • 7.Doing business

NOTES…4 • New coallition: Business-Parties; • Чехия-завой надясно-и на соцдемократите;BG-BSP-10%;Gerb-7%; • KP-Obama-Durchani; • Политика:намаляване на данъците-корпоративни, върху имоти и пр. в полза на богатите; • ПС-независим анализ;реформата да се фокусира върху приходите, а не само върху разходите;

THANK YOU ! • Any questions !

SYNOPSIS OF THE FLAT TAX RATES IN THE REGION OF SOUTH EAST EUROPE – SEE