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The tax base in transition : the case of Bulgaria

  • Bogetic, Zeljko
  • Hillman, Arye L.

The transition from socialism characteristically reduces existing tax revenues at the same time that it increases the need for government spending. An increasing need for revenue combined with an eroding tax base creates a transition-related fiscal gap and a challenge for tax policy. The solution, say the authors, is not to lay a heavier tax burden on new private firms. The issue is how to meet revenue needs without inhibiting private sector development. Large-scale tax evasion in the private sector - the de facto outcome in Bulgaria and in many other transitional economies - may be a good incentive for development of private enterprise, but it is illegal and inequitable to wage-earners and salaried workers. The chief means of increasing tax revenue are to: (1) reduce tax rates to decrease the benefit of evasion; (2) improve tax administration (to increase tax coverage and better dectect evasion); and (3) increase penalties for evasion. These three measures effectively decrease the benefits and increase the cost of tax evasion to economic agents. It takes time to improve tax administration, however. Given administrative limitations, what should the tax structure be? The authors contend that an administratively feasible system designed to encourage development of the private sector during the transition should: (i) be simple, not complex or oversophisticated; (ii) be administratively implementable with current resources; (iii) impose a low tax burden on all economic agents; (iv) rely on broad tax bases with minimum exemptions; (v) begin the long-term improvement of tax administration; and (vi) limit the severity of tax penalties in the transition from an authoritarian to a democratic regime. In theory, reducing the cost of compliance and increasing the expected cost of noncompliance should reduce tax evasion and increase tax revenue. In practice, small businesses and self-employed citizens tend to evade taxes, providing an effective zero tax base. The government has little to lose from reducing taxes on the self-employed but, to be equitable, it should reduce taxes for everyone. As a general rule, say the authors, economies in transition should impose lower tax burdens than are imposed in mature western market economies. It may also reduce the perception of"exploitation"by giving the impression of a more modest government consistent with the dynamic private sector led economy.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1267.

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Date of creation: 31 Mar 1994
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Handle: RePEc:wbk:wbrwps:1267
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  1. Guttman, Joel M., 1986. "Matching behavior and collective action : Some experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 7(2), pages 171-198, June.
  2. Buchanan, James M & Lee, Dwight R, 1982. "Politics, Time, and the Laffer Curve," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 816-19, August.
  3. Casson Mark, 1993. "Cultural Determinants of Economic Performance," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 418-442, June.
  4. repec:imf:imfpdp:9308 is not listed on IDEAS
  5. Bebchuk, Lucian Arye & Kaplow, Louis, 1993. "Optimal sanctions and differences in individuals' likelihood of avoiding detection," International Review of Law and Economics, Elsevier, vol. 13(2), pages 217-224, June.
  6. Ronald I. McKinnon, 1991. "Financial Control in the Transition from Classical Socialism to a Market Economy," Journal of Economic Perspectives, American Economic Association, vol. 5(4), pages 107-122, Fall.
  7. Polinsky, A Mitchell & Shavell, Steven, 1991. "A Note on Optimal Fines When Wealth Varies among Individuals," American Economic Review, American Economic Association, vol. 81(3), pages 618-21, June.
  8. Milka Casanegra de Jantscher & Vito Tanzi, 1987. "Presumptive Income Taxation; Administrative, Efficiency, and Equity Aspects," IMF Working Papers 87/54, International Monetary Fund.
  9. Vito Tanzi & Parthasrathi Shome, 1993. "A Primeron Tax Evasion," IMF Working Papers 93/21, International Monetary Fund.
  10. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
  11. Guttman, Joel M, 1987. "A Non-Cournot Model of Voluntary Collective Action," Economica, London School of Economics and Political Science, vol. 54(213), pages 1-19, February.
  12. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
  13. Hillman, Arye L., 1994. "The transition from socialism: An overview from a political economy perspective," European Journal of Political Economy, Elsevier, vol. 10(1), pages 191-225, May.
  14. Vito Tanzi & Parthasarathi Shome, 1993. "A Primer on Tax Evasion," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 807-828, December.
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