Economic Change and Restructuring

, Volume 48, Issue 2, pp 169–185 | Cite as

Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria’s 2008 flat tax reform



This paper provides a quantitative evaluation of the welfare effect of the introduction of proportional taxation in Bulgaria in 2008, an effect that operates through the grey economy channel. Using a general-equilibrium model, augmented with informal sector, a computational experiment is performed to evaluate the welfare gain from the adoption of proportional taxation. The lower effective tax burden in the new tax regime produces a relocation of people into the official sector, stimulates investment, and increases output and consumption. Finally, under the flat tax regime, the size of the informal sector is smaller, and quantitatively consistent with OECD (Is informal normal? Towards more and better jobs in developing countries. OECD, Paris, 2009) and European Commission (Tax reforms in EU member states, Official Publications of the European Communities, Luxembourg, p 2012, 2012) figures.


Taxation Exogenous growth Informal sector Labor reallocation Welfare gains 

JEL Classification

H22 J46 D51 D91 O41 


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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Department of EconomicsAmerican University in BulgariaBlagoevgradBulgaria

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