TCS Daily

VAT City

By Kamila Pajer - January 14, 2005 12:00 AM

Poland's government is working on a new value-added-tax regulation and the minister of economy advertises it as an action towards "improvement of consumption demand." From that you might think that the VAT will be made lower, since lower taxes and lower prices are the best ways to improve consumption. But this would be naïve. The minister of finance explains that in case of a serious price increase the loss "will be somehow compensated to those who need it the most." Thus we learn that this change of indirect taxes would most probably make prices higher.

Today in Poland there are four rates of the VAT: the preferential rates of 0 percent (for export and books), 3 percent (for food, drink and drugs) and 7 percent (for newspapers and magazines), and then the regular rate of 22 percent for all other products and services. The government wants to replace these with three rates: of 0 percent for exported products; 8 percent for food, drink and drugs, and 18 percent for the rest - including books and the press. Washing machines and other equipment would be cheaper, but many other products would be more expensive. It is therefore estimated that the average rate of the VAT paid during regular shopping would go up from the present 13-14 percent to 16 percent.

According to statistics, food and drink constitutes on average some 30 percent of household spending, and the poorer the family, the higher the percentage. Thus, obviously, the poorest will suffer the most. The governmental promise of some compensation for those who need it the most cannot solve the problem as, whatever the solution the state takes, the results will be deplorable. There are several ways the state may compensate. It may introduce a right to a tax deduction. But that would seriously complicate the income tax declaration. Depending on the scale of complication some people who do not understand the rules will not be able to take advantage of the right; others, for their part, might cheat, and eventually the income revenue service will have more work to do, costing the taxpayers more. The second solution, financial help for the poorest, is also bad. It is ridiculous for the state to first make people miserable and beg the state for help, and then help only some of them.

The reason behind new VAT regulation is inflation that the Prime Minister wants to create inflation. It will make all, and especially those who trusted the state and saved some money, poorer. But the Polish prime minister admitted recently that the zloty is "too strong" and that it devastates the economy. Only inflation would help economic growth, he argued. Many economists, among them Leszek Balcerowicz, the president of the National Bank of Poland, strongly disagree, pointing out that higher inflation creates economic growth only on paper and leaves people poorer. The hardest hit will be those who trusted the state and saved some money as inflation will reduce the value of their savings. The higher VAT would also give the state budget greater profits from the large black economy that does not pay income taxes but cannot avoid the VAT.

The present 22 percent VAT rate is one of Europe's highest. When it was first introduced in Poland, politicians blamed EU regulations for its existence and scale. The explanation was obviously a lie, and soon people discovered that the highest VAT rate in Luxemburg is 15 percent, in Germany 16 percent and in the UK 17.5 percent. According to last year's OECD report, Poland is among the countries that have the highest taxes in the world. And this year indirect taxes go up together with income taxes as a new rate of 50 percent was introduced. Income tax and social security contributions in Poland constitute 31 percent of gross wage earnings, whereas in the Slovak Republic they are 19 percent, in Switzerland 21 percent, and in Ireland 16 percent. This is particularly harmful to employment; Poland's unemployment rate is about 19 percent, the highest in the EU. The tax burden also encourages employers to hire workers illegally or to cheat on taxes. And they wonder why there's a black market?

Yet, indirect taxes are taxes on top of money already taken through personal income taxes. However, as the EU law requires member states to have VAT of no less than 15 percent, one of the Polish political parties, a conservative free market Real Politics Union, proposes similarly to abolish all income taxes and instead to have only the 15 percent VAT.

Today, consumption taxes are only a way to take more money from people. Moreover, they can also promote some firms at the expense of others, having an exemption can bring greater profits, so it is worthwhile to be nice to the officials who grant them. Some products and services are taxed at a regular rat percent VAT. Used car sales, for example, are considered second-hand goods under European directives and thus not taxed, so imports of them have soared since Poland joined the EU last May, to 800,000. New cars, that are taxed, meanwhile, have seen their sales plummet to 316,000. So, the Polish state intervened and taxed used cars with the excise, clearly wanting to be nice to car manufacturers and also make profit itself. The excise was against EU law, but the state is not going to resign from it, it is simply going to be replaced with a so called 'registration tax.'

Indirect taxes are often less justifiable than income taxes. While it is said that the excise imposed on alcohol goes for programs preventing alcoholism, in reality, the sum collected in one of the biggest Polish cities, Krakow, was so large last year that the administration ran out of ideas for how to use it.

And when Poland tries to give its people a tax break, as for Internet purchases, the EU steps in and orders it to apply the VAT to them so its rules will be compatible with other members. But why does the EU require Internet purchases to be taxed and for what will the tax go other than the bureaucracy? The EU is even considering taxing postal services. Why? To the authorities that isn't the question. It's more a matter of shrugging and asking: Why not?

Contrary to what the government believes, higher food and drink prices cannot improve consumption. Lower taxes would make people richer and able to buy more goods, invest more money and employ more workers. Thus, we could at last experience a real economic growth instead of a so called "jobless growth."



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