Slovakia Scraps 19% Flat Tax, Bulgaria Firm to Keep Its 10%
Slovakia PM Robert Fico (R) welcomes his Bulgarian counterpart Boyko Borisov (L) on his arrival for the opening of the PMs' meeting of 15 countries of the Friends of Cohesion group of EU, Bratislava, Slovakia, 05 October 2012. EPA/BGNES
Slovakia's parliament voted for scrapping the 19% flat tax, replacing it with higher taxes on the rich, politicians and corporations as of 2013.
Income tax for corporations was raised to 23%, while income tax for individuals earning more than EUR 3,300 a month – up to 25%.
The 19% tax rate will still apply to incomes under this level, however.
The new amendments were approved in parliament with the votes of Prime Minister Robert Fico's left-of-centre political allies.
An austerity package, proposed by the cabinet, also includes a higher levy on banks and changes to the pension system.
Slovakia introduced its trademark 19% flat tax in 2004, attracting foreign investment, primarily in the auto and electronics sectors, which helped boost former communist state economy.
The country joined the European Union in 2004 and adopted the euro in 2009 during Fico's first term as prime minister.
This year the country is expected to have the fastest-growing economy in the 17-nation eurozone, with an estimated expansion of 2.6%, but below the forecast 3.3%.
In Bulgaria, the finance minister has stepped back on plans for scrapping the 10% flat tax, saying it has to stay at least for the next ten-fifteen years to help the country catch up with other EU member states.
As of 1 January 2008, Bulgaria introduced a 10% flat tax applicable for all income levels, i.e., there is no non-taxable income threshold. It replaced the previous system, which combined several different tax rates - between 20 and 24%, depending on income.
The Socialist Party, now in opposition, has recently called for the return of a progressive income tax so that the upper-income households as well as the rich are taxed much more than the poor.
Bulgaria's 10% flat rate makes it the country with the lowest personal tax rate among European Union member states. Bulgaria also has the lowest social security rates, which coupled with a 10% flat rate, makes it very attractive for physical entities, employers and potential investors.
Over the last decade and a half, a number of countries introduced flat-rate taxation and Bulgaria jumped on the bandwagon in 2008.
The policy has a number of attractive features - equality, lower tax burden, the general trend to raise budget revenue as more companies leave the "shadow economy", just to name a few.
What made the debate in Bulgaria different is the fact that the proponents of the measure were the Socialists as it is usually the center-right parties that are aggressively pushing tax reforms.
Part of the reason why the flat tax has been an efficient tool in diminishing the "grey economy" in other countries is the willingness of governments to couple it with draconic measures to crack down on tax evasion.
Bulgaria, on the other hand, has notoriously been sluggish with its fight against corruption and organized crime.
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