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The fiscal cost of electoral debt

By Paul Lirette, Senior Economist, CASE

On November 3, Deputy Prime Minister Mateusz Morawiecki announced that the timeline for implementing a new retail tax proposal remains to be determined. The new tax formula, one that aims to fulfill Law and Justice’s (PiS) promises to tax the foreign-dominated retail industry, is linear across all retailers at 1.2 per cent of business turnover, yielding an estimated 1.6 billion złoty (US$ 400 million) per year, and, unlike the previous version, is hoped to not meet objection from the European Commission (EC).

The government’s first new retail tax law, introduced on September 1st, 2016, had two applicable rates: 0.8 per cent for retailers with revenues between 17 million Polish złoty (US$ 4.4 million) per month and 1.4 per cent for those exceeding 170 million Polish złoty (US$44 million) per month. Smaller retailers, those earning less than 17 million Polish złoty per month, would not be subject to the new retail tax.

However, on September 19, the EC launched an in-depth investigation on the new Polish retail tax over concerns that the progressive rate based on turnover would create an unfair advantage for smaller franchises, effectively breaching EU state aid rules. On September 20, the Commission issued an injunction, suspending the application of the tax law until investigations conclude. Wiesław Janczyk, a high official in the Ministry of Finance, plans to seek a dialogue with the EC to find out whether the new linear retail tax currently under discussion would be more acceptable. The goal is to put forward a new proposal to the Polish Parliament by the end of November 2016.

But this is not the first Law and Justice (PiS) Government policy to face heavy criticism and pushback, in some cases, by the party’s own deputies. For instance, Deputy Prime Minister Mateusz Morawiecki criticized President Andrzej Duda’s plan to convert Swiss franc loans into zloty, suggesting the law should only apply to less affluent citizens and that it would require further assessment before being enforced. The reduction of the retirement age and the “500+” program (paying citizens for giving birth) also faced criticism, this time from the former Polish Ministry of Finance Paweł Szałamacha, who suggested that the Ministry of Labour failed to provide an accurate assessment of possible financial consequences of the programme.

Overall, the PiS government seems to be increasingly finding itself wedged between a rock and a hard place. Whether or not PiS will be able to strike the right balance between delivering on inflated social spending promises made during their election campaign and not breaching the EU’s 3% deficit cap, which is currently forecasted at 2.9% of GDP in 2017, remains to be seen. But for now, PiS faces harsh fiscal choices as it walks a thin line to deliver a new tax law that finds the Commission’s approval, keeps Polish businesses happy, and does not anger foreign investors or crush the economy.

CASE — Center for Social and Economic Research is an independent, non-profit economic and public policy research institution, established in 1991 in Warsaw.

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