By Grzegorz Poniatowski, Director of Fiscal Policy Studies, CASE
On November 29, after a frenetic two-day legislation process, Polish President Andrzej Duda signed a bill that amended the threshold and rules for granting tax-free allowance on personal income.
Starting in the next fiscal year, the new threshold for tax-free allowance will increase from 3,091 PLN to 6,600 PLN. However, this increase will only be applicable to lower-income taxpayers, as taxpayers who earn more than 11,558 PLN (which is less than the income of half-time employees earning minimum wage) and less than 85,000 PLN will continue to be given a tax-free allowance up to the current value of 3,091 PLN.
The cost of the tax-free allowance adjustment for low earners will mostly be borne by those who make more than 85,000 PLN (approximately US$20,000) yearly. Earning an income above this threshold will lead to a gradual phase-out of this allowance, eventually resulting in no allowance at all at the highest income levels.
By reshuffling the personal income tax structure, the government is attempting to convey the message that it is fulfilling promises from its successful electoral campaign. But in reality, it is not actually making good on these promises. As CASE alerted readers last October, the roster of promises made by the government during the campaign were extremely dangerous for the stability of public finances. Among the promises of the incoming government was an increase of the tax-free threshold up to 8,000 PLN. This increase was supposed to apply to all tax payers, a move that would decrease tax revenues by 17 billion PLN.
Confronted with tight budgetary constraints and a slowing pace of economic growth (in part due to other policies the government is promoting), this new move decreases the tax burden for less than three percent of taxpayers, shifting the burden of fiscal expansion to those who already give back the highest share of their income to the state, namely the middle class.
Deputy Prime Minister Morawiecki admitted that the government is facing real constraints in implementing its policies, as it “has already given 37 billion PLN to the (Polish) people this year.” But the current profligate policies of the government endangers Poland’s policy credibility, and has already resulted in a substantial downward revisions of GDP growth rates (as well as increased costs of government bonds). Economists known well that there is no such thing as a free lunch, but it is not proven if the government knows that yet.