Why Businesses Migrate from Greece to Bulgaria: Smaller Government Is Cheaper

What “prompted many Greek manufacturers to relocate to neighboring Bulgaria” is not just less-capricious regulation, as The Wall Street Journal suggests, but also the much lower cost of government.

Bulgaria has a 10% flat tax on corporate and personal income and a 20% VAT. Greece has a 49% personal income tax, 26% corporate tax, 45% payroll tax and 23% VAT.  Unbearable tax rates drive a fourth of the Greek economy underground while businesses in the formal economy migrate or shut down.

What about government spending (which Keynesian economists call “fiscal stimulus”)?  Government spending in Bulgaria was 35.7% of GDP in 2012, according to Eurostat, compared with 53.7% in Greece.

If the word “austerity” is used to mean excessive frugality in governmen spending, as defined by Joe Stiglitz and Paul Krugman, then Greece is very far from austere.  A rising share of Greek government spending is now going to pay interest on accumulated debt, to be sure, but that is simply past profligacy coming home to roost.

On the other hand, if austerity is sensibly defined as punitive marginal tax rates on entrepreneurship, effort and investment, then Greece is indeed practicing suicidal austerity.