Revenue-productive income tax structures and tax reforms in emerging market economies - evidence from Bulgaria

Using a household budget survey for 1992, The author shows the poor revenue performance and distributional impact of Bulgaria's personal income tax system. He explores the implications for revenue and income distribution of two alternative tax systems - a flat tax and a progressive but simpler three-brackets tax system. He demonstrates that simpler tax structures with lower tax rates could achieve at least equal revenue and distributional objectives and are superior in terms of efficiency and equity. (The findings are robust when Bulgaria's significant tax evasion is included). But tax changes since 1992 have, if anything, moved Bulgaria even further from a simple income tax system: the number of rates and brackets increased from 7 to 10, and the levels of exemption remain unchanged. (Complex, higher rates complicate administration and enforcement and provide incentives for tax evasions. And in the alternative systems the author explores, the poor are protected with higher exemptions.) Fortunately, the country's personal income tax structure began to move toward less nominal progressivity after Bulgaria's 1997 tax reform program. The tax rate in thetop income bracket was reduced from 52 percent to 40 percent, the number of tax brackets was halved, and the exemption level was increased 20 percent (reducing tax burdens on the poor).