In this work we analyze the effects of the 2015 reform of the Spanish personal income tax (PIT) on tax revenue, liquidity, redistribution, progressivity, and poverty, using microdata. Tax reform has increased the redistributive effect. The applicable legislation in 2016 is almost 6.3% more redistributive than that in 2011, as measured by the Reynolds-Smolensky index. This is a remarkable achievement since greater redistribution has been attained through significantly lower tax revenue. The 2016 legislation has produced 4.4% lower tax revenue, but progressivity, as measured by Kakwani index, has increased by 12.2% from the 2011 legislation. The redistributive and progressivity analysis has been conducted with the use of microsimulation tools developed in the Instituto de Estudios Fiscales (IEF), in Spain. The poverty analysis is made using EUROMOD, a tax-benefit microsimulation model for the European Union.
At the start of 2017 Bulgaria entered a tough political debate on a range of problematic
issues raised during the parliamentary election campaigns. The main political parties put
forward their proposals for the adjustment of taxation and income policies, in response to
public expectations. Indeed, these expectations have a long history – about 15 years of
neoliberal economic policy that introduced a 10% flat rate for personal income tax, brought
about a substantial shift in the burden of social insurance from employers to employees, and
focused income support on a narrow share of the population. Combined with the effects of the
economic downturn of the 2008-2009 crisis, this policy inevitably induced persistent
poverty, emigration, and negative demographic trends (
The paper suggests some preliminary results from a sequence of microsimulation exercises that produce estimates of the budgetary effects of a selection of initiatives for income policy adjustments discussed during the 2017 election campaigns. Most of these initiatives are targeted to reforming income support policies, taking two main types of approach – assistance- or taxation-based. For example, a proposal has been made to ease the task of bringing up children by working parents through the introduction of a child tax credit, replacing the tax base exemption for dependent children, which is deemed ineffective. An overall proposition for family taxation and joint filing is currently under debate, although it was already frequently considered in a series of political disputes during the market transition period. Furthermore, a minimum pension proposal has been hotly discussed, with mutual accusations of misleading populism. Along the same lines is a suggestion for a substantial expansion of the eligibility for targeted social assistance for heating and energy.
An overall impression is that none of the ideas for policy reforms or adjustments of policy parameters seem to be supported by a sound empirical analysis of the possible distributional effects. Besides, no estimates of the aggregate financial effects of such proposals have been announced – the tentative “bill” of each reform is not “submitted” to the taxpayer, nor it is clear to the public how the expanded deficit of the social budget could be compensated for.
The paper provides an empirical assessment of the possible non-neutral budgetary effects of
selected proposals for policy adjustments – basically, the necessary shifts in the social
spending budget – if implemented in the year 2017. The calculations are performed by EUROMOD
– the tax-benefit microsimulation model for EU countries (
Bulgaria at the time of the electoral debate is characterized by the consequences of the global crisis of 2008-2009 on the economic situation and the search for effective ways of regaining the pre-crisis levels of investment (especially FDI), employment, and exports. Another important issue is also in the focus of the debate: the steady establishment of the substantial dependence of the country on EU funding for all major structural reforms and overall economic revitalization. In the light of this, public interest during the election campaigns has become sensitive to all issues related to living standards, income policies and social support for the vulnerable, e.g. the old, unemployed, disabled and so on. In spite of the overall positive trend in the dynamics of the income level during the post-crisis period – coinciding largely with the first decade of Bulgarian full EU membership– the “status quo” of the “poorest EU country” has been emphasized and utilized by the argumentation throughout the campaign.
Nevertheless, the dynamics of the main income indicators showed recent trends somehow
opposite to the adverse demographic shifts. A stable negative rate of natural population
growth amounting to about -5 per 1,000 residents and continual emigration led to a severe
decline in total population size (from 7.5 to 7.1 million in the period 2010-2016). In the
first half of the 2010s, the average number of children per family has persistently
stabilized at about one child (
Dynamics of total population (million), rate of natural population growth (NPG), and the average number of children per family (NCF)
In the same period, the average monthly wage has constantly grown from about BGN 650 to
over BGN 1,000 (50% for the period) followed by even faster growth of the minimum wage. As a
result, the ratio of the minimum to average wage increased from 37% to 45% in the early 2017
(
Dynamics of the minimum and average monthly wages
Relation between GDP per capita and average annual wage, 2010-2016
In summary, according to
The specialised literature provides empirical evidence regarding Bulgarian taxbenefit
policies and their effects, mainly regarding research into income distribution, inequality,
and poverty (e.g.,
The 2017 election campaigns were not substantially different to those conducted during the
past 20 years, which was a period of relative stabilization after the hyperinflation crisis
and banking system collapse of 1995-1996, followed by the introduction of the Currency Board
Arrangement in 1997 and stabilization of the macroeconomic indicators. In most cases, the
debate has been between the major left- and right-centred political forces, with the
participation of minor liberal, centrist, and (less significantly) ultra-left or
nationalistic wings.The leading role during the 2017 election campaigns was played by CEDB
(Citizens for European Development of Bulgaria) – the political party that just came out of
central government offices with the role of a “proponent” of the established current
economic and social policies. Its election platform was publicly announced on the party’s website Political Programme of CEDB 2017 (in Bulgarian); document retrieved from: the undisputable The total wedge of social insurance contributions in the total expenditures for
labour inputs for 2017 is 24% split in the 13.9/10.1 ratio between the employer
and employee; this wedge for 2007 was 36.2% (23.8/12.4). main sources for increasing the public revenues identified as: tightened
administrative operations, with a better focus on counteracting corruption (including
pressures on the grey economy, underreporting, customs misconduct facilitating
smuggling/trafficking, etc.); strict control over the expenditures, assuming the argument “redistribute only what
you collect” – as a result, social spending focused only on those who objectively
cannot manage in the labour market (the old, disabled, families in extreme poverty and
so on); family support provided mainly through improved community services (kindergartens),
financial support to children if at school and such like.
The program rarely announces quantitative targets and other policy parameters, which shows its great caution regarding any “promises” the keeping of which will be able to be verified in due time. Just few numerical parameters were modestly defined, e.g.:
increment of all pensions by 2.4% since July 2017 (which was planned during the budgetary process of 2016);
support to the so called “3-child family model”, although not accompanied by any specific policy instruments except a general vow concerning targeted financial support to a third child, with a reduction of this support to subsequent children;
few targets that are, however, spread over the whole 4-year mandate: macroeconomic expectations for at least 2% GDP annual real growth rate; average and minimum monthly wages to reach 1,500 and BGN 650 respectively, at the end of the mandate (i.e. about 50% growth in both wages, or 12% annually).
A similar general platform was announced by the prospective governmental partner of CEDB
– which actually became so after the election – the United Patriots coalition An alliance of 3 parties: National Front, Ataka, and IMRO (Internal Macedonian
Revolutionary Organization, a successor of a historical configuration from the national
liberation period) – fragments of the nationalisticpolitical wing (political platform
retrieved from:
The main opposition forces were represented by the Bulgarian Socialist Party (BSP) – a
political organization integrating the social-democratic wings of the former totalitarian
party-ruler of the country up to 1989. Although its political platform Official platform for 2017 elections campaign (retrieved from:
an upgrade to the monthly benefit for raising a child aged between 1 and 2 – up to the minimum wage level, i.e. by 35% – from BGN 340 (not uprated since year 2014) to BGN 460;
double expansion of the coverage of the targeted benefit for heating – a special tool expected to provide a vast support from low-income voters;
a targeted reform of the flat PIT: the introduction of a twice higher marginal tax rate (20%) for incomes above BGN 120,000 annually, which is equal to about 10 average wages for 2017 (another “tool” for mobilizing ultra-left voters with the idea of “taxing the top incomes higher”);
a substantial revision of the PIT policy for treatment of the children – namely, introduction of a child tax-credit and abolishment of the regime for tax base exemption for raising children. The proposal is however generally formulated “to support the parents who work – and have taxable earnings – for raising their children”. According to the proposal, they must receive an annual refund of the tax bill: BGN 600 for 1 child (BGN 50 monthly) and BGN 1,000 for 2 or more children.
All proposals originating from political fragments that strive to gain significant support are clearly justified by expectations of massive support from targeted social strata. In some cases – as will be shown below – these strata include a substantial number of potential voters. With the assumption of a 50% turnout, typical of parliamentary elections in Bulgaria (it reached actually 54% in 2017), the votes of even half of the potential “beneficiaries” from some of the proposals could provide significant positive shifts in the overall position of the respective party-proponent. However, what the budgetary effect of the introduction of any such proposal would be remains unclear, i.e. the question “how much is the bill and who will have to pay it” does not have any reasonable answer, and various speculations were floated during the election campaigns.
The quantitative evaluation of selected proposals for income policy reforms in Bulgaria is
performed by the method of tax-benefit microsimulation implemented in EUROMOD. Such a
simulation method has several important qualities one of which is particularly valuable for
the present study, namely, “… the possibility of accurately evaluating the aggregate
financial cost/benefit of a reform. The results obtained … at the individual level can be
aggregated (using the weights contained in the datasets where necessary) at the macro level,
allowing the analyst to examine the effect of the policy on government budget constraints”
(
The “pension for insurance and old age” (PIOA) is provided to individuals who have reached the standard retirement age (about 61 for women and 64 for men) with a minimum length of contributory service of 35 (women) and 38 (men) years. Figure 4 presents the distribution of PIOA recipients by the main intervals of the monthly pension and shows that 45% of them are below the line of the announced proposal: an unconditional floor of BGN 300.
Distribution of recipients of old-age pension by size of pension (BGN)
Simulation results (Proposal 1: Minimum threshold for PIOA)
Number of PIOA recipients
1,834,875
Incl. recipients of pension < BGN 300
836,716
45.6% of the total number
Total expenditures for PIOA (baseline)
7,574
Million BGN
Total expenditures for PIOA (proposal)
8,399
Million BGN
Deficit:
-826
Million BGN
Deficit as a percentage of PIOA expenditures
-10.9
Deficit as a percentage of expected 2017 GDP
-0.85
The results from the simulation of this proposal (
In order to expand the scope of the eligible receivers of TBH the thresholds have been relaxed in order to ease access to the benefit for a selection of targeted individuals (single mothers, the elderly, and the disabled). For example, any person with reduced work capacity of 50% or more (50% disability) who also lives alone, gets an uprated threshold to guarantee eligibility if her/his income is below BGN 300 – the current ratio of 2.7268 is increased to 4.6154. Thus, if the test shows that the income of this individual is less than 4.6154*GMI = BGN 300, then her/his eligibility for TBH is approved. Further categories that get uprating of the threshold up to 4.6154 are:
persons aged over 65 and living alone;
persons older than 70;
persons with reduced working capacity of 50% or more living alone;
single parents with a child younger than 18 (or 20 and in education);
children aged below 18, with a permanent disability.
Simulation results (Proposal 2: Targeted benefit for heating)
Simulated TBH beneficiaries (baseline)
368,223
Number
Simulated amount of TBH (baseline)
133.4
Million BGN
Simulated TBH beneficiaries (proposal)
701,757
Number
Simulated amount of TBH (proposal)
254.2
Million BGN
Deficit as a percentage of TBH expenditures
-90.6
Deficit as a percentage of expected 2017 GDP
-0.124
After the introduction of the reform – although targeted only to the categories presented above – the number of eligible recipients is expanded by over 333 thousand. This number can still be increased by including another targeted category of individuals in the scope of the simulation exercise. The budgetary effect is not substantial – this political goal can be achieved by a small additional deficit of 0.1% of GDP (which will not even emerge if GDP actually grows at least by half a percentage point more than the macroeconomic budgetary forecast).
These results however should be considered with caution due to problematic issues of the
SILC survey related to underestimation of the “upper tail” of the income distribution due to
under-coverage of such taxpayers (e.g. refusals to participate), under-reporting of
earnings, etc. (
Simulation results (Proposal 3: 20% marginal PIT rate for top incomes)
Simulated PIT payers (baseline)
3.883
Million
Simulated amount of PIT (baseline)
3.336
Bn. BGN
Simulated PIT payers above the proposed threshold (BGN
120,000)
3,778
Number
Simulated amount of PIT (proposal)
3.353
Bn. BGN
Additional revenue (million BGN)
0.017
Bn. BGN
The results show clearly that negligible budgetary effects can be expected from such a reform, even in the case of the static calculations performed by EUROMOD – about BGN 17 million (0.5% of the total PIT revenues and 0.02% of the expected GDP for 2017). The taxpayers that have official (reported) incomes above the policy threshold are just 0.1% of all PIT taxpayers – the narrow scope of this reform proposal identifies it as much more of a propaganda tool than a genuine income policy reform.
During the election campaign the BSP suggested the introduction of a child tax credit –
reduction of the annual PIT duty by BGN 600 (if there is 1 child) or BGN 1,000 (if 2 or more
children are being raised in the family). This makes an “allowance” of BGN 50 monthly for
child 1 and BGN 33.33 additionally for the second child, which, however, is non-refundable.
The political “message” seems clear – all those working parents who have low incomes (with
PIT duty up to these thresholds) that raise their children will be supported by the
government
Simulation results (Proposal 4: Child tax credit)
Number of children (total)
1,311
Thousand
Cases “first child”
873
Thousand
Cases “second child”
352
Thousand
Cases “third or next child”
86
Thousand
Simulated amount of PIT (baseline)
3.336
Bn. BGN
Simulated amount of CTC (proposal)
0.665
Bn. BGN
Simulated PIT, residual
2.671
Bn. BGN
The simulated child tax credit identified in these two cases amounts to BGN 665 million. In this static version of the simulation exercise no behavioural responses are assumed – the result shows what the expected change in the PIT revenue in 2017 would be if the parent (with the largest taxable income) were allowed to deduct the proposed amount of child tax credit from her/his tax liability. The question that concerns the budgetary planners – about how to compensate the deficit of 20% in the PIT revenue – requires additional calculations and initiation of parallel proposal(s) related to necessary alternations of the existing family support policies. At the stage of the electoral campaign, the sources of funds for the coverage of this “bill” were not clearly defined.
The empirical results about the effects of selected proposals for income policy adjustments evaluated in this article were obtained by the utilization of the capabilities of EUROMOD – European-wide microsimulation model that assists the analyses of tax-transfer interventions on personal and household incomes in the EU countries. The information basis of the empirical analysis here is derived from the annual large sample representative survey of household income components in the EU countries (EU-SILC) which ensures the required degree of reliability and validity of the achieved results. The capacities of EUROMOD for the evaluation of particular proposals about reforming tax-transfer policies are substantial but still underexploited, especially in the case of Bulgaria.
The paper suggests empirical results from simulation exercises conducted to obtain numerical estimates of the potential effects of proposals for policy reforms concerning income taxation, social assistance and child support. These proposals were suggested by some of the major participants in the Bulgarian 2017 parliamentary election campaigns. The results show that any introduction (or alteration) of policy instrument that has an impact on a large mass of potential beneficiaries will induce a substantial budgetary deficit, which, in some cases, can compromise the low-deficit policy of Bulgarian governments compliant with the Maastricht deficit criterion. In this respect, one example can be pinpointed, in respect to the proposal concerning the minimum threshold of BGN 300 for the old age pension – when they were part of the governmental coalition, the proposers compromised on a threshold of BGN 200 to be introduced from October 1st 2017 (which led to an agreement for parliamentary approval of the necessary adjustment of the central budget for year 2017.
The results presented above clearly show the need for further in-depth analysis of each of these proposals involving alterations of related policy instruments that could compensate fully or partially for the negative budgetary effect. Any such further analysis could include, in the first place, the design and simulation of an integrated scheme for child treatment through PIT, including joint filing and targeted coordination of family support policies – both contributory and assistancebased provision of child benefits. Another important and sensitive problem for Bulgarian society is pension system reform – it definitely requires the exploration of a refined simulation of minimum thresholds for contributory pensions coordinated with the provision of disability and inheritance pension components.
The process of the enhancement and upgrading of EUROMOD is supported financially by grants from the General Directorate “Employment, Social Affairs, and Inclusion” of the European Commission (Programmes PROGRESS and EaSI). The empirical results here are derived by version G4.0 of EUROMOD through processing of EU-SILC-2015 User Database provided by Eurostat.
No potential conflict of interest was reported by the author.