The Polish Deal: The economic consequences of the proposed new tax system

The 170th mBank-CASE seminar analyzed the potential economic effects of the proposed changes to Poland’s tax system in the New Polish Order economic plan, which the government presented in mid-May. According to its authors, the wide-ranging program planned for 2021-2030 is intended to overcome the effects of the pandemic, and in fact is a strategy of “civilizational change.” The most important points of the program in the area of tax include:

  • increasing the tax-free allowance (standard deduction) to PLN 30,000
  • increasing the threshold for the higher income-tax bracket to PLN 120,000 from PLN 85,000
  • a PLN 50,000 tax deduction for returning emigres
  • R&D tax relief for entrepreneurs and companies
  • zero income tax for those who continue working after retirement age
  • a change in the rules for health insurance contributions (a flat 9% of income)
  • income-tax breaks for the middle class

The speakers were Marek Skawiński, director of the Finance Ministry’s Macroeconomic Policy Department; Łukasz Czernicki, the ministry’s chief economist; Dr. hab. Michał Myck, director of the Centre for Economic Analysis; Professor Paweł Wojciechowski, vice president and chief economist of Employers of Poland; and Professor Joanna Tyrowicz from the University of Warsaw.

The Finance Ministry’s representatives were the first to speak, presenting the assumptions for reform of the tax wedge. They started by presenting the main goals of the reform, naming four: increasing the labor supply, making the tax wedge more progressive, reducing the gap in health insurance contributions between different forms of employment and shrinking the shadow economy. They compared the Polish New Order’s assumptions with the current tax system. According to the ministry’s calculations, 17.7 million taxpayers will be better off under the reform, while 3.1 million will lose out. For 5.6 million taxpayers the reform should be neutral. The reform will also significantly reduce the number of people in the higher tax bracket: to 0.6 million in 2022 from 1.2 million in 2019. The ministry’s experts also talked about the assumptions of the planned “middle class tax relief, but their presentation didn’t include the details of these solutions. They then discussed the effects of the tax wedge changes for various social groups. People earning up to PLN 4,500 gross per month (PLN 6,000 for sole proprietors) will benefit, while the increased burdens will affect people who earn more than PLN 13,000 gross (PLN 6,000 for sole proprietors).

Dr. Myck began his presentation with a slightly different view of the social groups who will win or lose from the proposed tax reforms. The group with the most beneficiaries of the New Polish Order is retirees. This may contradict the main goals of the program, i.e. promoting legal employment and increasing the labor supply. One additional consequence of the proposed changes is a change in the structure of budget revenues: a drop in the take from personal income tax, with higher contributions to the NFZ national health fund. Dr. Myck also discussed what he believes the planned reform will fail to achieve: it won’t increase the amount subject to tax very significantly, it won’t broaden the tax base to include farm income and it won’t simplify the system (due to the special tax breaks). He then proposed an alternative reform, which he believes will accomplish all the goals, while also being clearer and simplifying the tax system. The purpose of this proposal was to initiate a discussion on the final shape of the tax reform.

Professor Wojciechowski spoke next, beginning his presentation by recalling an earlier plan – the Strategy for Responsible Development, announced in 2016. One of the goals of that plan was to increase the investment rate to 22-25% by 2020. Today the level is 17-18%, lower than other countries in the region, and also lower than in 2015. Professor Wojciechowski said the reason for such a low rate lies mainly in institutional factors: the complicated tax system, unpredictable laws and the tax authorities’ attitude toward business. He also pointed out the problem of rule of law and judicial independence, and noted that the assumptions of the Polish New Order don’t promote investment or employment, while many of the solutions needlessly complicate the system.

Professor Joanna Tyrowicz was the last to speak. Her presentation focused on a broader problem, that of redistribution programs meant to combat poverty. She believes an honest discussion of this subject is hindered by the lack of long-term, comparable data. That also encourages poorly thought out regulation of tax amounts and brackets, and the politicization of the fight against poverty. Professor Tyrowicz pointed out that even though retirees are among the main beneficiaries of the New Polish Order, over the longer term this group is highly exposed to the problem of relative poverty. The main reason is the use of ad hoc solutions such as the so-called 13th month pension payment, without any general reforms of the pension system, particularly increasing the retirement age. Data indicate that without changes in this area, the number of retirees whose pension is below the minimum will start to approach 60% in the next few years, and later will even exceed 70%.

Author: Adam Śmietanka