In recent months, the income tax threshold has been one for the most popular topics in Polish public discourse – understandably so, considering that it has been kept at the same level for the past six years. The conclusion of the government’s austerity measures connected to the excessive deficit procedure creates an opening for a discussion on its possible increase.
In the interest of a substantive debate on this issue, we analyzed several possible scenarios for income tax threshold increase. They assume the primes of an increase to 3575 PLN, 4550 PLN, 6530 PLN and 8000 PLN respectively.
Scenario 1 – including consumer prices increase in order to reinstate the effective tax rate of 2008 (increasing the income tax threshold to 3575 PLN)
The phenomenon of cold progression, which we have dealt with in recent years, is certainly an argument for increasing the income tax threshold. Refusing to consider the price increase when establishing the threshold results in an increase in the effective income tax rate. Cumulated consumer price increase in 2009-2015 should be – based on government prognoses for CPI – 15.7 percent. Thus, in order to compensate for inflation, the threshold should be ca. 3575 PLN. This would contribute to a 7 PLN net monthly increase in wages which – though it is hardly a shocking sum – would still cause budget income from income tax for physical persons to drop by 2 bln PLN.
Scenario 2 – increasing the threshold by three times the value of cumulated inflation (to 4550 PLN)
Before, when the threshold was increased, it was usually increased by a little less than three times the value of inflation in a given year. If we were to reintroduce this practice and at the same time compensate for the raises which were not made in recent years, we would have to increase the threshold to ca. 4550 PLN. The direct cost of such an operation would be ca. 6.1 bln PLN a year, giving the taxpayers an additional 22 PLN a month.
Scenario 3 – increasing the threshold to three times the value of the monthly existential minimum (to 6530 PLN)
It is often emphasized that even those, whose income is below the existential minimum have to pay the PIT. In the case of employees on contracts of employment or order contracts, who pay deductible social security and health insurance contributions, the threshold over which income tax has to be paid is established slightly higher than the existential minimum. However, tying the threshold to the existential minimum would insure its automatic valorization, which would be favourable for taxpayers. On the other hand, it would restrict the government’s fiscal freedom, despite the fact that the government is already dealing with a high rate of the so-called fixed expenses in the budget. The cost of introducing such a solution would be relatively high (14.3 bln PLN in the first year), though the benefits for the taxpayers would also be significant (ca. 52 PLN a month).
Scenario 4 – increasing the threshold to 8000 PLN
One of the most ambitious suggestions with regards to income tax threshold, it has already been raised in the presidential campaign. Its introduction would decrease budgetary income from PIT by a maximum of 20.4 bln PLN. All in all, the cost would be somewhat lower, as not all taxpayers achieve a monthly income of 1538 PLN gross (in the case of employees). At the same time, we should keep in mind that for the same reason, the benefits for the poorest in this scenario would be the smallest.
Benefit recipients with the lowest pension would only gain 44 PLN a month and those with the highest income – 74 PLN.
Considering the need to maintain budgetary discipline even after the conclusion of the excessive deficit procedure, a rapid increase of the income tax threshold appears unlikely. The most likely scenario is an increase of 15-16 percent in order to compensate for inflation in 2009-2015. Increasing the threshold to over 5000 PLN would have a significant negative impact on the budget’s condition as well as the situation of communes and counties where income from PIT is ca. 50 percent of all income. We should also keep in mind that a sizeable increase bring relatively small benefits for the poorest, as tax cannot be negative (apart from pro-family deductions).
This does not mean that there is no space for a discussion on changes in the tax system. However, it seems that the propositions should be systemic, as the possibility of modifying the parameters of the system while maintaining its current shape are in fact rather restricted.
Łukasz Kozłowski, economic expert of Employers of Poland