ISP Working Paper Number 05-10

Tax Compliance of Small Business in Transition Economies: Lessons from Bulgaria

Konstantin Pashev, March 2005

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Abstract:

This paper studies the challenges of raising tax compliance in the small business sector in transition economies, drawing from the experience of Bulgaria. It identifies the elements of tax design and enforcement that discriminate against the small business and drive non-compliance. It argues that these drivers are related mainly to the disproportionate tax burden of compulsory social insurance contributions and income taxation of sole proprietors, as well as to the higher compliance costs faced by the small business in Bulgaria. In this framework it studies Bulgarian experience with two presumptive taxes - the patent tax and the minimum insurance income thresholds - and discusses the opportunities and costs of their optimization.