Tax rate revamp may be gone, but it's not forgotten
Despite failure for the second consecutive year to push through a comprehensive package of tax rate cuts on personal and corporate income, government officials vowed last week to keep chipping away at the current law to mold a new tax.
Last week, after President Aleksander Kwasniewski (Democratic Left Alliance SLD) vetoed proposed rate cuts for personal income next year in what many view as partisan politics, the spotlight turned to Deputy Prime Minister and Finance Minister Leszek Balcerowicz (Freedom Union, UW), the tax package architect who'd threatened to leave the government if his plan failed.
Although corporate tax cuts survived, the veto of personal income tax changes carved out an essential element of Balcerowicz's plan, officials said.
The resulting fear of a resignation sent the zloty into volatile trading early in the week. The finance minister, however, calmed those fears late Tuesday saying he would remain in Prime Minister Jerzy Buzek's cabinet. Seizing the spotlight to renew the cry for changes in the tax system, Balcerowicz said his main incentive to stay was the government's determination to revive reform of the personal income tax for next year.
But considering months of wrangling within the government over the tax package and the upcoming presidential election next fall, obtaining a consensus in the coalition won't be an easy task. Moreover, a complete package of reforms designed in the 1998 White Book has twice failed to run the gauntlet of politics.
By late last week, Solidarity Election Action (AWS) and UW jointly claimed that failure brought factions closer together and the coalition was stronger than ever. A sense of urgency and speaking in one voice could push through reforms next year, officials said.
"We will get to work on the bill (personal income tax) straightaway, next year," said Piotr Zak, spokesman for AWS. "We have a completely different situation as five-year reform plans will have to be compressed now."
A lot has to be done to accomplish the goals set in the White Book, said Peter Driscoll, chairman of Pricewaterhouse
Coopers and deputy chairman of the American Chamber of Commerce's managing board.
"The key thing is obviously the reform of personal income tax as we always speak about broadening the base and a reduction in the rate," Driscoll said. "We would also want to have, as close as possible, an alignment between the top margin rates of personal income tax and the current rates of corporate income tax."
The goal of the White Book of Taxes is to streamline the nation's tax system by removing tax breaks and loopholes and to align personal and corporate tax rates (See table, Tax Planner). The 1998 White Book called for steep reductions in personal and corporate tax rates with personal income taxed at a flat rate of 22% by next year and step-by-step reductions in corporate taxes to 22% by 2002.
The original plan was defeated last year but resurfaced and obtained parliamentary approval in a much-compromised form this fall and went to the president late last month. The proposal called for reduction of personal income tax rates for the top tiers of 40% and 30% to 36% and 29%, respectively. The lowest rate, 19%, was to remain unchanged in 2000. Again in 2001, taxes on top income earners were to be further reduced to 35% and 28%. In 2002, however, the three-tiered system would be reduced to two tiers, taxed at 18% and 28%. The original goal of achieving a 22% flat tax on individual income was not part of the final version of the tax bill.
Although the compromise plan for personal income was scrapped with the president's veto, corporate tax reform is on track, albeit at a slower pace than Balcerowicz called for in the White Book. The original goal was a 22% corporate tax rate by 2002, which won't be met until 2004, under the approved schedule.
The presidential veto is not a failure of reformers because they had very much diverged from the goals set out in the White Book, said Robert Gwiazdowski, analyst for the Adam Smith Research Centre think tank.
"For 95% of tax payers (who under the vetoed bill would continue to pay a 19% personal income tax in 2000) nothing would change," he said. "The rich, who thanks to the housing deduction used to pay an effective 28% rate instead of 40%, could even pay slightly more if the bill had been signed without the tax breaks."
But Poland needs radical changes to give a real boost to its economy, Gwiazdowski said. "The government's determination to change the tax system will depend on political will, which made for instance Ireland a tax paradise," he said. "Maybe it will only be an economic breakdown that will motivate politicians to look for solutions in changing the tax system."
That said, the corporate tax cuts are a bold step, according to analysts and executives. "The corporate tax rate to be reduced to 22% is a very low rate for a large country like Poland," Driscoll said. "If not revolutionary, it was at least a pretty bold change."
But overall, the plan was likely ahead of its time, especially considering budget constraints, analysts said.
"The government could not cut the lowest personal income rate even by 1% because it would devastate the budget," said Krzysztof Bledowski, chief economist at Wood&Co. "The (vetoed) bill was just the first step, a symbolic government statement, that could have been done."
