Friday, 15 October 2010

Austerity for the Majority

The government has drawn up an emergency financial plan, which could mean further hardships for the vast majority of Polish society. A clause exists within the Polish constitution that automatically triggers austerity measures if public debt crosses 55% of GDP – these are then increased if it breaches 60%. The government predicts that public debt will peak at more than 54% in 2012 and then begin to decline thereafter. However, with such a small margin of error, the government has drawn up a contingency plan if public debt does in fact exceed its self-imposed threshold.

There is a serious argument in favour of reforming this law. At the moment public investment is driving the economy – boosted by the inflow of funds from the EU – and it is imperative that this is both continued and public services supported. However, Poland is a country on the periphery of the world economy and one which is dominated by international capital. The international financial markets are able to severely punish it – and drive up the cost of government bonds – if the Polish government is seen to be breaking from its neo-liberal orthodoxy. So if, for the sake of argument, we were to accept that the government cannot reform its constitution (which in-fact could be addressed if the government and opposition showed the political will) the major question at the moment is who will foot the bill if public debt crosses the 55% threshold.

Up until now the government has made it clear as to who will pay to try and prevent this from happening: low and medium wage earners. The government’s decision to raise VAT and cut public spending will negatively affect the majority of society. An increase in VAT is felt the most by the poor – as the vast majority of their income is devoted to current consumption. Reducing public and social spending will also lower the consumption level of large sections of society - not least the public sector workers whose wages are being frozen. The government is also attempting to speed up privatisation in order to boost its coffers. This is an extremely short-sighted policy that involves selling off often profitable and strategically important companies for short-term economic gain.

The government’s new financial plan now makes it clear who will pay if public debt crosses its 55% limit. If this occurs then the government has announced that it will abolish, for three years, the popular tax reliefs for the Internet and children. The latter tax relief was initially developed as part of the government’s pro-family policy – designed to encourage couples to have more children. Poland has one of the lowest birth-rates in Europe and – alongside high emigration and low immigration – is leading to a shrinking and ageing population. The government will also abolish the tax breaks received by independently working artists, journalists and academics. Furthermore, the government plans to sharply decrease subsidies financing the salaries of disabled workers. Finally, it has announced that it will further increase VAT (above the already planned rise) by a further 1% for two consecutive years. Ouch!

All of this is not just grossly unfair but also makes no objective economic sense. By increasing the rate of tax for ordinary citizens demand will be cut and economic growth slowed. Below I publish a translated version of an article written by the publicist Piotr Szumlewicz that explains the unfairness of the government’s tax policies and at how a small group of high earners have disproportionately benefited from them. It also shows how businesses pay a lower rate of tax than employees. The absurdity of this situation is highlighted when we consider that private firms are not investing in the economy at the moment and that public investment is keeping it afloat. One point that should also be borne in mind is that the personal income tax reforms, enacted by the present PO government, are laws that were passed during the term of the PiS government. This shows how despite their efforts at ideological obscurification – when it comes to economic policy not much separates these two right-wing conservative parties.

(Piotr Szumlewicz)

The Ministry of Finance has presented figures showing the amount that individuals paid into last year’s government budget. The Ministry’s report did not cause any great controversy, despite it including some shocking data. It reveals that although the present and past governments have cut income taxes, the real tax burden for the majority of society has in-fact increased.

In 2009 the government replaced the three personal income tax bands of 19%, 30% and 40% with two new tax bands – 18% and 32%. From last year those whose income exceeds ZŁ 85,528 (more than ZŁ7,000 per month) now pay 32% tax. In the previous system those crossing this level would have paid 40%. In other words the government has significantly reduced the tax rate for two of the highest earning sections of society and only minimally cut it (barely by 1%) for the remaining tax payers. Last year as many as 98.41% of taxpayers (24.02m people) were included in the 18% tax band and just 1.59% (387,000 people) in the 32% band. In 2008 those in the highest two tax bands made up 7.85% of tax payers (1.40% and 6.45% respectively.) There has therefore been a clear move away from progressive taxation and personal income tax in Poland is now virtually linear.

In 2008 the three different tax groups – after taking into account tax reliefs and exemptions – paid 13.85%, 18.71% and 29.01% of all effective taxation. A year later people from the first group (which previously encompassed groups one and two) paid an average of 12.93% and the second (previously within the third group) paid 22.75%. This means that the tax burden for 1.40% of taxpayers, who are the highest earners, fell by 6.37% and for 6.45% of taxpayers, who two years ago were included in the second tax band, declined by 4.78%. At the same time 92.15% of taxpayers – who presently pay a tax-rate of 18% - pay on average 0.08% more!

The Polish Statistical Agency (GUS) has also published figures showing the level of tax paid by different types of taxpayers according to their type of work. It occurs, that workers pay higher taxes in Poland than employers do. The real taxation rate for someone who earns a salary solely from paid work equaled 15.13%; whilst those who gain their income through owning a non-agricultural business pay on average 14.3% tax. Furthermore, pensioners pay only slightly less than business owners – 13.8%.

In 2009 personal income tax brought Zł41.5bn into the government’s budget – which is Zł5.5bn less than a year earlier. This is a similar amount to that raised by the increase in VAT planned for next year. This particularly hits poor people, for whom current consumption takes up the majority of their income.

The government has decided that the burden of the budget deficit, caused by cutting taxes for the wealthiest sections of society, is to be borne by the whole of society. It should also be taken into consideration that the amount of income that was taxed last year was Zł40bn higher than a year earlier. If last year’s income had stayed at the same level as in 2008, then the loss for the budget would have been even greater.

Experts predict that the budget’s income from personal taxation this year will be similar to that in 2009. In other words the cost to the budget of reducing taxes for the richest few percent of Poles will be more than Zł16bn over the next 3 years. The effects of giving this present to the highest salary earners will be painfully felt by the vast majority of society over the next year.

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