Measuring the Welfare Costs of EU Accession: The Case of Vat Reform in Bulgaria

Abstract

We analyze possible reforms to the Bulgarian VAT system, evaluating revenue-neutral reallocations of goods to tax bands within the existing 2-rate structure. We investigate the sensitivity of the results to behavioural response and imperfect tax recovery. We find only a weak case for the use of non-uniform VAT rate structures for redistributional purposes. Selective VAT exemptions can produce approximate welfare gains equivalent to a general price fall of much less than 1 per cent for plausible specifications of social welfare.

Keywords: Bulgaria, economic transition, tax reform, EU accession, welfare measurement, behavioural response

JEL Classification: D31, J31, P24