Redistributive Effects of Income Tax Reform: Bulgaria vs. Spain

This report critically examines the redistributive effects of income tax reforms in Bulgaria and Spain. Bulgaria shifted from a progressive to a flat tax regime in 2008, aiming to simplify taxation and reduce inequality. The report analyzes the measures taken, including changes to income tax rates and minimum wages. Spain, in response to economic challenges, implemented a tax reform in 2015 to address income inequality, unemployment, and poverty. The report details the new tax schedules, withholding tax reductions, family taxation credits, and adjustments to retirement and social security contributions. The analysis includes the Atkinson and Gini indices to measure inequality. The conclusion summarizes the impact of these reforms, highlighting the effects on household liquidity, income redistribution, and overall economic development in both countries, emphasizing the importance of tax policy in reducing social inequalities and promoting balanced economic growth.

Running head: Public Finance and Taxation Policy
Public Finance and Taxation Policy
Name of Student
Name of the University
Author Note

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Public Finance and Taxation Policy
Executive Summary
The aim of this report is to make critical examination of the redistributive effect of the
income tax reform in the country like Bulgaria and Spain. The report focuses on the measure
taken by both the countries in making taxation amendment. As Bulgaria, in order to make
their taxation structure simpler and easy, they made a shift towards the flat taxation regime
from progressive structure. On the other hand the report further discusses the measure taken
by the Spanish government in their tax reform to tackle the challenges of the income
inequality, unemployment, poverty and many more. At the last the report provide conclusion
on the taxation policy analysis of both the country Spain and Bulgaria.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
The aim of the recent tax reform in the Bulgaria and Spain......................................................3
Measures introduced in the Tax reform in Bulgaria in the year 2008.......................................4
Measures introduced in the Tax reform in Spain in the year 2015............................................6
Conclusion..................................................................................................................................9
Referencing..............................................................................................................................10

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Public Finance and Taxation Policy
Introduction
This report is about critical examination of redistributive effect of income tax reform
in the Bulgaria and Spain in the year 2008 and 2015 respectively. The purpose of this report
is to analyze and study the effect of income tax reform in the developed and less developed
economies. The report contains a brief introduction of Tax reform and detailed study has
been done to understand the measures taken by the government of the respective country for
the tax reform. Further the report discusses the role of income tax in the redistribution of
income, measures taken by the country in reducing the inequality and equity implication of
both the country. At last the report provide a conclusion on how can income tax can reduce
the social inequalities in the society and provide a way for the balance growth of the
economy.
Discussion
The aim of the recent tax reform in the Bulgaria and Spain.
Tax reform was introduced in the Bulgaria in the year 2008 (Vasilev 2015). The
country Bulgaria has shifted its tax structure from progressive to flat tax rate (Kleven and
Schultz 2014). The government has introduced the tax structure for a period of ten years in the
country. This step is taken by the government because of the following reasons like these flat
tax structure helps in reduction the income inequality, reduction in unemployment, and
minimization of Tax evasion. On the other hand progressive tax structure was not suitable for
the country with limited population. The progressive tax increases with the increase in the
income of the people which provides burdens on the people mind (Kleven and Schultz 2014).

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The country like Spain which is a part of the OECD countries is most affected country
in the world due to world economic crisis (López-Nicolás, Cobacho and Fernández 2013). As
per the Gini coefficient the market inequality raises sharply in this countries in the year 2007
to 2011. Therefore the government of Spain brings the major tax reform in the country in the
year 2015. This reform was necessary to protect the country economy from the ill effect of
Income inequality which is the result of the huge unemployment, poverty and uneven
distribution of wages.
Measures introduced in the Tax reform in Bulgaria in the year 2008.
The country Bulgaria had switches its taxation structure from the progressive tax
schedule to flat tax regime from Jan 1 2008(Vasilev 2015). In the earlier progressive
structure, income tax rate increases with the increase in the income level of household, thus
progressive model of taxation discourages the people to accumulate capital and spend them in
their overall development like education, employment and living a standard lifestyle. The
people in the progressive model are of the opinion that there is no need to earn more money

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as they have to pay more taxes on their income as their earning rises. As a result of this, there
was a sharp increase in the unemployment, poverty, social inequality (Corak 2013).
Table 1: PIT reform in Bulgaria in 2008
Prior to reform After the reform – 2008
Annual taxable income
(BGN) – Tax brackets Tax rates Tax brackets Marginal tax rate
from to
10% on all income above minimum
wage earnings
0 2,400 0%
2,400 3,000 20% over 2,400
3,000 7,200 BGN 120+22% over
3,000
7,200 and more BGN 1,044+24% over
7,200
Source: United Nations, 2014.
Then the government of Bulgaria make a major tax reform in the country in the year
2008, by introducing the flat taxation structure. The rate of the tax was fixed to be flat 10% of
the income. This taxation structure shows a considerable cut in the marginal tax on the
personal income of the people, as a result of this people started capital accumulation and
saving. These accumulations are further Spend on the education, employment, skill
development and other personal welfare of a human being.
In this flat taxation regime the government also focus on the low income household,
as they were facing difficulty with taxation scheme. In the Earlier progressive taxation
structure these low income household are not liable to pay taxes as they received various
deduction and benefit in the government scheme. So the government in the flat taxation
structure, in order to provide relief and compensate to this low income people who were the
main loser in the taxation policy change (Tanchev, 2016).

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Distribution of gross annual earnings in Bulgaria in 2006 and 2010 according to NACE
2, % of full- and part-time employed, in Bulgarian Lev
up to
2K 2K-
2.5K 2.5K-
3K 3K-
3.5K 3.5K-
4K 4K-
4.5K 4.5K-
5K 5K-
5.5K 5.5K-
6K 6K-
6.5K 6.5K-
7K 7K-
7.5K 7-5K-
8K 8K-
8.5K 8.5K-
9K 9K-
9.5K 9.5K-
10K 10K-
10.5K 10.5K
-11K 11K-
11.5K 11.5K
-12K more
than
12K
0.0
5.0
10.0
15.0
20.0
25.0
in %
Source: National Statistics Institute of Bulgaria, 2006; 2010; own interpretation.
N.B. K stands for 1,000 Bulgarian Lev. Unlike Estonia and the Slovak Republic, the
Bulgarian case shows distribution of annual gross earnings of both full- and part-time
employed. Inclusion of part-time employed causes underestimation of average gross earnings
according to OECD (2014b).
The government has increased the minimum wages monetary amount which is non-
taxable. Bulgarian currency is known as Lev. The minimum wage rises up from lev 80 to lev
220 in 2008, then to lev 240 in 2009, lev 270 in 2012, lev 310 in 2013, lev 340 in 2014, and
finally reaches to lev 360 in 2015.
These amendments made by the government provide a major relief to the people
related to the low income tax bracket. Now the relative significance of personal income tax
earning has enlarged, in terms of share of total tax revenue accumulated and relative to the
budget of the economy.

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Apart from this, the relative share of the revenues from individual income as a share
in output had become comparatively stable.Thus it can be said that Bulgaria started making
balance growth in the flat tax regime as compare to the progressive taxation structure (Tullock
2013).
Measures introduced in the Tax reform in Spain in the year 2015.
Spain had under taken an income tax reform in the year 2015 which became
applicable in the year 2016( López-Nicolás, Cobacho and Fernández 2013). The reform was
aimed to reduce inequality in the redistribution of income, increasing liquidity, employment
and reduction of poverty (Corak 2013). The tax reform included certain measures which are
necessary for over all development of the economy.
ATKINSON INDEX- EUROMOD
Effects of tax-benefit system on inequality (Atkinson index)
Countries year
Original Income
A(0.5) A(1) A(1.5) A(0.5) A(1) A(1.5) A(0.5) A(1) A(1.5)
Spain 2014 0.084 0.161 0.315 0.156 0.296 0.691 0.120 0.238 0.426
2015 0.097 0.194 0.328 0.218 0.417 0.812 0.144 0.288 0.554
2016 0.096 0.192 0.332 0.221 0.419 0.838 0.143 0.286 0.564
2017 0.096 0.191 0.334 0.222 0.420 0.843 0.143 0.286 0.567
Disposable
income
Original
Income plus
pensions
Source: EUROMOD version no. I1.0+
Measures taken by the company for tax reform
Implementation New tax schedule
As per the new reform a new taxation slab has been introduced for the person
considered as the tax payer. Now the work is considered as tax payer in the economy of the
country only if his taxable income exceeded 12000 euro per year (Golosov, Maziero and
Menzio, 2013).

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A significant reduction in the withholding tax
A significant reduction of 19% in the tax rate for the manager whose remuneration
comes from an organization whose turnover is less than 100000 euro.
Also there is a sharp reduction being made in the retention income of the professional of
about 18% in general and 15% or 9% in the specific circumstances.
Family taxation
This reform is made keeping in mind the person with disability or minor living with
their parents. This new tax credit scheme is mostly for the person with high family burden,
large family or the person with disabilities. Now under the new scheme they can deduct 1200
euro per annum as an expense in taking care of their family (Golosov, Maziero and Menzio,
2013).
Contribution to retirement pension plan and social security.
As per the new taxation scheme the individual limit of the contribution in the
retirement pension plan have been reduced from 10000 euro to 8000 euro. The reform also
made an amendment in the amount of contribution in the social security. Such contribution
has increased from about 2000 euro to 2500 euro per year. This amendment is only applicable

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to the tax payer spouse who does not obtain income from work or business for an amount of
8000 Euro.
Patronage deduction
The Spanish tax reform has introduced fiscal measures for the increment in the
patronage activities (Del Pino 2013). The general deduction has been increased from 25% to
30% in the personal income taxation of an individual. For stable donation an increase rate has
been provided for the deduction at rate of 35%. For the increment in the micro patronage, a
maximum deduction of 75% has been introduced for a donation of 15 euro.
From the above discussion, it can be summarised that Spanish personal tax reform has
initiated many goods to the society and in the development of the country economy. The tax
reform has improved the household liquidity of the individual, help in the redistribution of
income, progressivity and poverty reduction.
Why Reducing Inequality matters
As per the data released by the world inequality report 2018, there is a sharp increase
in the inequality in the world. Rich person is becoming wealthier and poor people is
becoming poorer. The consequences of this growing trend in inequality is very hazardous.
Poverty, Unemployment and the social conflicts are the by-product of the increase in
Inequality in the society. Therefore government should eradicate the inequality from the
society by bringing the major tax reform in the country and taking some constructive fiscal
measures.

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Effects of tax-benefit components on inequality
Gini index
Country Year
Spain 2017 0.338 0.373 0.349 0.381 0.335 0.530 0.419
2016 0.339 0.373 0.350 0.382 0.336 0.530 0.419
2015 0.340 0.374 0.351 0.383 0.337 0.528 0.420
Disposable
income (DPI)
DPI less
means-
tested
benefits
DPI less
non means-
tested
benefits
DPI plus direct
taxes
DPI plus
Social
Insurance
Contrib.
Original
Income
Original Income
plus pensions
Sour
ce: EUROMOD version no. I1.0+
Conclusion
From the above detailed study of the Bulgarian and Spanish taxation structure it can
concluded that both the country have made a reform in their economy by introducing new
taxation scheme. Bulgarian economy has shifted its taxation policy from the progressive to
flat taxation regime. This change was introduced to cope up with the challenges in the
unequal redistribution of income, poverty, unemployment.
On the other hand Spanish government has made a reform in the taxation structure
which is applicable in year 2016. The new taxation structure has made a positive impact on
the redistribution of the income, increases the liquidity position of assets class, reduction in
the poverty. The tax reform rises the redistributive consequence to 6.3% that is considered as
extra redistributive as compare to the year 2011. Some of the important Spanish tax reform
like implementation of the new tax schedule, reduction in the withholding tax, family
taxation and patronage deduction helps the country in attaining the economic growth and a
balance taxation structure.

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Referencing
Bozio, A., Emmerson, C., Peichl, A. and Tetlow, G., 2015. European public finances and the
great recession: France, Germany, Ireland, Italy, Spain and the United Kingdom
compared. Fiscal Studies, 36(4), pp.405-430.
Corak, M., 2013. Income inequality, equality of opportunity, and intergenerational
mobility. Journal of Economic Perspectives, 27(3), pp.79-102.
Corbacho, A., Cibils, V.F. and Lora, E., 2013. More than Revenue: Taxation as a
development tool. Springer.
Del Pino, E., 2013. The Spanish welfare state from Zapatero to Rajoy: Recalibration to
retrenchment. In Politics and Society in Contemporary Spain (pp. 197-216). Palgrave
Macmillan, New York.
Di Mascio, F. and Natalini, A., 2015. Fiscal retrenchment in southern Europe: Changing
patterns of public management in Greece, Italy, Portugal and Spain. Public Management
Review, 17(1), pp.129-148.
Golosov, M., Maziero, P. and Menzio, G., 2013. Taxation and redistribution of residual
income inequality. Journal of Political Economy, 121(6), pp.1160-1204.
Kalchev, E., 2014. The Bulgarian Flat Tax. Economic Alternatives, (1), pp.33-41.
Kleven, H.J. and Schultz, E.A., 2014. Estimating taxable income responses using Danish tax
reforms. American Economic Journal: Economic Policy, 6(4), pp.271-301.

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Tanchev, S., 2016. THE ROLE OF THE PROPORTIONAL INCOME TAX ON
ECONOMIC GROWTH OF BULGARIA. Economic studies, 25(4).
Tullock, G., 2013. Economics of income redistribution. Springer Science & Business Media.
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