Funding the governments budget deficit
By : Anna Szymańska
Id been racking my brain for a subject worthy of the Tax Watch readership when inspiration struck while I was eavesdropping on a couple in front of me in a supermarket checkout queue.
They were discussing the potential increase in the cost of childrens school supplies. What does that have to do with tax? Well, as most of you may have noticed, this years budget deficit has not gone as planned and next years looks none the rosier. So is this the governments problem? Not entirely. Those ultimately responsible for slashing the deficit, despite fancy discussions about cutting government expenditures, will be none other than you and I the taxpayers. And what does the government have up its sleeve to assist us in helping them get out of the mess theyve created? Well heres a selection of the potential changes to the tax law that are on the table:
A plan to freeze tax brackets at their 2001 level, which they estimate could bring in about zł. 2 billion ($476 million) in additional income. Not so long ago they were debating lowering personal tax rates, limiting them to two instead of three and decreasing the number of available reliefs and exemptions with a view in the long term of bringing in a system of linear taxation.
Taxing the interest on bank savings. Not a popular move, but in line with most Western countries.
Removing the possibility of joint filing for spouses and sorting through the existing list of available reliefs, bringing additional income of about zł. 2 billion.
Removing some of the existing specific exemptions from the personal tax law estimated income of zł. 900 million ($214 million). These ideas, if introduced, will be less than popular if the outcry following these suggestions along with the lowering of the top tax rate from 40% to 34% is anything to go by.
Bringing in an import tax of 5% estimated income of about zł. 10 billion ($2.3 billion).
Bringing VAT law in line with EU regulations and increasing the basic VAT rate from 7% to 22% on items such as building materials and childrens items (remember the conversation in the supermarket checkout queue?). The proposed VAT changes alone are estimated to bring in additional income of about zł. 4.4 billion ($1.04 billion). These changes are the most likely to be given serious credence considering that sooner or later the VAT law must be brought in line with EU regulations.
Allowing for the increase in the healthcare contribution (dont forget this comes out of taxes paid) by 0.25% per year to reach 9% by 2006, which is a return to the original contribution level of 7.5%. This will bring additional income to about zł. 1.6 billion ($380 million).
If you think those ideas are bad, there are some other more controversial ideas that are not related directly to tax. These include the suggestion that the work of the open pension funds (which form the second mandatory pillar in the reformed social security system and are supposed to provide for future pensioners by allowing the investment of a portion of the social security contribution of each individual) be put on hold for a few years and the funds currently accumulated be used to fill the budgetary gap. Its an interesting concept somewhat reminiscent of what went on prior to 1981.
On a lighter note, since a team of four financial experts has been called in to check and verify the findings of the Finance Ministry concerning this and next years budget deficit, why not do away with the ministry altogether and leave it in the hands of these four experts? This will cut administration costs (not to mention the budgetary deficit) quite substantially.
By way of a caveat we still have four months left until year-end and a general election, so these proposed changes Ive listed may never happen. Many of these steps are being retracted or denied to have been made in the first place, and we shall have to wait and see which, if any, of them are brought in, in a desperate effort to lower the potential deficit figure in 2002. Ill do a roundup at year end summarizing what has and hasnt changed.
The sad thing is, of course, that no one at the ministry, the government or even the opposition parties has thought to inquire as to what has caused this deficit in the first place. If we knew what the problem was, wed be in a better position to solve it. Or is it that they already know, and its not in their interests to share the reason with the rest of us?
Meanwhile, there is at least some good news going forward they are not going to abolish Sunday trading after all well, not just yet anyway.
Anna Szymańska is a tax senior manager in the Warsaw office of Andersen.
