Taxes can be classified into several categories. They actually build a complex system through which government spending is distributed to varying degrees among individual entities (households and entrepreneurs). Why is it important to have basic knowledge of it, given that you are not a specialist? Understanding the tax system is essential for building and defending an active civic position on issues concerning the economic and social development of the state. It will help you understand the economic consequences of various decisions at the state level, not to be misled by fake news, as well as not to be influenced by biased presentation of information.

 

What Are the Main Categories of Taxes?

Some taxes are paid into the central budget, such as the personal income tax (PIT), value added tax (VAT) and business profit tax (corporate tax). Other taxes are local – they are paid into the budgets of municipalities, for example, when acquiring property (such as an apartment or a car). These include the vehicle tax and the real estate tax. Local taxes provide a certain financial independence for municipalities. The higher their share in the municipal budget, the smaller the share of transfers from the central budget.

The classification of taxes into indirect and direct is important. Indirect taxes include VAT, excise duties and customs duties. They are also called consumption taxes. In these cases, the tax bearer – the one who bears its burden – is the end user – who consumes the good or service. But the taxpayer (the one who pays it into the state budget) is the merchant – the one who sells the good or service. A certain good abroad (for example, a car or a computer) may seem cheaper to you than in Bulgaria. If it is located outside the EU, when importing it to Bulgaria, in most cases, in addition to the delivery, you will have to pay both customs duty and VAT, which usually equalizes the final price with that in our country. You also cannot directly compare prices in the US with those in Bulgaria. Usually in the States, prices are announced without the so-called sales tax, since its amount depends on which state the sale is made in.

Almost every good and/or service that you buy in our country is subject to VAT, and in most cases, its rate is 20 per cent. This means that not the entire amount that you pay to the merchant is income for them, and part of it goes to the state budget. Whenever you compare prices, it is good to keep in mind the different VAT rates between individual categories of goods or services, as well as between countries. For example, investment gold in our country is exempt from VAT, but silver is not. It is for this reason that the difference between the “buy” and “sell” rates for silver is much higher.

Indirect taxes are characterised by what is known as "transferability”. Why is this important for you as a consumer? If the state decides to stimulate a certain sector that is temporarily affected by adverse conditions, it can reduce the VAT rate for it. This implies that the final price for the consumer will decrease. Accordingly, people will consume more goods and services and entrepreneurs' turnover will increase, and hence – profits. However, it is possible that the final price remains the same. This means that businesses become more profitable – a larger share of the price is revenue, and a smaller share – VAT. Hypothetically, the opposite situation is also possible. If the state increases the VAT rate, entrepreneurs can increase prices by a smaller percentage, which would reduce their profits. They would do this if they believe that otherwise the price would increase too much and would discourage consumers from buying.

With direct taxes, the bearer of the tax burden and the taxpayer – the one who pays the tax into the budget – are the same person. Direct taxes can be income-based, when income is taxed (such as personal income tax and corporate income tax), or property-based, such as the tax on motor vehicles and the tax on real estate.

Taxes also differ depending on the object of taxation. For real estate, taxation is based on the area measured in square metres. For motor vehicles up to 3.5 tonnes, two components are taxed — a property component (the engine power, adjusted by a coefficient based on the year of manufacture) and an environmental component (the category in which the vehicle falls). Most commonly, the taxable basis is value — the amount of income received (for personal income tax) or the sale price, respectively the customs value (for VAT).

Taxes are also distinguished depending on whether the tax rate changes or not. If it is constant, the tax is proportional (or “flat”). This means that no matter what the amount of income is, it will always be taxed at the same rate. Until 2008, a progressive tax was applied in our country – as the taxable tax base increases, the tax rate also increases, i.e. higher incomes are taxed at a higher rate. As of 2025, a proportional (flat) tax is applied in Bulgaria – for both individuals and businesses.

 

Proportional or Progressive Taxation?

It is often discussed which taxation is fairer – proportional or progressive. Some economists believe that in developing economies that are catching up with other countries, proportional taxation is more appropriate. One of the arguments in favour of this is that higher incomes are usually associated with higher investments of resources. For example, a person earns more because they work more or have invested more time in education and qualification. It is also possible that they have taken a risk and run a business, creating jobs and increasing the gross domestic product. It is from this point of view that it is illogical for them to be demotivated by the state, which taxes them more and more for every next euro they have earned.

At the same time, proportional taxation is easier to implement. People are more motivated to declare and pay the real amount of taxes they owe. They are also less likely to make mistakes. All of this implies that tax collection is more efficient and costs less to the state (i.e. to all of us).

Progressive taxation also has its supporters. Although the tax rate is different, it also assumes that everyone pays the same amount. This is because of the abstract concept of “equal sacrifice.” According to it, a person with an income of 1,000 units who has to pay a tax of 100 units (10%) will experience greater metaphorical pain than someone with an income of 10,000 units who has to pay a tax of 1,500 units (15%). This is because the former is likely to be deprived of the means to buy food, books, medicine, etc.

There are a number of other arguments, but either approach can be defended. The tax system can achieve income redistribution, but the question is what the purpose of society is. Some economists believe that this effect should be sought through government spending (i.e. targeted assistance and support for people with lower incomes), and not through revenue.

In summary, it is important to emphasise that the quantity and quality of the public services that society receives, as well as the support the state provides when needed, are directly linked to the taxes people pay. This is precisely why it is important not to tolerate the shadow economy. When someone evades the taxes they owe and does not pay them, they are in fact harming society as a whole for their own personal benefit.