Sunday, 31 March 2013

VAT Cut Stalled?

In 2011 the Polish government raised VAT from 22% to 23%, in what was meant to be a temporary measure to help deal with the effects of the economic crisis. From the beginning of 2014 this should automatically go back down to 22%, however it now seems increasingly likely that the government will reverse this decision. The reason for this is the worsening state of public finances caused by the present slowdown in the Polish economy. Yet, the possible decision to maintain this high rate of VAT exposes the unfairness of the Polish taxation system. 

Like most other Central-Eastern European (CEE) countries, the tax system in Poland is characterised by high indirect taxes; a low business tax rate and a low level of progressive redistributive personal income taxation. The income tax rates and corporation tax rates are generally far higher in Western Europe than in CEE, whilst VAT is slightly lower in Western Europe than in CEE.  

The Polish taxation system is heavily reliant upon indirect taxes (such as VAT), that are regressive in nature as everyone pays the same whilst lower earners spend a greater share of their income on basic consumption. 

The major change to the Polish income tax system occurred in 2008, when the conservative Law and Justice Party (PiS), introduced a reform that moved from 3 personal income taxation bands to 2. The top income tax rate was cut by 8% points to 32%, whilst the bottom band was lowered by just 1% to 18%.  Although the top rate of personal income tax is relatively high compared to some other CEE countries, this reform essentially introduced a flat-tax rate in Poland, as just 1.5% of personal income tax payers now pay the top rate (while previously 10% had done so).

A similar trend is observable in changes to the business tax (CIT) in Poland. Up until the mid-1990s, CIT was actually higher in Poland (40%) than the average in Western Europe. In 1997 and 1998 the business tax rate was progressively cut, eventually reaching 27% in 1998. However, the most fundamental change occurred just as Poland was entering the EU in 2004, when the Democratic Left Alliance (SLD) government reduced it to 19%. 

The relatively low and non-progressive rate of direct taxes is balanced by higher indirect taxes such as VAT. This is both unfair and economically inefficient, as it suppresses the consumption of basic goods and reduces domestic demand. 

Top statutory income tax rates and standard VAT rates (%)[i]

Income Tax
Corporation Income
EU 15 Average
EU10 Average
Sweden: 56.6
France: 36.1
Hungary: 27
Bulgaria: 10
Bulgaria: 10
Luxemburg: 15


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