Simplifying and Improving: Revisiting Bulgaria's Revenue Forecasting Models

Abstract

In the thirty years since the end of real socialism, Bulgaria's went from having a rather radically 'different' tax system to adopting flat-rate taxation with marginal tax rates that fell from figures as high as 40% to 10% for both the corporate-income tax and the personal-income tax. Crucially, the econometric forecasting models in use at the Bulgarian Ministry of Finance hinted at an increase in tax revenue compatible with the so-called 'Laffer curve'. Similarly, many economists held the view that revenues would have increased. However, reality fell short of those expectations based on forecasting models and rooted in mainstream economic theory. Thus, this paper asks whether there are betterperforming forecasting models for personal-and corporate-income tax-revenues in Bulgaria that are readily implementable and overperform the ones currently in use. After articulating a constructive critique of the current forecasting models, the paper offers readily implementable, transparent alternatives and proves their superiority.