Balcerowicz resignation averted tax bill on its way
Dueling factions in the government coalition agreed late last week to a watered-down tax bill paving the way for an 11th hour legislative approval.
But while wounds within the ruling coalition appeared to be on the mend, failed promises of significant revisions and clashes among politicians that brought Finance Minister Leszek Balcerowicz to the brink of resignation have deeply, if not irreparably, scarred the government's credibility, business leaders said.
"Any country that is developing very fast is in need of stability," said Cristiano Pinzauti, chairman of the Forum of EU Chambers of Commerce, a coalition of foreign businesses and chambers of commerce.
"Especially in this part of the world, foreign investors look at political stability as one of the major factors for decisions about investment policies," Pinzauti said. But that stability was rocked in recent weeks when Balcerowicz threatened to resign, he said. If Balcerowicz were to resign, potential investors might rethink their plan and "that's the biggest risk," Pinzauti said.
Those fears were narrowly averted last week when leaders of Solidarity Election Action (AWS) and Freedom Union (UW) agreed on a tax bill last Friday. But the proposed guidelines fall far short of expectations, said Andrzej Falinski, chairman of the Chamber of Foreign Investors.
"What is going on now is just a skirmish after a lost battle," he said. "The Polish political class failed to introduce tax reform and it's only trying to save its elements."
Investors are disappointed because they were expecting radical changes, such as a promised reduction in corporate taxes by 10%, Falinski said. "Of course it's not the end of the world but it proves again that Poland is not a predictable country."
According to the proposal hammered out last Friday, corporate taxes would drop to 30%, down 4% from the current level and personal income tax rates, originally to undergo the most radical surgery, will remain three-tiered. Income cutoff points will rise about 11% in zloty terms and tax rates will drop modestly for upper tax brackets. However, the controversial housing tax breaks that the Finance Ministry wanted to do away with will be maintained.
Concerning personal taxes, rates will drop from 40% to 36% for annual incomes greater than zl. 65,884 ($16,471), and from 30% to 29% for incomes above zl. 32,942 ($8,236), while the lowest rung at 19% for incomes above zl. 2,300 ($578) will remain unchanged. These proposed rates drop effective tax rates 1-2% from the current level, for example, to about 28% on a $25,000 annual income, 32% for $50,000 and 34% for earnings of $100,000 a year, estimated at current exchange rates.
As part of longer-term plans, income tax rates for 2001 would drop to 19%, 28% and 35% and in 2002 the number of tax rates would be reduced to two, 18% and 28%, according to the proposal approved by UW and AWS party members.
"The AWS proposal is acceptable," said Piotr Dubno, Balcerowicz spokesman. "Now, the most important thing is to tailor it in line with the 2000 state budget."
According to ministry estimates, the AWS proposal might affect the budget due to changes in the concept of pro-family deductions and the introduction of longer maternity leaves. "But it can be done as it's not a matter of tax rates," Dubno assured. "Now, everything is in the hands of the Public Finance Parliamentary Committee."
And timing is important. Lawmakers are under the wire as political wrangling and time spent on discussing the bill at the finance committee delayed its route through the legislative process. The bill now has three weeks to gain approval from both houses of Parliament and a presidential signature. If the bill is not signed by the end of the month, under the constitution, current tax guidelines will prevail for another year.
The Finance Committee was expected to adopt the coalition's changes at the beginning of the week and move the bill to the Sejm by mid-week. Earlier, last week, some of its members announced that they wouldn't be able to finish their work on time. That caused a heated reaction from Balcerowicz. The threat of resignation helped remove the log jam and to achieve compromise on key issues such as housing tax breaks and a roll-back in the scope of tax-rate reductions.
After getting the nod from the Sejm, which is expected this week, the tax bill will be debated in the Senate. All of this reduces the time that President Aleksander Kwasniewski will have to review the bill. Kwasniewski, however, has said he would not need much time for the job.
The tax package now under consideration has traveled a long way since Balcerowicz launched the plan more than a year ago. General guidelines back then called for reducing corporate tax 12% over five years, throwing out all types of tax breaks, including the housing deduction. Even the idea of a 22% flat personal income tax was under consideration. Over time, however, political storms whittled the plan down and now it is to be implemented in three instead of two years as proposed by the government.
