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March 16, 2005

Poland’s Flat Tax.

News today that Poland is following the trend towards flat taxation systems:

Poland is to join the flat-tax revolution sweeping Eastern Europe, switching to a single band of 18pc on income tax, corporation tax, and VAT.

All well and good...although I have a suspicion that one of the reasons why they seem to be working in Eastern Europe is because of the legacy of Communism, not the innate virtues of the system itself (and I’m well aware of and agree with those virtues). Thinking back to the early 1990’s in Russia it was technically feasible for a company to owe 110% of turnover in tax (yes, turnover, not profit) a situation which meant that everyone was cheating and bribing just to stay in business. The apparatchiks loved it of course, as they were the recipients of such bribery, rent seekers on the system.

As our own system, however good or bad one might think it is, does not suffer the same level of corruption, we might see less benefit from sweeping away the complexities that allow it, even make it necessary. The other way to look at it is that the tax advisors, lawyers, trust formers, lobbyists and the rest are exactly the same set of rent seekers, just legitimised. Your choice I guess.

The number that really shone out from the report was this:

Polish officials say the tax-free threshold on personal income is likely to remain, near its current level of 37,000 zloty (£6,400).

Poland is a much poorer country than the UK. Yet their tax free allowance is higher than ours. At a guess that number means that only those on more than mean (or median) income are paying income tax. How different from our own system where those working part time on the minimum wage pay income tax. I know the Tories put forward the idea that personal allowances should rise to 10 grand and I think it’s the one simplest thing that could be done to make our own tax system fairer (the second would be to raise the NI limits to the same number) but it won’t happen because the two together will blow a 25 billion hole in the Govt accounts.

There’s even a way in which it can be sold to the chatterati at the Guardian and Independent. They’re all falling over themselves applauding Richard Layard’s book on Happiness, thinking that it provides an intellectual justification for higher taxation. However, one can read it slightly differently, in that he calls for 60% marginal taxation on incomes over 10k a year (remember, both direct and indirect taxation) and that’s pretty much what is paid now, in fact, adding excise taxes, we pay more than that. But he’s quite clear that for those on under 10k a year, a rise in income does make them happier...so we can say that a Labour Peer, indeed, some would say the economic guru of the Third Way, thinks that the low paid should not be taxed at all, as this will make the nation as a whole happier....exactly what he is arguing should be the thrust of public policy.

But just to make the point as clear as possible. The poor in the UK pay income tax, the poor in Poland do not. Are we certain that we have this the right way round?

March 16, 2005 in Economics | Permalink


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» Flat tax alert! from New Economist
It was only a matter of time before the simple-minded advocates of flat taxes reached British shores. Who better than the Adam Smith Institute to spread the word? Their new report, A Flat Tax for the UK - a Practical Reality (PDF), calls for income tax... [Read More]

Tracked on Mar 16, 2005 9:39:40 PM

» Poland’s Flat Tax from The Road to Euro Serfdom
I missed this story yesterday, but it seems that Poland is joining the Flat Tax Revolution. [Read More]

Tracked on Mar 17, 2005 6:58:27 AM

» Flat Tax Policy from The Monjo Blog
Poland has introduced a single-rate flat tax. It has set [Read More]

Tracked on Mar 29, 2005 11:04:54 PM

» Flat Tax Policy from The Monjo Blog
Poland has introduced a single-rate flat tax. It has set [Read More]

Tracked on Mar 29, 2005 11:08:30 PM

» Flat Tax Policy from The Monjo Blog
Poland has introduced a single-rate flat tax. It has set [Read More]

Tracked on Mar 29, 2005 11:12:44 PM

» Flat Tax Policy from The Monjo Blog
Poland has introduced a single-rate flat tax. It has set [Read More]

Tracked on Mar 29, 2005 11:17:42 PM


Abolishing income tax for those on the minimum wage makes sense, but why have National Insurance? it is just another income tax under a different name. Better to put it in with income tax.

Tim adds: Sure. The only thing different about NI is that you have to pay it for a number of years to get a pension. With the mooted change to a simple qualification by age and residency, that last reason for the difference will disappear. Then the two systems can be merged (as I think they ought to be) ....the only political problem with this is that people will then see quite how much they pay. The Employer’s supposed NI is really coming out of people’s wages and there may be a certain discomfort when people realise that the low paid are actually paying marginal direct tax rates of 40%.

Posted by: Phil Hunt | Mar 16, 2005 10:56:21 AM

Conservatives want to change that pension thing iirc, although maybe it was for only over 85s or soemthing. The BBC asked what we'd like to see in the Budget today I responded:
"Reduce VAT to just 5 per cent. This would encourage consumer spending and also reduce the price of petrol.
I would like to introduce a 20pc income tax on our 4.5million expats (just like the US does), this alone would easily plug the £11bl hole.
Finally introduce 50pc tax band for earnings over £200,000, but raise the tax free earnings to £10,000 to free a lot of part-time workers from paying income tax."

Posted by: Monjo | Mar 16, 2005 3:36:03 PM

Would anyone from The Guardian or The Independent oppose raising the tax free threshold anyway? I doubt it. It seems a perfectly good way to redistribute income, if you are into that sort of thing.

Interesting that you mentioned National Insurance, Tim. If it actually became a flat tax then it would be a far more progressive tax than it currently is, with its 1% top rate for employees.

Tim adds: I think it was Polly Toynbee who did oppose it just a few days ago.
About progressive tax rates...I’m not particularly against them. I just want efficient tax rates...ones that distort the economy the least possible while still raising the money the Govt needs. Of course, we do then get into arguments about how much it needs, but that’s another matter.

Posted by: Quinn | Mar 16, 2005 4:52:19 PM

Tim adds: I think it was Polly Toynbee who did oppose it just a few days ago.

Figures. I've not defended Polly Toynbee before, and I'm not about to start now!

About progressive tax rates...I’m not particularly against them.

I wasn't suggesting you were; I was just pointing out that if NI contributions became a flat tax it would actually address the way that an 11% rate drops to a 1% rate when you go above the upper threshold. Why not raise the NI free allowance at the same time as you make 11% payable on all earnings above the allowance?

I certainly won't hold my breath for that happening.

Tim adds: Why do you think NI is 11%? 20 odd % by my reckoning. The so called employer’s NI comes out of wages just as the employee’s does, the name notwithstanding. We actually have very similar marginal tax rates for the rich and the middle income groups, taking both NI and income tax together (around 40%) . The people who really get screwed are those on the margin between the benefit and tax systems, who can face marginal rates of 70-80%, when withdrawal of benefits and tax impositions are taken into account. If we look at marginal tax rates we actually have a regressive system.

Posted by: Quinn | Mar 16, 2005 5:53:13 PM

Most flat taxes seem therefore to be a two tier system. I have heard suggestions that one should have 18,000 tax free before a vingtcinquieme kicks in. But this would include NI. From what I understand, even in an advanced system such as our own the guesstimates suggest a revenue neutral position.

Posted by: Elaib | Mar 16, 2005 11:02:24 PM

I'm not an employer, but is it really true to say that "The so called employer’s NI comes out of wages just as the employee’s does, the name notwithstanding"? I accept it is an additional labour cost, but I suspect that if the employers NI contribution was reduced then I would not notice the difference in my pay packet.

I have always accepted that when you combine Income Tax and National Insurance our tax system is not as progressive as it is often made out to be; but it certainly is actually regressive if we include the Employers contribution. If my sums add up then we have a basic combined tax rate of 45.8%, with a top rate of 42%.

As for "those on the margin between the benefit and tax systems", I remember being on the dole in the early Nineties, and I was told that if I managed to get some part time work I was could earn £5, but after that I would lose £1 in benefit for every £1 I earned, which is a hell of a disincentive even before you even get into the position of paying tax.

Certainly there are many inequities in the tax and benefits system that need looking at, and there are many obvious and fairer ways it could be run. I think those of both the "left" and "right" can agree on that.

Tim adds: Your conclusion? Agreed.
The NI issue. Certainly theory says that the two chunks both come out of the wages....although there will be a lag between a change in the rates and a change in wages. A business (if it is going to stay in business) looks at the total cost of employing labour. This includes all taxation of course, plus office space, management time, computers, holidays, maternity leave and so on. The actual amount paid over to that labour is what is left out of that total sum after all the other costs have been deducted. If the market rate for that labour (in terms of cash paid out) is less than what is available, then that job doesn’t get filled. If under it, it does. Standard stuff, businesses will hire labour until the marginal costs equal the marginal revenues.
Whether part of that total cost of labour goes to the government or to the labourer makes no difference to the company itself....it’s still a cost that is accounted for in totting up the cost of labour.

Posted by: Quinn | Mar 17, 2005 9:08:06 AM

Just read the post on Poland Flat Rate.

There is a big error. The Polish tax-free threshold is not 37000 zloty, its 530 zloty.

The 37000 level is the upper limit of the 1st tax band (19%).

Makes a lot of difference I think.

Still agree with you that it should suit Poland, although they have more than evasion as a problem: Businesses have to declare, and pay tax on, profits on a monthly basis, starting from the month following the date of incorporation. Try that!

Tim adds: That last sounds like a relic of the high inflation.

Posted by: Russ Hagger | Nov 11, 2005 12:44:22 PM