Long-run equilibrium between personal income tax and economic growth in Bulgaria

S Tanchev

doi:10.15826/jtr.2021.7.1.090

Abstract

The study analyzes the relationship of personal income tax and economic growth in the long and short runs to show which type of income tax (progressive or proportional) is more compatible with Bulgaria’s economic growth. The methods of Vector Error Correction and Correlation are applied to determine the long-run and short-run impacts of the two types of income tax. The research covers the period from the first quarter of 1999 to the first quarter of 2020. Eurostat data (85 observations) were used. The empirical research has been divided into two periods. The long-run and short-run relationships between economic growth and tax revenue from progressive income tax in Bulgaria have first been studied, followed by the relationship between economic growth and the tax revenue from proportional income tax. The research results show that there is a long-run equilibrium relationship, but not a short-run relationship, between personal income tax and economic growth. The results imply that the progressive income tax is more compatible with economic growth than proportional income tax in Bulgaria in the long run. In the short run, the progressive income tax and proportional income tax have not shown statistically significant relationships with economic growth. Therefore, a progressive income tax leads to greater economic growth than a proportional income tax. From a long-run equilibrium standpoint, it is advisable that Bulgaria switch from proportional to progressive income taxation. It may be inferred that progressive taxation is more appropriate for economic growth than proportional taxation. The results are in conformity with the theory of endogenic growth and reject the neoclassical theory.

Highlights

Taxes from the population are used because the national economy has not yet reached - it continuously grows - a level so high that, the budget revenues made from the state-owned companies, the cooperative ones and the private ventures, can fully meet the ever increasing demands of our society
Several contemporary economists argue that excessive taxes exert an adverse influence on the national economy because it undermines the incentive and the initiative of entrepreneurs and hinders the growth of production
As you can see from the above information, the flat income tax is not a universal cure to the economic weaknesses of a state, a number of European countries, including several EU member states have introduced the regime "one fee for all types of income / profit"

Summary

Introduction

Taxes from the population are used because the national economy has not yet reached - it continuously grows - a level so high that, the budget revenues made from the state-owned companies, the cooperative ones and the private ventures, can fully meet the ever increasing demands of our society. As you can see from the above information, the flat income tax is not a universal cure to the economic weaknesses of a state, a number of European countries, including several EU member states have introduced the regime "one fee for all types of income / profit". Many of these countries are faced with substantial budget deficits, and some of them must align with the economic status requirements of the "euro zone". 6% of the population obtains incomes over 4000 lei and only 1% exceed the amount of 8,000 lei per month

Population incomes

CONTRIB stat

Findings

Disadvantages It favors rich people in detriment of the poor