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The tax base in transition : the case of Bulgaria

Author

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  • Bogetic, Zeljko
  • Hillman, Arye L.

Abstract

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.

Suggested Citation

  • Bogetic, Zeljko & Hillman, Arye L., 1994. "The tax base in transition : the case of Bulgaria," Policy Research Working Paper Series 1267, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1267
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    References listed on IDEAS

    as
    1. 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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    5. 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.
    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. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
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    Citations

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    Cited by:

    1. Jorge Martinez-Vazquez & Robert McNab, 1997. "Tax Reform in Transition Economies: Experiences and Lessons," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper9706, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    2. Zeljko Bogetic & Fareed Hassan, 2005. "Personal Income Tax Reform and Revenue Potential in Transition," Public Economics 0510003, EconWPA.
    3. Jorge Martinez-Vazquez & Robert McNab, 2000. "Tax Reform in The Tax Reform Experiment in Transitional Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0001, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    4. Luca Barbone & Domenico Marchetti, 1995. "Transition and the fiscal crisis in Central Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(1), pages 59-74, March.
    5. Hassan, Fareed M. A., 1998. "Revenue-productive income tax structures and tax reforms in emerging market economies - evidence from Bulgaria," Policy Research Working Paper Series 1927, The World Bank.

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