"We promote freedom"



Analysis 5/2017: Unjust revenue tax: a loss for small businesses and the state budget as well

Analysis 5/2017: Unjust revenue tax: a loss for small businesses and the state budget as well


Revenue tax harms the fiscal sources of economic growth: investments and specialization.  

  • Since revenue is the basis for calculating the amount of this tax, expenditure on investment is not taken into account. Companies pay taxes irrespective of the size of their investments, so investing is discouraged.
  • Revenue tax is levied every time a company sells materials or intermediate products. It is, therefore, more profitable to produce everything within one huge corporation - rather than buying from specialized subcontractors, which would involve paying revenue tax.
  • Switching from income tax to revenue tax would create a huge need for changes in the structure of businesses and contracts, generating demand for lawyers and tax advisors.
  • First, holding companies will merge into single companies. As a result, all transactions within the holding company will cease to be taxable. Also, larger companies will take over their subcontractors and thus bypass one stage of taxation.
  • Second, wherever possible, companies will try to change the structure of contracts so that they become just an intermediary. If a company buys goods from its supplier and then sells it to a customer, the revenue tax will be paid twice. However, if the contract is changed so that the company only presents and displays the merchandise, while the supplier remains to be its owner, the tax will be paid only once.
  • Third, in the case of goods that are traded a number of times at various stages of production, it will be cheaper to buy them abroad and to pay tax once rather than to pay it at every stage of their production inside the country.
  • The structural fault of revenue tax is its cascading nature - the tax increases with every transaction. That is why highly developed countries have abandoned such taxes, replacing them with VAT, a better economic construct. The possibility to deduct taxes paid at previous stages of production means VAT not distort the structure of enterprises.
  • The introduction of income tax would harm most small domestic companies cooperating with larger corporations. Revenue tax would make it more profitable to make goods in-house than to work with smaller suppliers, which would involve at least double taxation.

Full analysis by FOR (in Polish) available to download here.

You are welcome to contact our expert:

Aleksander Łaszek - Chief Economist at FOR