Tax Over Deposits Interests is an Attempt to Conceal a Lie

The government decided to impose tax on deposits interests – this news blew up the public space on Wednesday. It’s been a long time since the government has last produced news with such public response.

If one tracks down through the whole governmental policy, however, and in particular the one related to incomes, would reveal that this development is logically and fully consistent with GERB’s governmental practices.

It could be definitely claimed that this idea has not come to the government in the last second. As it turned out, two weeks ago, the website of the Ministry of Finance published information that the ministry was going to offer such a tax into the new tax laws for 2013. Following the journalists’ interest, the material disappeared from the website and the ministry’s press office and the minister himself denied even discussing this idea.

Now, it became totally clear that this idea has been Mr. Simeon Dynakov’s cornerstone for raising funds for the budget in order to increase pensions. Obviously, this information has leaked due to the carelessness of some officer of MF and due to the lack of any other alternative, the Minister said this gross lie in order to whitewash the blunder. Because there is no way that an idea for such a significant change in the taxation came to the Minister’s mind in the last week before the adoption of the budget by the Council of Minister. It simply lacks technological time.

Thus, apart from everything else, the Bulgarian Minister of Finance can easily be euphemistically called a person, who deliberately misleads. It is rather insolently to know that such a change in the tax legislation is going to be adopted in one week and to stand up before the Bulgarian people only to lie to its face that there is no such an idea at all.

But let’s put aside the moral virtues of the financial minister. They will probably be the subject of future comments, not so far away from now. Let’s consider the meaning of the proposal.

The tax over the deposits interest is not yet a fact since it has to be first passed by Parliament. For the time being, GERB has set all efforts to protect this thesis, including using the so-called “eminent” economists, always ready to lend a helping hand to the government in order to keep the benefits they receive in one form or another from the government.

It is very difficult to find arguments in favor of such a measure. One of the theses is that the introduction of the tax is a consequence of the EU requirements and in particular Directive 2003/48/EC, effective as of 2003 and with deadline for transposition in the legislation of EU Member States until 01.07.2005.

As we can see, this Directive has been effective as of 2005, for Bulgaria as of 2007, when our country became an EU Member State, and until now, it hasn’t brought forth any need for introduction of a tax over deposits interests. In this connection, it is very strange that suddenly, five years later, the government found an argument in this particular directive for the introduction of such a tax. One of the “independent” apologist of this measure even found violation of the European legislation and grounds for imposing sanctions for Bulgaria due to unequal treatment of Bulgarian and foreign EU citizens.

The lack of any problems related to the application of the above Directive in Bulgaria does not arise from the fact that our country complies with all requirements but because interest taxation is regulated by bilateral double taxation avoidance agreements (DTAA). Our country has signed such agreements with all EU Member States and these agreements stipulate on the way of taxation of interest revenues. In this case, the more general requirements of the Directive related to this tax remain practically non-applicable. So, for the time being, there are no reasons for the government to worry that it does not adhere to the European requirements and that such non-adherence could incur sanctions.

The other argument of the government, saying that the introduction of this tax is oriented to the rich Bulgarians, is also beneath criticism. If the government’s goal was to tax the incomes of rich citizens, then the most reasonable thing to do would be to repeal the flat tax and introduce progressive income taxation, which was applied in Bulgaria before the left party BSP, which from ideological point of view should have looked after the incomes of the poorer part of the population and should have overridden it.

Since, however, such an action would fully expose the left-wing nature of this government, it decided to use a deception, introducing a new type of tax with the sole purpose to raise funds for pensions increase.

Yet, the introduction of such a tax has nothing to do with the introduction of social justice of any kind since it will actually affect mostly people with lower incomes, who have put aside some cash for hard times. It will be very difficult for such people to find an alternative for investing their savings since it is obvious that one cannot start a business of any kind with an amount of several thousand BGN, especially in times of crisis.

Actually, the logics that by taxing savings one can make people invest is quite incomprehensible because investment decisions are not made based solely on the expected profitability. The business environment and general economic situation are also a very important component of making investment decisions.

If Bulgaria actually did offer interesting business opportunities, they would have attracted foreign investors, and that, unfortunately, is not a fact, despite the timid increase in foreign investments recently. It is also irrational to suppose that people and companies with big deposits, which are anyway presumably able to manage their own funds, will suddenly decide to develop new investment projects provided that they have not already done so, if they had the chance.

Naturally, the present global crisis limits a lot of opportunities for development of new business and it is only logical to suppose that if money stays in the banks, the reason is probably not unwillingness to initiate new business undertakings. On the other hand, it is the rich Bulgarians, who represent a very small part of the population, that do stand a chance to redirect their savings to other opportunities in order to avoid the new tax.

It is pointless to comment on some reference economic patterns that the received interest in the banks is actually a compensation for the inflation rate, which in Bulgaria remains considerably higher than the inflation rate in other EU parts, with some minor exceptions. In Western Europe, interest rates on deposits may be much lower but the inflation rate in these countries is also much lower than in Bulgaria and in fact, the actual interest rates in these countries, which do represent the real compensation for the inflation rate, are positive.

Currently, the actual interest rates in Bulgaria and in other EU member states do not differ much, although in terms of nominal numbers, interest rates in Bulgaria are higher indeed.

The introduction of a tax on such interests is very likely to make their actual value negative, which will mean that the state actions will lead to additional impoverishment of citizens.

It should be taken into account that there actually may be a tax over deposits interests in the other EU Member States applied but there is also exemption of the interest costs for loans. Unfortunately, it was exactly this government that revoked the concessions for repayment of mortgage loans, which were used by young families. I.e. despite all claims that the tax burden is not being increased in the country, as years went by, GERB’s government revoked all concessions for the incomes of the poorer people, such as the family income taxation, the above-mentioned concessions for mortgage loan interests, etc.

Another similar economic patterns that the government neglects, is that in order to have investments in one country, there have to be savings available. Currently, with this step, it is the population’s thrift that the government penalizes, which will surely affect the future investment activity in the country. In fact, the main problem with respect to the investment activity in the country is that the business environment is so severely distorted, serving the interests of the big and close to the power corporations, that actually it is too risky for any normal entrepreneur to invest his money in any business, unless he relies on some kind of protection on the part of the ruling class or unless he is a part of a big business group.

A very suitable example in this respect can be given with the actions that the state undertook to destroy the green energy business, by deteriorating the situation to such an extent that the investors started selling their assets in Bulgaria on a mass scale. At the same time, it is more than obvious how certain businessmen, including deputies to the National Assembly, change the laws in such a way as to favor them personally and their circles. Given the facts, claiming that the business and population are to blame for the increased savings and decreased investments, never recognizing one’s own personal responsibility for the situation, is a sign of either extreme lack of foresight or of felonious bias.

Actually the effects, which will probably come with GERB’s decision, may be considered in two aspects.

Firstly, it is very probable that a great part of the saving deposits will be closed. No serious reason should be sought in this – it is simply a sign by Bulgarians that they do not agree with the policy, conducted by the government. For the time being, it is not clear how many Bulgarians will choose to do this but what will become clear after such an act would be that the government cannot take the deposit basis in the country for granted and conduct its fiscal experiments upon it. If a significant number of people decide to withdraw their deposits in protest, on one hand, the end result for the budget will not be consistent with the expected parameters and, on the other hand, the bank system will undergo some pointless cataclysms.

At the same time, the withdrawn funds will most probably be spent for consumption instead of some kind of investments, which could also have some short-term effect on the economic situation, increasing GDP of the country but in the longer run, the country will have less savings and the consumption will consequently shrink, unless we assume that the crisis in EU will be over next year, which currently is a rather irrational assumption.

It is pointless to make any more analyses and comments on the government’s decision on the matter in order to realize the simple truth that imposing a tax over deposits interests actually aims only at raising funds for keeping the promised increase of pensions as of April 2013. Unfortunately, the debate that filled entirely the public space, is not rational because it does not lie on any rational principles. It happened due to the need to conceal one lie of the government, which instead of thinking about the prosperity of the state that it rules is interested, on the first place, in winning the elections next year and seeking a way to bribe the population to vote for it.

There is nothing worthy in this approach and this will become morbidly obvious at the next elections. In the history of Bulgaria so far, there is yet no example of a political force winning the power by using straightforward or concealed deception.

Actually, it is a pity that GERB itself came to power with such a rush, once the triple coalition did its best to change the electoral legislation in such a way as to almost win the elections in 2009 ex officio.

What happened thereafter is already history.

The article was published with minor changes on 12.10.2012 at www.mediapool.bg.