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“Polish Order” economic programme brings disorder and could cost PiS dearly

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Poland – Being a sort of Polish-style New Deal, the “Polish Order” (Polski Ład) programme includes a tax reform component that, with its entry into force on 1 January, has become a cause for confusion and discontent. Many imperfections and errors require immediate correction, but some important adjustments will not be possible until 2023. Moreover, even those categories of taxpayers who were supposed to benefit from this major tax reform, introduced by the Morawiecki government with only a few months’ notice, and even less if one takes into account the latest changes made at the end of the year, are seeing their gains evaporate because of an annual inflation rate of 8.6%, according to estimates by the Polish statistical office (GUS) for December. Thus, what was conceived as a blitzkrieg that was to ensure Jarosław Kaczyński’s Law and Justice (PiS) party another electoral victory in 2023 – or earlier in the event of early elections, as PiS enjoys a fragile majority in the Sejm – has already turned into a war of attrition, in the words of a Polish political scientist.

Many public sector workers and pensioners who were supposed to benefit from the January increase in the tax-free income threshold to 30,000 zlotys (about €6,600) regardless of one’s total income, compared with 1,360 zlotys (but only for low-income earners) in 2021, have had their net pay reduced in January because of calculation or interpretation errors by accountants (Polish income tax being withheld at source), because they had not submitted a declaration as they should have after the reform, or conversely because they had previously submitted a declaration that was no longer needed in their case.

On 7 January, Prime Minister Mateusz Morawiecki apologised to Poles and promised that the errors would be quickly corrected so that the unduly withheld sums would be paid out before February. And he took the opportunity to defend his new flagship reform. “We want all Poles to earn a better living. But above all, it is those who have been neglected so far who must earn more. After all, that’s what progressive taxation is all about”, said Morawiecki, who has criticised the previous system for benefiting the richest and disadvantaging the poorest, the latter being taxed more heavily as a percentage of their income when all taxes and social contributions are taken into account.

Government members and spokespersons insist, as Family Minister Marlena Maląg did again just recently, that “the tax measures brought about by the Polish Order programme are intended to help Polish families live better” and that people earning less than 12,800 zlotys a month (approx. €2,800) will not lose out, while those earning up to 5,700 zlotys (approx. €1,200) will benefit from the reform. However, they do not mention the more than 2.5 million self-employed Poles who, for the most part, are going to lose out under the latest PiS reform. This is mainly because, instead of paying a fixed amount for compulsory health insurance, which until 2021 was for the most part deductible from the income tax base, they will now have to pay 9% of their income for this contribution, which is now non-deductible from the income tax base, and gives access to the free care offered by a very poor public health system.

As a result, for most self-employed Poles, including those with low incomes, what Morawiecki and Kaczyński call a tax cut is going to cost them dear. One solution many of them now have at their disposal is to opt for flat-rate taxation of their turnover, but here too the reform is badly conceived. Such a tax regime does not allow them to deduct their expenses, but it offers lower tax rates and, above all, a very advantageous fixed amount of health insurance contributions (which will still be about 40% more expensive than in 2021). However, the income tax rates applicable to turnover depend on the type of business activity, without there being a precise and complete list of activities with their respective tax rates. Many Polish media outlets and tax experts have warned of the risk of future tax adjustments and penalties if the tax authorities dispute the tax rates applied by individual entrepreneurs. To make things worse, those entrepreneurs may also have to apply different income tax rates on the invoices they issue, depending on the type of services covered by those invoices. It is also very difficult for such one-person businesses to choose at the beginning of the year the tax system that will benefit them the most. While many websites offer tools to calculate the best option based on projected revenue and expenditure, these are not well constructed, probably due to the short time between the adoption by parliament of the reform’s final details and its entry into force. As a consequence, those tools give divergent results, which is very unhelpful when trying to make such an important decision. As a result, what is presented by the Polish government as a simplification of taxation is a real headache for millions of entrepreneurs.

Finance Minister Tadeusz Kościński, however, believes that “many people have got more money, but they keep quiet and are happy, while those who received less complain loudly.” It should be noted that the new PiS tax reform not only raised the first tax threshold from 1 January. The second income threshold (there are only two in all), above which the basic tax rate of 17% increases to 32%, is now 120,000 zlotys (approx. €26,500) instead of 85,000 zlotys (approx. €18,800).

But it is not just the tax reform’s losers who are complaining. Since Tuesday, tax officials have been forced to work overtime (between 8 am and 7 pm every day) to answer the many questions from taxpayers, and they wish they had been sufficiently trained in the new features brought about by the “Polish Order” programme in order to be able to resolve doubts. According to representatives of the Związkowa Alternatywa trade union in the tax administration, the Ministry of Finance has not only made legislative mistakes with this reform, but also mistakes in the way it organised its implementation.

Thus, the “Polish Order” programme, the outline of which was presented by Prime Minister Mateusz Morawiecki last May, has already been dubbed “Polish Disorder” by the opposition and the media. It is supposed to leave an extra 17 billion zlotys in taxpayers’ pockets this year, which should benefit 18 million Poles (out of a population of some 38 million), and it was also supposed to draw on funds from the European Next Generation EU recovery plan, but these are still being blocked by the European Commission and look set to remain so for an indefinite time. All of this is to boost an economy that is already overheating, if we are to believe the figures for inflation (8.6% per year), growth (around 5.2% in 2021 according to the Ministry of Finance’s estimates, after the 2.8% recession in 2020), and unemployment (at 3% of the active population in November 2021 according to the Eurostat calculation method, compared with an average of 6.5% in the EU as a whole).