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How the proportional income taxation increases inequality in Bulgaria

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  • Stoyan Tanchev

Abstract

The proportional income tax is popular in countries of Central and East Europe and 14 CEE countries adopted it with different tax rates from 1994 till 2008 year. But four of them have replaced it with the progressive tax yet. The main criticisms towards the proportional income tax is that it leads to an increase of the inequality after taxation. The article aims to evaluate the impact of the proportional income tax without non-taxable minimum on inequality in Bulgaria, measured by the Gini index. The relationship between the Gini index and the growth rates of GDP per capita, the gross average income and net average income was studied. The methods of Ordinary Least Square (OLS) and correlation were applied to determine the impact of proportional income tax on income inequality in Bulgaria. The research covers the period from 2008 till 2019. National statistical institute of Bulgaria data (12 observations) has been used. The empirical results confirm positive relationship between Gini index and the growth rates of GDP per capita, the gross average income and net average income in system of proportional income tax. Inequality in Bulgaria had increased by 22% after introducing the proportional income tax in 2008, the highest incomes have increased by 113% and the lowest only by 85%. The results of the study show that the increase of the gross average income and net average income leads to increase of the inequality measured with Gini index. Therefore, after taxation of incomes with proportional income tax the inequality does not decrease, but continues to increase. It may be inferred that the proportional taxation increase inequality in Bulgaria.

Suggested Citation

  • Stoyan Tanchev, 2021. "How the proportional income taxation increases inequality in Bulgaria," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 7(3), pages 244-254.
    • Handle: RePEc:aiy:jnljtr:v:7:y:2021:i:3:p:244-254
    DOI: https://doi.org/10.15826/jtr.2021.7.3.101
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    References listed on IDEAS

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    Cited by:

    1. Svilena Mihaylova, 2023. "Wage Inequality in Bulgaria: Decomposition by Economic Sectors, Occupational Groups and Districts," Bulgarian Economic Papers bep-2023-05, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Sep 2023.
    2. Andrey A. Pugachev, 2023. "Assessment of the Impact of Social Tax Deductions for Personal Income Tax on the Welfare and Inequality of Citizens in Russia," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 22(4), pages 789-813.

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    More about this item

    Keywords

    proportional income tax; inequality; Gini index; OLS method; Bulgaria;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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