Poland’s finance ministry is seeking an array of experts to join its tax team. One new hire will be expected to prepare “legal solutions” to “problems” arising from “newly designed levies”. Other tax specialists will classify taxes, track legal interpretations, and help plan public debt.
The tax authorities are gathering troops as Prime Minister Mateusz Morawiecki prepares to launch a major “New Deal” programme for post-pandemic recovery.
Reports indicate that it will include both increased spending and tax reform. Morawiecki himself has said that the overhaul will bring Poland’s tax system “to the level of the most developed European countries”. That has sparked speculation about a more progressive income tax as well as extending taxation for groups such as freelancers and farmers.
Parts of this are likely to prove a tough sell, both to an electorate that has been promised no tax hikes and within a ruling coalition that has become increasingly brittle. Yet with a shrinking tax base and the rising costs of the ruling party’s generous electoral promises, something will have to give.
Spending its way to power
Since coming to power in 2015, the socially conservative Law and Justice-led (PiS) government has been fiscally open-handed. Its flagship “500+” child benefit scheme alone cost more than 134 billion zloty (roughly €29 billion) from its introduction in 2016 up to January 2021, according to official figures.
While opposition parties and liberal economists warned that such spending would be unaffordable, PiS has until now been able to defy such claims thanks to a booming economy. GDP grew between 4.5% and 5.3% annually in the three years before the pandemic. Between 2016 and 2020, public debt fell from 54% to 44% of GDP, according to government figures.
Before the pandemic struck, the government had briefly celebrated passing the first balanced state budget in Poland’s post-1989 history. However, the onset of the crisis then forced it to announce a record budget deficit of 109 billion zloty instead.
The government has also been creatively seeking out loose change through a number of new levies. In its first year back in power, PiS slapped banks with a new tax worth an annual 4.8 billion zloty (roughly €1 billion), according to calculations by Rzeczpospolita.
In 2018, a levy on plastic shopping bags was introduced to limit single-use plastic waste, and which provided the budget with 1.4 billion zloty (€310 million) annually. The next year, a fuel surcharge added an extra annual 1.7 billion zloty (€380 million), while a “millionaires tax” contributed 1.2 billion zloty (€265 million).
As the pandemic struck, buried in an economic support package the government introduced a “Netflix tax” of 1.5% on the revenue of video-on-demand (VOD) platforms to bolster the domestic film industry.
This year it has already rolled out a power capacity fee worth 4 billion zloty (€880 million) annually, a sugar tax worth 3 billion zloty (€660 million), and a trade tax worth 1.4 billion zloty (€310 million).
A champion of low taxes
In spite of the creeping levies, PiS has painted itself as a champion of lower taxes.
“All three most important taxes have been significantly reduced,” said Prime Minister Mateusz Morawiecki in December, referring to personal (PIT) and corporate (CIT) income taxes as well as VAT. Earlier in 2020, he hailed Andrzej Duda as “the guarantor of no tax rises” during the president’s successful re-election campaign.
Marcin Piątkowski, professor of economics at Kozminski University in Warsaw, argues that it is hard to gauge the net change since 2015. In past years the government has cut corporate tax, reduced personal income tax from 18% to 17% and added exceptions, including for young people.
“There are those taxes that are rising and those that are falling, such as personal income tax for younger Poles or corporate tax for small and medium-sized enterprises,” says Piątkowski.
The effects of these, however, are contested. “Those that were favourable to entrepreneurs were publicised, and those that were unfavourable were cast as ‘plugging holes’ in the tax system,” says Premysław Pruszyński, a tax expert at Confederation Lewiatan, an employers’ association.
He argues that many of these “plugs” have ended up increasing what businesses pay in tax, despite lower nominal tax rates. For example, by changing rules about what can be written off as costs, the profit base has effectively increased from some businesses.
Sins and solidarity
Where new charges have been introduced, they have euphemistically been called “levies” or “solidarity fees”. This has been the case with the planned media advertising tax – which the government has presented as contributing to fighting the effects of the pandemic – as well as a previous income tax on millionaires introduced in 2019.
In response to the criticism regarding the new sugar levy, deputy finance minister Piotr Patkowski insisted that the new fee is “not a tax” because it “will not be transferred to the state budget, but to the budget of the National Health Fund” instead.
These changes – which though numerous are individually relatively small – have also been cast as ways to change consumer habits.
“They primarily have sectoral goals related to health protection, road safety, improvement of environmental protection, reduction of smog,” said Morawiecki in December, when asked about the new sugar surcharge. “The main budget revenues are related to basic taxes…All the rest constitute 10% of budget revenue.”
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“They may be justified by the public interest, but it comes down to boosting the budget,” says Pruszyński. “I have no illusions that the function of these surcharges is fiscal.”
In the case of the sugar surcharge – officially meant to “shape pro-health attitudes of consumers” – Pruszyński notes that no other efforts were undertaken to nurture public awareness about the health impact of sugar.
“No one bothered with a media campaign. No one decided to lower VAT on fitness services or equipment to shape health attitudes. Only the fiscal path was chosen,” says Pruszyński.
By contrast, Piątkowski thinks such taxes serve a good purpose. “They are not perfect, but they tackle real social problems. It is good that we are increasing budget revenues while nudging people to choose consumption patterns that are better for them and less harmful to society as a whole,” he says.
Yet, even if an increasing number of corrective levies is meant to improve behaviour, it comes at the cost of worsening the tax transparency and competitiveness of the country. In the past five years Poland has dropped from 30th to 34th place of 36 countries in the OECD’s tax competitiveness index.
What’s the New Deal?
Yet the government’s fiscal balancing act has now been thrown off by lower tax incomes during the economic slowdown as well as growing costs of fighting the pandemic and appeasing its core voters.
According to media leaks on Sunday, Morawiecki’s planned “New Deal” includes plans to raise the income-tax-free allowance to 30,000 zloty (roughly €6,500) and no income tax on pensions up to 2,500 zloty (€550). Economists estimate that the former change could cost 60 billion zloty (€13 billion) in foregone revenue, and the latter an additional 27 billion zloty (€6 billion), reports Business Insider.
The government is expected to raise health spending up to 7% of GDP in coming years, from around 4% right now, as well as to increase the defence budget. On top of that, the country’s response to the coronavirus pandemic over the past year carries a bill of its own.
Podniesienie kwoty wolnej od podatku do 30 tys. zl i emerytury bez podatku do 2.5 tys. zł to jest program na przedterminowe wybory.
— Piotr Miączyński (@piotrmiaczynski) March 7, 2021
Morawiecki says that his plans will “rebuild both the public finance system and the tax system”, including “lower and fairer taxes” to bring Poland “to the level of the most developed European countries”.
Compared with the OECD average, Poland’s public finances have a higher share of social security contributions – at 37% vs 26% – and consumption taxes including VAT and excise – at 37% vs 33% – but a notably lower share of income and business tax – at 21% compared with 34%.
A new tax system emulating the west could include more progressive taxation, raising taxes on the more wealthy from the current 17% on income up to 85,528 zloty (€18,700) and 32% over, or preventing some people from switching to sole proprietorship to pay lower taxes.
New revenue streams are speculated to also come from expanding the social security base – such as to include freelancers and farmers. Social security contributions could also potentially be increased by raising rates or linking them to income, reports Gazeta Wyborcza.
Pruszyński warns against fiscal myopia: “tightening screws now is the worst possible route to recovery. Instead, there needs to be greater certainty, predictability, security and encouragement for investments that will provide jobs and grow the tax base for the coming years.”
Piątkowki also argues for moderation in taxation. “Poland does not necessarily need much higher taxes today, because we are in a historically unprecedented situation where global and domestic investors are paying to buy Polish debt,” he says, noting that with a 1.3% interest rate on 10-year government bonds and inflation at almost 3%, the real interest rate on lending Poland money is negative.
He believes that if Poland were to increase levies, it should do so for redistributive ends. “There is still a lot of scope to raise taxes on top incomes, financial assets and wealth, given that Poland is one of the leaders in inequality in Europe as measured by the gap between the incomes of the top 10% of the richest Poles and the rest of the society,” he says.
Whatever the shape of the tax reform unveiled at a New Deal conference on 20 March, the government will face a number of hurdles. Selling a de facto overall tax rise to the electorate will be one. Another will be winning support from a pro-business junior coalition partner, Agreement (Porozumienie), with whom relations are already difficult.
The finance ministry’s new hires – like its bosses – are in for a busy tax season this year.
Maria Wilczek is deputy editor of Notes from Poland. She is a regular writer for The Times, The Economist and Al Jazeera English, and has also featured in Foreign Policy, Politico Europe, The Spectator and Gazeta Wyborcza.
