As far as taxes go, evolution is better than revolution

As far as taxes go, evolution is better than revolution The public debate concerning taxes has recently touched upon comprehensive overhaul of Polish tax law, including a steeper progression of the personal income tax rates and adoption of a new tax code. 

To focus for a moment on this idea of a new tax code, this would clearly have to be a normative instrument of an all-encompassing character, laying down regulations applicable to all taxes and fees of a public nature alike as well as a body of procedural rules for tax cases. Any new tax code could not concentrate on a specific type of tax only – this would remain a matter for specific legislative acts drawing upon the general rules laid down in the tax code, as has been the case until now.

Any new regulation would also guarantee at the formal level the basic rights of all taxpayers in a species of taxpayer rights charter. Such a solution, clearly, would be very desirable from the perspective of taxpayers, particularly of business enterprises. Public opinion has been outraged by recent reports of blatant abuses of taxpayer rights which, in extreme circumstances, have led to suicide of the entrepreneurs involved, so any initiative to safeguard taxpayer rights at the statutory level will be welcome.

And what would become of the judicial authorities concerning application of the current tax laws ? 

This is a very important issue in its own right. The Ordynacja Podatkowa, or Tax Ordinance, has been in force since 1997, and over these seventeen years there accrued a sizeable body of administrative court rulings concerning its interpretation and application. If the Tax Ordinance were replaced with an entirely new legislative instrument, this would entail a period of interpretational uncertainty of the sort which typically accompanies new statutes, especially as regards the procedural aspects of tax law. Be that as it may, a hypothetical new tax code would probably end up reiterating most of the rules currently in force, begging the question of why implement a new act in the first place ?

The tendency is that, when an existing legislative act is replaced with a new one, the successor statute tends to swell in size, laying down more provisions then its predecessor. By way of an example, one might compare the legislative Act regarding tax liabilities from 1980 with the Tax Ordinance from 1997; the latter has more than six times the number of articles contained in the former. If this tendency were to demonstrate itself also in the current instance, I fear that any new tax code would end up being considerably more voluminous than the current Tax Ordinance, and also that much of the judicial authority built up around the Tax Ordinance would effectively cease to apply.

So, what would be better ? 

Personally, I subscribe to the view that there is nothing wrong with the Tax Ordinance now in force that a well-reasoned and well-prepared raft of legislative amendments could not fix. I am a strong believer in the importance of a stable, predictable legal system, especially as regards tax law. All too often, the Polish public discourse succumbs to the conviction that adoption of a new law, especially at the level of a legislative act, must, in and of itself, amount to a cure-all. I, for one, would much prefer rational amendment of the current statute in those areas where this is required rather than riding in roughshod with an entirely new statute with all the destabilisation that this would entail.

Returning to the question of a steeper progression of the personal income tax, there have been suggestions from some quarters – similar to those heard in the American debate – that the tax rates are simply too low. Do you share in this view ? 

The strongly progressive conception of the tax system has many proponents – traditionally in the Scandinavian countries, but more recently also among the super-rich in the United States. Warren Buffett, the American billionaire investor, has gone on record last year saying that the taxes that he pays are too low; he also pointed out that the tax rate which he falls under is lower than that of his personal assistant, a state of affairs which he deems to be unfair. Warren Buffet proceeded to mount a campaign of sorts seeking higher taxes for the richest Americans, and he has won over to this idea many other members of what are known as the one percent.

Such views appear legitimate enough in the specific case of the United States, a jurisdiction in which income from labour (as earned, presumably, by Warren Buffet’s PA) and from inheritances attracts a higher tax rate than income from capital gains (which, presumably, accounts for most of Warren Buffett’s own earnings). In other words, the issue is not one of low taxes on high incomes, but of the structure of the various tax rates and, possibly, of skewed differentiation among different categories of American taxpayers. Those who have had any closer experiences with the American tax system will appreciate that, for any number of reasons – also historical and political ones, it is a highly complicated one, and that this complexity enables considerable tax savings through resort to refined financial instruments, various derivative instruments, and all and sundry investment credits.

So, would any increase of the progression in personal income taxes offer advantages for the Polish tax system ? 

There is little to support transplantation of the American arguments, as cited above, to European soil, or to Poland. Fortunately, the Polish tax system is not characterised by disparities of the sort seen in the American one. Poland applies two rates of personal income tax, 18% and 32%, as well as a 19% tax on capital gains (including interest accruing on cash deposits). If we take into account the fact that taxes at 32% are remitted by only a small fraction of all Polish taxpayers while the rest pay at 18% (or at an optional 19% for entrepreneurs), we come to the conclusion that the Polish system is in no need of changes of the sort called for by Mr Buffett in the United States. Me, I have always argued in favour of a single, flat tax rate, and I continue to do so. If we managed to implement a single tax rate for all and sundry types of income, coupled with an appropriate increase of the basic tax-free amount so as to ensure due protection for low earners, then the current differences in tax rates, small though they are, would be eliminated.

And if the proposed increase of the tax progression scale is implemented, what might the negative consequences be ? 

It is a known fact that high tax rates and a heavy-handed approach to enforcement motivate taxpayers to look for tax optimisation solutions, which include offshore structures based in jurisdictions with more user-friendly tax regimes, or simply with lower taxes. We might recall here the French attempt – fortunately quashed by that country’s Constitutional Tribunal – to implement a 75% tax rate for the highest earners. It is argued that increase of the tax burden would end up being a disincentive, ultimately bringing detriment to the national budget and to perceptions of the tax system – and please bear in mind that the latter influence the investment climate. In short, simply increasing the tax rate and sitting back, waiting for increased revenues to the state coffers is actually counterproductive and, in the longer term, must bring more harm than good.

So, all in all, it is fair to say that you do not favour major overhaul of the Tax Ordinance or of the personal income tax rates… 

In both these areas, I generally favour stability. I take a sceptical view of the perspective of an entirely new tax code in that, apart from what we might call public relations aspects (a new name more in tune with the times, greater linguistic emphasis on taxpayer rights), there is little to militate in favour of such a radical change.

I am likewise in favour of systemic stability as regards possible increase of the personal income tax rate. In my opinion, any changes in this regard ought to concern consistent implementation of a single tax rate, coupled with increase of the basic tax-exempt amount so as to protect taxpayers with the lowest earnings. In other words, any radical changes in the tax system ought to be avoided, and it should be evolution rather than revolution.