Proceed with caution
By the time Finance Minister Grzegorz Kołodko announced his resignation last Wednesday, his disappearance from the political stage was neither surprising nor unwelcome. Prime Minister Leszek Miller's announcement earlier in the week that he was willing to discuss the introduction of a flat-rate tax - an idea that had been gaining steam in recent months and weeks - pretty much sealed Kołodko's fate, as he was the staunchest Cabinet member opposed to the plan, and probably the only proponent of raising taxes at this crucial juncture in Poland's economic development. It is fitting that Kołodko plans to return to being a purely theoretical economist, as academia often becomes the refuge for failed ideologues. In the academic world, Kołodko will no longer have to take reality into account when dreaming up solutions to universal economic problems.
Nonetheless, there is an implicit societal failure in the recent popularity of the flat-rate tax. The implication is that Poland cannot manage its finances well enough to account for the nuances of a progressive taxation system, which takes into consideration financial disparities between different regions, different familial situations, different backgrounds and upbringings. Whether or not one subscribes to the notion of "social justice," there is no denying that a taxation system based on some version of this concept requires a level of fiscal discipline on the part of the taxpayer and the tax collector that the country does not appear to be capable of.
On the whole, a better and less unpredictable solution than the flat-rate tax would be to eliminate low-level corruption from the tax offices, hold bureaucrats accountable for accounting errors and missing funds, adopt all the latest information technologies available to ensure that every corporate entity and individual in the country is paying taxes, reform the tax regime so that major loopholes are closed and - most importantly - reduce taxes on those entities that account for the most capital spending, and therefore have the greatest direct effect on economic growth - enterprises. But, in Poland, this is only a pipedream.
So the country, like many of its eastern neighbors, could soon part ways with most of the developed world, where progressive tax regimes are almost universal, and develop a system that will take absolutely nothing into consideration except income. Economists agree that, if the tax rate is set properly, this will serve to bring additional revenue to Treasury coffers while at the same time eliminating unnecessary bureaucracy at many points in the fiscal procedures of corporations and individuals. But in adopting such a system, Poland would be following the precedent of countries that historically have not been perfect examples of fiscal management. Russia, Ukraine and Lithuania are hardly vanguards of economic success, and though their experiences with the flat-rate tax indicate its ability to spurn government revenues, the longer-term consequences have not yet transpired, and the effects of the tax regime on society as a whole are harder to read than a State Treasury balance sheet. We know that a flat-rate tax will give far greater tax relief to the wealthy than it will to the poor. We also know that a flat-rate tax can lead to stronger economic growth. But can we be certain that the millions of unemployed, underemployed and chronically poor people in Poland will come to understand this? If they don't, what can we expect their reaction to be?
If a taxation system so simple that a three-year-old can understand it is the only way forward out of the fiscal mire, so be it. But we must proceed with caution, lest we create a whole new kind of infantile mess.
