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FOR Communication 18/2017: 350,000 Poles will pay more taxes to cover growing expenditures of the government

  • The project of the Ministry of Labor, planning to abolish the upper limit of mandatory social security contributions since the beginning of 2018, will increase the State's income by about PLN 5.5 billion. Seeking money in the taxpayers’ pockets is a clear proof that PiS government is in dire need of money to finance the costs of election promises. Their repeated assertions that election promises could be financed by sealing of the tax system were just lip service.
  • The government reaches into the pockets of taxpayers to find additional money to cover the costs of the 500+ Family Program (PLN 24 bn) and lowering the retirement age (PLN 8 bn in 2018, more in subsequent years). This is despite the resignation from the third expensive promise to raise the tax-free personal allowance for all. (Instead, the planned increase will cover less than 1/5 of the taxpayers and reduce the state's revenue by less than PLN 2 bn rather than PLN 16 bn.)
  • Abolition of the contribution limit is a further action of the government to increase the taxation of Poles. In 2015, only those earning 210% of the average wage in the enterprise sector were subject to the highest rate of the PIT. The freezing of tax thresholds means that in 2018 earning 180% of the average wage will be enough to fall into the highest tax bracket. According to estimates by the Ministry of Finance, this applies to 350 thousand employees.
  • The policy of increased taxation of higher incomes contradicts the government's declarations about the growth of the innovativeness of the Polish economy. The talented people in developing sectors earn more, and it is their income that will be hit. If the proposed changes enter into force, earnings above 180% of the average wage (i.e., above the second tax threshold) will be taxed almost 52%. Such a strategy, instead of reinforcing the motivation of the most talented employees to develop their career in Poland, will encourage them to emigrate. If this happens, then the hole in public finances will grow even further.

Under current regulations, the old-age and disability pension contributions are paid on the part of a salary not exceeding 30 times the average wage in the economy (about PLN 10,000 per month and PLN 120,000 per annum). If one exceeds this threshold, his pension account will no longer accept contributions, neither those deducted from the gross pay nor those paid by the employer. This provision was introduced at the beginning of pension reforms in 1999 to prevent very high benefits being paid by the Social Insurance Institution in the future.

According to estimates of the Ministry of Labor, in the perspective of the next ten years, the abolition of the 30-fold limit will improve the balance of the Social Insurance Fund by approximately PLN 7.3 billion a year. However, as higher pension contributions will reduce the tax base, after the planned changes the income from the PIT will fall by about PLN 1.6 billion a year, and the National Health Fund’s income from health insurance will be reduced by PLN 0.27 billion per year. The net effect for the public finance sector is estimated at PLN 5.5 billion annually. The Ministry of Labor estimates that the change will affect around 350,000 employees.

The abolition of the limit on pension contributions will improve the current balance of the Social Security Fund, but at the same time it will increase the future pension liabilities of the state. In theory, well-paid employees should expect high pensions in the future, proportional to their contributions. But such a scenario puts the stability of the Social Insurance Fund at risk. Therefore one can fear that future governments will try to deliberately restrict the valorization of the benefits of those receiving the highest pensions, although they paid the largest contributions in the past.

Even if the retirement age stayed at 67 years and the current social security contribution limit was maintained, then the deficit of Social Security Fund would reach approx. 1.7% of GDP, in the 30s it would increase to approx. 1.9% of GDP, and in the 40s to approx. 2.5% of GDP. This is a consequence of the declining number of employed, the increasing number of pensioners and the need to subsidy minimum pensions. As the retirement age was lowered, the public finance gap will increase even further: by an average of 0.8% - 0.9% of GDP per annum in the next decade, by 1% of GDP in the 30s and by approx. 1.2% of GDP in the 40s of the current century. Including subsidies to minimum pensions, in the 30s the financial hole in Social Security Fund may reach 2.8% of GDP, and in the 40s 3.7% of GDP. In the current situation this amounts to over PLN 55 billion a year in the 30's and over PLN 70 billion a year in the 40's.

The aging society, coupled with low retirement age, will cause enormous pressure to seek savings to minimize budget subsidies to the Social Security Fund. It is easy to predict that when a narrow group of people who receive high pensions is formed in the future, politicians will want - at best - to limit their valorization so that enough money is available to raise the lowest benefits. Already now politicians want to reach into pockets of the richest, and in the future the temptation will only grow.

It is highly probable that in result the best-paid employees will try to reduce the amount of taxable income, for example by charging their personal expenses to the company, so the improvement in public finances may be less than the currently estimated PLN 5.5 billion.                                                                                    

It is worth pointing out that the plan to lift the limit on pension contributions is yet another project that reduces the income of the best-paid employees.

The first was the complete liquidation of the tax-free personal allowance for people earning more than PLN 127,000 per year since 2017.

The second was the maintenance of frozen tax thresholds. While in 2015, the second tax bracket included earnings over 210% of the average wage in the enterprise sector, in 2018 just 185% will be enough to fall into this range, taxed at 32%. It should be remembered that PIT is only a part of the tax wedge, which also includes contributions to the Social Insurance Fund and the National Health Fund. Therefore, after entering the second tax bracket, from every złoty paid by the employer almost 52 groszy of taxes and contributions are deducted, and the employee will receive less than 50 groszy. Of every zloty paid by the employer within the second income bracket:

  • Social Security contributions are 28 gr, divided into 16 groszy paid by the employer and 12 groszy by the employee. (It is worth pointing out that this division is fictitious because the employee is interested in his net pay and the employer in total cost, whatever contributions and taxes are called).
  • NFZ contributions are 7 groszy,
  • PIT amounts to 18 groszy.

The PiS government speaks a lot about the growth of innovation in the Polish economy, while at the same time it significantly increases the tax burden on those of the highest productivity, naturally earning more than the national average. This strategy, instead of strengthening the motivation of the most talented employees to develop their careers in Poland, will encourage them to emigrate. At the same time, it will discourage the arrival of foreign specialists in Poland (despite the encouragement of Deputy Prime Minister Moraviecki, addressed to financiers at the City of London, inviting them to move to Poland in response to Brexit). If these are the effects, the public finance hole will increase even further.

Read in Polish.

Contact with the authors:

Aleksander Łaszek, Chief Economist at FOR
e-mail: aleksander.laszek@for.org.pl

Wiktor Wojciechowski, Plus Bank Chief Economist, FOR Expert

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