Tax Buoyancy and Economic Growth: Empirical Evidence of Bulgaria

Abstract

The study analyzes the long-run and short-run tax buoyancies of Bulgaria and their relationship with Bulgaria’s economic growth. The buoyancy measures the response of tax revenue to changes in economic growth. The buoyancy indicates whether collectability of the tax on income, profit, and consumption increases. The object of this study is the collectability of aggregate tax revenues and of the revenues from different types of taxes – value added tax, personal income tax, corporate tax and social security contributions in Bulgaria. The subject of the study is the relationship of different tax revenues with economic growth. The research methods employed are the fully modified least squares (FMOLS) and autoregressive distributed lag model (ARDL). The research covers the period from the first quarter of 1999 to the second quarter of 2017 and uses the Eurostat data (78 observations). The study aims to show which type of revenues (from direct or from indirect taxes) is more important for Bulgaria’s state budget. It is shown that the buoyancies of aggregate tax revenue, personal income tax and social security contributions significantly differ from one another in the long-run. The buoyancies of the value-added tax and the corporate tax are above one in the long run. In the short-run the buoyancy of the aggregate tax revenues, the corporate tax, the income tax and the social security contributions are different from one. The short-run buoyancy of VAT exceeds one, hence dynamics of VAT revenues is sustainable. The collectability of the aggregate tax revenue, personal income tax and social security contributions has increased neither in the long run nor in the short run. It is therefore recommended that inefficient taxes, whose collectability does not increase, be reformed.