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Contents | | Executive summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of Poland published on 11 June 2008.
Contents
Tax reform should be geared towards improving work incentives
The tax wedge on labour income remains above the OECD average, despite recent reductions. It contributes to low employment rates in the official sector, especially among low skill workers. To a large extent, this reflects high rates of social security contributions used to finance basic public pension regimes, which, combined with other income support schemes (including early retirement and disability benefits), lead to a low effective retirement age. Personal income tax is not particularly high, with the vast majority of taxpayers being in the 19% bracket. Against this background, a longer term strategy for tax reform should be developed with a view to shifting the overall mix away from labour taxation and on to less distorting bases such as property and environmental externalities. Although a reduction in the overall tax burden would be desirable from a longer term efficiency perspective, it should not be envisaged before public finances have been put on a clearly sustainable path. In any case, a cautious approach to estimating endogenous revenue gains from growth enhancing tax reforms should be adopted.
Personal tax rates will be cut in 2009, but a flat tax is being considered
Personal income tax (PIT) rates will be reduced for most taxpayers in 2009 in the context of a simplification of the tax structure. The number of brackets will be streamlined, leaving only two brackets, set at 18 and 32%, respectively. Following this, Poland will have one of the lowest top marginal tax rates in the OECD, both in statutory and effective terms. Nevertheless, the possibility of going one step further and adopting a flat tax – set at a rate similar to corporate income tax (though that might not yield enough revenue for current needs) – is being envisaged. A flat tax would have the advantage of discouraging tax avoidance and encouraging entrepreneurship, but it would provide less redistribution than the current progressive rate structure. Given that under the Polish system capital and labour income are taxed at different rates – consistent with a semi dual income tax system – the desire to harmonise the top marginal rate with the 19% rate on corporate income is also understandable, at least in principle, so as to avoid creating fiscal incentives to incorporate. However, the gap between the two rates does not seem be large enough for this to be a major concern. In any case, given the overarching objective of boosting employment, especially among low skill individuals, a higher priority is to reduce the tax wedge so as to enhance work incentives.
Targeted cuts in social security contributions would be a good way to shrink the tax wedge
In order to maximise the cost effectiveness of reductions in the tax wedge, cuts should be substantial, targeted at the bottom end of the wage distribution and focused on social security contributions. More specifically, their size should be highest at the minimum wage level and gradually withdrawn so as to be zero at around 70% of average earnings (which corresponds to 1.75 times the minimum wage). All components of social security contributions could be considered for a reduction, except old age pensions in order to preserve the actuarial neutrality of that system. Targeted cuts would also help to raise the very low degree of progressivity of the tax system. Another pro work measure that the government could consider is to introduce an earned income tax credit. This would encourage labour market participation of marginal groups. However, to be most effective such a measure should take place in the context of a broader welfare to work strategy, with stronger emphasis on effective public employment services.
Beyond raising labour supply the priority should be on base broadening
Further reform of the PIT should instead focus on broadening the tax base by eliminating a number of tax allowances. In this regard, the deduction for internet subscriptions has little justification and therefore appears as a prime candidate. Also, the recently introduced child tax relief should be reconsidered. In principle, another sensible measure to broaden the base would be to eliminate the PIT exemption granted to farming revenues. However, it may be politically difficult to reform or, better still, eliminate the special pension regime for farmers and subject their income to personal taxation at the same time. In such a case, reforming the pension regime should be seen as more pressing.
Reduction in labour taxation will necessitate drawing on alternative tax bases
Even if the reform of the social security system were to create some room for the recommended narrowing of the tax wedge, it may not be sufficient to cover its cost, and therefore alternative sources of revenues may have to be sought. Even though statutory and effective corporate income tax (CIT) rates are among the lowest in OECD countries, they are comparable to rates observed in other central and eastern European countries, including those that have recently joined the European Union. Considering the high mobility of capital, raising CIT would be inappropriate to finance the reduction in labour taxation. On the other hand, further CIT rate reductions could be contemplated in the context of a base broadening that would leave the average rate largely unchanged ex ante. Another potential source is consumption tax, but both the main value added tax (VAT) rate and excise duties are fairly high, thus limiting the scope for raising more revenues from these tax bases. VAT reform should focus on the simplification of procedures to reduce compliance costs for businesses. More generally, the tax code should be written more clearly so as to obviate the need for local legal interpretation of specific provisions and to reduce the vulnerability of businesses to arbitrary (and often conflicting) decisions by the two main tax inspection bodies. The merging of these two agencies would eliminate the duplication of controls and generate useful savings.
Little revenue is collected from residential property tax
One prime candidate for raising revenues is taxation on immovable property, which is low by OECD standards. This is one of the tax bases with the least adverse effect on economic efficiency. Poland is one of the few OECD countries without a full ad valorem (or cadastral) tax on property, even though the technical obstacles to such tax being implemented have basically been lifted. A move to such a tax would raise revenues for municipalities, allowing the central government to reduce its subsidies to sub national administrations. Alternatively, local authorities could use the higher property tax revenues to eliminate stamp duties on housing transactions, thereby improving labour mobility. In order to facilitate the introduction of an ad valorem property tax, the rate should be set initially at a low level and be accompanied by measures to ensure that house rich/income poor households can afford the tax without having to liquidate their property.
Magnitude and sources of reduction in the tax wedges by income level1
Percentage points, single earner, married couple with 2 children
1. Each bar shows, for different earning levels, the total reduction in the tax wedge resulting from three measures: i) the reduction in rates of social security contributions (2007-08), ii) the introduction of a child allowance (2008) and iii) the forthcoming simplification and cut in PIT rates (2009).
Source: OECD (2007), Taxing Wages.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Poland 2008 is available from:
Additional information
For further information please contact the Poland Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Alain de Serres and Rafal Kierzenkowski under the supervision of Peter Jarrett. Research assistance was provided by Sylvie Foucher-Hantala.
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