Distribution of income and the income tax burden in Bulgaria

Using the 1992 Bulgarian household budget survey, the authors analyze the distribution of income and of the income tax burden by income and expenditure class and by rural-urban sector. They find: 1) Low income inequality (although that is changing rapidly). 2) A progressive income tax system. The poor (the lowest two-income decile) pay only 1.4 percent of their per capita income in income tax; the rich (the top decile) pay nearly 6 percent. In-kind income and expenditures are excluded from taxation. 3) The urban sector pays proportionately more in taxes than the rural sector. For example, urban households pay 5.3 percent of their per capita income in income tax, whereas the rural sector pays 2.4 percent. 3) Income tax contributes significantly to reducing income inequality at both the national and sectoral (rural-urban) level, as the poor pay a smaller share of taxes than their share of national income. These results hold whether income or expenditure is used as an indicator of economic well-being. The authors caution that as in-kind income becomes monetized and the economy becomes more market-oriented, the system will become less progressive and urban-rural differences will diminish. They contend that the bias toward higher urban taxes is justified to some extent by the fact that urban households benefit more from government services than rural households do.