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Poland's tax revolution on the edge

Jo Harper
January 31, 2022

The Polish government’s fiscal reform plan has been labeled Marxist by liberals, anti-social-democracy by the left and a dog’s breakfast by accountants. Does it put more power in the hands of the ruling PiS?

Zloty coin
Experts are divided over Poland's new tax regulations and who stands to profit most from themImage: Fotolia/whitelook

After months of pandemic-related uncertainty, rising inflation and political bartering over the ruling party Law and Justice’s (PiS) Polish Deal, early January saw the rollout of what its proponents called a fair tax reform and its opponents a return to socialism in the ex-communist country.

The government says the project will reduce tax for over half of all adult Poles, but increase revenues by taxing the richest 10%. It plans to use the funds to raise spending on health care to 6% of GDP in 2023 and 7% in 2027 from the current 5.3%, a low rate relative to other EU countries.

The tax allowance for all PIT (personal income tax) payers will increase to 30,000 zlotys ($7,800, €6,800), from 8,000 zlotys. The government says this means a reduction in the amount of tax payable or complete elimination for about 18 million Poles. 

The second change raises the income threshold for entering the higher income tax band of 32% from 85,000 zlotys to 120,000 zlotys.

According to the government's calculations, those earning up to 6,600 zlotys gross per month will gain the most, those earning up to 11,000 zlotys will not lose out and taxes will go up for those earning over 11,000 zlotys.

Crucially, the government also announced changes to the rules for deducting health contributions to Poland’s state-run Social Insurance Institution (ZUS). After amendments to the bill, the ZUS contribution will remain 9%, but will stop being tax-deductible and will depend on the payer’s income. For higher earners, this will mean an effective tax increase of 7.75%, estimates suggest. Those on 20,000 net monthly incomes could see a net drop of 1,000 zlotys a month, according to estimates by the financial consultancy Grant Thornton. The Ministry of Finance has announced relief to offset the higher tax, but its details have not yet been presented. 

Wine harvest in Poland
The tax reform is meant to be a good deal for low-income workers across PolandImage: picture-alliance/dpa/M. Bielecki

Critics galore

"More socialism, more etatism; worse for those with ideas, initiative and working the hardest," Tomasz Lis, editor-in-chief of Newsweek Polska, wrote on Twitter.

Wojciech Paczos from Cardiff University, meanwhile, warned against labeling the Polish Deal a social democratic program, arguing it is simply pouring money into the public sector without a vision of how public services should work.

"It is neither social democratic nor Keynesian, because it lacks clear objectives. On aggregate it will be fiscally expansionary as it reduces total tax income, which given the very fast economic recovery and the record-high rate of inflation is not the right thing to do in my opinion," Paczos said.

Progressive tax?

"To date, Poland has been the only country in the EU where part of the health care premium was tax-deductible," Prime Minister Mateusz Morawiecki wrote on the government website.

"Besides offending the sense of justice, this deepened inequalities that had already been exacerbated during the crisis," the PM added.

The problems identified by PiS are real, experts agree. "The Polish tax system is regressive and this makes Poland an exception," Jakub Sawulski, head of the Polish Economic Institute’s (PIE) macroeconomics team, told DW. "This plan is strongly redistributional — households from the nine lower income deciles will benefit from it, while the top income decile will lose. The reform is being met with strong resistance, as it increases the taxation of owners of high-income business activities, who are currently highly privileged in the Polish tax system."

"On the one hand, the Polish Deal will primarily benefit poorer households and could help them in covering their basis needs amid high inflation. On the other hand, the reform boosts demand in the economy, which could increase inflationary pressure in the long term," Sawulski added.

Real worries not addressed?

Some believes that many of the concerns of Polish society are not addressed in the plan, with nothing about science and innovation, climate change or education.

Writing in the left-leaning think tank Krytyka Polityczna, Michal Sutowski argued that the plan sounds "as if it was written 20 years ago, ignoring key civilisational challenges, starting from climate change, and allows us to believe that our problems can be dealt with in the same way as before, just more generously and on a larger scale. Unfortunately, it also has a great chance of being liked by many millions of Poles."

The Polish Entrepreneurship Council said the plan risked "deepening the inconsistencies of the tax and social security system" and pushing people into an economic grey zone. The reforms could also encourage more business owners to switch to a lump-sum taxation system or to set up limited companies, which would lead to decreased contributions. 

The council has appealed to the government to urgently prepare draft legislative changes that will suspend the application of the tax provisions of the Polish Order until January 1, 2023, and restore the application of existing legal regulations.

Other point out that it does not impact foreign investors. "Protecting FDI is always a good thing, but such asymmetric regulation impacts negatively on the competitiveness of Polish companies and this is happening during the ongoing pandemic," Wojciech Sztuba, managing partner of advisory firm TPA Poland, told DW.

"It certainly looks more to me like a package addressing the political concerns of PiS," Sztuba said. "In the last year, they have lost 5-10% in the polls and maybe they got the idea that if they let it slip further, they would have no power to hold on to," he added. 

Confusion on the ground

"It is likely that there will be a number of legislative corrections in the course of this year," Sztuba argued. "Due to chaotic implementation and extreme complexity of the new regulations, some tax allowances and privileges will remain theoretical for many tax payers. The net income of many low-income employees in fact dropped in January instead of the opposite," he pointed out.

Accountants meanwhile face the slog of interpreting shifting rules. "The plan is very complicated, tax advisors do not even know how to apply these regulations, there is a lot of ambiguity and a lack of interpretation from the Ministry of Finance," Joanna Lempicka-Szumny, an accountant in Warsaw, told DW. 

"Employees from the Tax Office and the National Tax Information (KIS) are not trained and do not want to provide information because they do not know themselves," she said.

"If we get better health services and nurses' pay goes up, then that is fair and I support it. But I doubt this will happen; the money will likely be spent on other things," Szczecin-based tax advisor Natalia Gorczyca told DW.

Edited by: Hardy Graupner