The flat tax: why stay (and what the IMF says: Change the system and move from a flat to a progressive tax)

Brief: Flat tax provides simplicity and predictability in an environment with a large informal economy. A progressive tax may reduce inequalities but carries risks of income evasion and higher administration costs, especially without a strong tax administration. The IMF recognises both sides - and explicitly warns that if progression is to go ahead at all, controls must first be tightened and the tax base broadened. [1]

What is actually "flat" vs. "progressive"

• Flat tax: Same rate for everyone (in our country 10% for personal income and corporate profits). This is a "proportional (flat)" system and is among the lowest in the EU. [2]
• Progressive tax: The rate rises with income; the idea is a higher contribution from the highest earners.

Position: keep the flat - but improve the system around it

Why:

1. Predictability and less incentive for "acrobatics"
   Flat rates reduce the motivation to shift and disguise income. In a country with widespread informality, this is a real advantage - as long as it is built on with stronger controls and smarter administration. This is where the IMF insists: the widespread informality in Bulgaria requires a strengthening of control and audit processes and a focus on large taxpayers and risky sectors. [1]

2. The real "leaks" are in collections
   The World Bank shows significant gaps in VAT/GST collection and great revenue potential from better audits and targeted controls rather than from changing the rate architecture. [2]

3. A broader fiscal package works better than a move on PIT
   The IMF/Fiscal Monitor stresses that inequalities are most effectively addressed by a combination of policies: targeted social spending, good education/health and well-designed taxes - not just personal tax changes. [4]

Honest about the arguments for progression - and where the catch is

The IMF in the Article IV Consultation for 2024 says clearly:

"Moving away from the low flat rates of 10% for corporate and personal taxes to higher and - for PIT - progressive rates would help reduce inequalities and raise more revenue."[1]

• First, we need to curb informality and strengthen controls so that evasion among high earners does not spike as we progress. [1]
• Bulgarian authorities "are not convinced that the timing is right"; raising marginal rates could lead to more evasion. [1]

Conclusion: Even when the IMF "opens the door" to progression, it sets a condition beforehand - administrative "muscle" and closed loopholes. If these two things are missing, progression risks worsening rather than improving the outcome.

What the IMF says about taxing wealth

The IMF recommends prioritizing taxation of actual realized wealth income (dividends, interest, capital gains) and inheritances/gifts as less distortionary and fairer instruments relative to an annual "wealth tax." [3]

The 5-Step Plan: a better system without changing the flat tax

1. Strengthen collection: Risk-based audits; prioritization of large payers and risky sectors; more automatic cross-checks. [1]
2. Expanding the tax base: Limit preferences and special regimes that erode revenue. [1]
3. Focus on VAT: Targeted controls where non-compliance is greatest; improved voluntary compliance processes. [2]
4. Efficient spending: Reforms in public procurement, education and social payments - "more results for the same money". [2]
5. Moderate adjustments in other taxes: Capital gains, inheritance/gift and broader carbon taxation for revenue and green transformation. [3]

Q&A for the general audience

Will the "middle class" pay more if we leave it flat?
No - the architecture doesn't change. More money comes from better collections and fewer loopholes. [1]

And the inequalities?
They are brought down by targeted social spending and meaningful taxation of capital/inheritance income, plus quality public services - that's the IMF/Fiscal Monitor line. [4]

Is it "fair" for everyone to pay the same percentage?
Fairness is also a working system that actually collects what is owed and does not tolerate informality. Without that, any progression "on paper" is emptied of substance. [1]

Quotes (ready for visual emphasis)

"Moving ... to higher and progressive (for PIT) rates would help reduce inequalities and raise more revenue." - IMF, Bulgaria, Article IV 2024. [1]

"[The information economy] is widespread... There is a need to strengthen controls and auditing, especially to avoid a spike in high-income evasion if progressivity is introduced." - IMF, Bulgaria, Article IV 2024. [1]

"The Bulgarian authorities... are not convinced that the introduction of progressive taxation is desirable at this stage." - IMF, Bulgaria, Article IV 2024. [1]

"Taxing real earned income is less distortionary and fairer than a wealth tax." - IMF, How to Tax Wealth, 2024. [3]

Sources (for clickable notes)

• 1. IMF Country Report No. 24/163 - Bulgaria: 2024 Article IV Consultation (key passages on progressivity, informality and the position of the authorities)
.
• 2. World Bank - Bulgaria Public Finance Review 2023 (VAT gap, revenue, cost-effectiveness; describes the flat 10% as part of the system).
• 3. IMF - How to Tax Wealth (2024) (why taxing wealth income is preferable to an annual wealth tax).
• 4. IMF - Fiscal Monitor (2017; 2021, ch. "A Fair Shot")
  - framework to reduce inequalities through a package of measures, not just a PIT.

Conclusion

Changing just one rate rarely solves system problems. For Bulgaria, the sensible conservative choice is: keep the flat tax but aggressively improve collection, cut loopholes, make spending more efficient and use "smart" taxes where distortions are smallest. So we get more fairness in practice without risking base outflow and a spike in evasion.

Note: The text was generated using artificial intelligence. As per upcoming EU requirements, content is marked as AI-generated.