PERSONAL INCOME TAxATION IN POLAND

The Polish taxation system has been undergoing substantial changes in recent years, aimed at creating a more transparent system and conforming to the taxation standards of market economy countries. The two most important changes were introduction of the personal income tax (PIT) in 1992 and replacement of the turnover tax with the value added tax (VAT) in 1993. The uniform personal income tax covered all incomes generated by natural persons irrespective of where the sources of income are located. The reform provided also a more equitable distribution of the tax burden by introducing a progressive system with three nominal tax rates (in 1992–20%, 30%, 40%). A comparative study of the effective PIT rate for pensioners and other groups of PIT payers is the main goal of this paper. The study refers to our own research on data received from The information of Polish Ministry of Finance about accounting of PIT in several subsequent years. Statistics cover a period from 1993 to 2003. However, numbers of taxpayers refer also to year 1992 when the PIT has been established and a period from 2004 to 2006. Concluding the situation in Poland, taxpayers with the highest income make exhaustive use of tax reductions. There are occurring situations when well-off people benefit more than people with relatively minor income (e. g. pensioners). It happens even if most of deductions were aimed generally at all taxpayers. Such a situation reduces the impression of the system fairness. Because tax deductions reduce budgetary revenues, the foregone revenues have to be compensated by other taxes or / and higher rates. Therefore, the system of deductions and relief, on the one hand, supports the special gains (e. g. house building), however, on the other it generates costs. It is possible that the reduction of tax rate for the I tax bracket and removal of some tax exemptions and deductions would make the Polish personal income tax more transparent, equal and simple.


introduction
the study of tax-related issues viewed from the perspective of personal income requires a short introduction to the Polish tax law regulations.the Polish taxation system has been undergoing substantial changes in recent years aimed at creating a more transparent system and conforming to taxation standards existing in market economy countries.the two most important changes were introduction of the personal income tax (PIt) in 1992 and replacement of the turnover tax with the value added tax (Vat) in 1993.
the uniform personal income tax covered all incomes generated by natural persons irrespective of where the sources of income are located.the reform provided also a more equitable distribution of the tax burden by introducing a progressive system with three nominal tax rates (in 1992 -20%, 30%, 40%).
the tax subject of the Polish PIt is extensive because it embraces personal revenue and revenue from private business activities.However, there are some exceptions, and certain types of income are not subject to the personal income tax.the list of exceptions contains, among others, the following sources of revenue: • agricultural activities, which are generally understood as production of unprocessed foodstuffs on a farm, and income from forestry.However, income from special branches of agriculture (including breeding of certain animals and mushroom cultivation) is subject to income tax; • forestry; • property falling under provisions on inheritance and donations; • resulting from activities which cannot be considered a subject of a legally effective contract; • distribution of the joint property of spouses due to the cessation or limitation of their property co-ownership; • ship-owners falling under provisions on tonnage tax; • payment for supporting family needs according to article 27 of Family and Guardianship Code. the tax base of the personal income tax is the sum total of revenues earned by a taxpayer from nine sources.Income from each source is defined as the surplus of revenues from that source over the costs involved in generating that revenue in a given tax year.If in a given tax year losses from any source of income exceed the taxpayer's income from that source, then the taxpayer has the right to deduct the loss over the next five years from income derived from the same source (but no more than 50% of the loss in one year).
The country tax law defines a complex system of rules for calculating the costs of earning.In general, these rules make costs dependent on a source of revenue.For example, a cost of earning revenue from a permanent employment contract is specified as fixed amounts in the tax act, while a cost of revenue from a commission contract is equal to 20% or 50% of the revenue.In the case of pensions, no costs can be calculated because the whole revenue coming from the pension is considered as a personal income eligible for taxation.
In such a situation, the definition of income according to the law on income tax differs from the real private person's income and from theoretical definitions (see, for example, H. C. Simons let me remark that pensioners are the only group of taxpayers in Poland that have no choice of the tax remitter.In their case, the law enforces that the PIt remitter is an institution being at the same time the payer of their pensions.the rest of taxpayers that do not belong to this group may choose the tax remitter.they can pay tax themselves or choose a tax remitter that settles their tax, for example, the current employer.the choice of tax remitter involves an unconditional delivering of a filled PIT-12 document to such tax remitter before 10th January of a year after the settled year.Pensioners have to submit a filled tax return only in a situation when they have some additional revenues from other sources than their own pension or have chosen a joint tax settlement with the spouse or plan to benefit from tax deductions.
a comparative study of the effective PIt rate for pensioners and other groups of PIt payers is the main goal of this paper.the study refers to our own research on data received from "The information of Polish Ministry of Finance" about accounting of PIt in several subsequent years.the statistics cover a period from 1993 to 2003.However, the numbers of taxpayers refer also to year 1992 when the PIt has been established, and a period from 2004 to 2006.

Groups of Pit taxpayers according to tax settlement form
this section presents a study of data describing a number of PIt payers in relation to the form of a year-wide tax settlement.There are two main ways of tax settlement: by oneself or by a tax remitter (see tables 1 and 2).
Elaborated data unveil that only in 1992 (the first year after PIT introduction to the Polish tax law) the number of taxpayers settled by tax remitters was higher than the number of taxpayers who settled themselves.The share of the first group was 54%. the situation reversed in 1993 when about 51% of taxpayers settled PIt themselves.the share of this group rose in subsequent years to 79.1% in 2005.the decreasing share of taxpayers settled by tax remitters was a result of the withdrawal of employers from tax settlements activities for their employees.Some reverse of this trend was observable in 2006 when 73.0% of taxpayers settled themselves.During the whole period, the most numerous fraction in the group of taxpayers settled by tax remitters were pensioners.their share in this group of taxpayers rose from 52.7% in 1992 to 90.7% in 2005.
all payers of pensions in Poland are at the same time tax remitters of pensioners.A significant participation of pensioners in the group of taxpayers settled by tax remitters reflects the fact that these people live lonely or their spouse is also a pensioner.Therefore, they have no interest in a joint tax settlement with their spouse.Because the majority of them are older, they do less willingly any expenses that would be deductible from the tax.Most of tax deductions in the Polish tax law are directed toward younger population, e. g. tax deductions for the Internet.In effect, they resign from additional and unprofitable work connected with filling a tax return, and they prefer to leave tax settlement activities to pension payers.an additional motivation for leaving PIt settlement activities to payers of pensions is given by the regulations in the law.a pensioner has no obligation related to delivering the PIt-12 form to the appropriate tax remitter (his pension payer).

Effective personal income tax burden for different sources of revenue
In this section, an effective tax burden rate is understood as a relation of the tax amount after deductions to the income before deductions.the income before deductions is not yet a tax base.the taxable income is calculated after deducting the income tax deductions.table 3 contains the PIt rates in years 1993-2003.a difference among these rates and the effective tax burden rates reveals how much taxpayers were able to reduce the tax burden using tax deductions.although the tax rates in the year 2003 do not differ much from the tax rates of 1993, we can observe significant fluctuations in the tax rates over the last eleven years.the span for the highest tax rate was up to 5 percentage points and for the higher rate up to 3 percentage points.the basic rate was relatively stable and changed up So ur ce: the information of Polish Ministry of Finance about accounting for PIT in particular years.So ur ce: the information of Polish Ministry of Finance about accounting for PIT in particular years.
and down only by two percentage points (see table 3). the Polish personal income tax has been subject to many amendments, e. g. a change of tax rates, broadening the tax scope, and abolition of a number of deductions and reliefs.the most important changes were introduced in 1997 and in 1999.In 1997, the change was connected with the construction of deductions.till 1996, most allowances were connected to deductions from the tax base, and since 1997 most allowances were deducted from the tax amount.this change was unfavorable to taxpayers situated in the second and the third brackets.Deductions from the tax base allowed reducing the tax rates.
In 1999, the change was related to the reforms of the system of social security and health insurance.Since 1st January 1999, two major reforms within the social security field came into force in Poland: • the health care system reform -replacing the public health care system with the health insurance system based on a separate contribution; • the social insurance system reform, its first stage being a fundamental reform of the pension system, consisting in the introduction of two compulsory pillars of which the first one is pay-as-you-go financed, and the second one is composed of funded pension schemes.
The basic source of the health care financing is an income from health insurance contributions.this contribution is deductible from the PIt amount of a contributing taxpayer.under the revised Health Insurance Act, the health insurance contribution in 2003 rose to 8% (from 7.75%) 9 .as the amendment was not accompanied by a corresponding amendment to the Personal Income Tax Act, the will not be deductible for personal income tax purposes.Under the social insurance system reform, both an employer and an employee pay compulsory social security contributions.Employees pay 18.71% of the gross wage as social security contributions which can be deducted from income before taxing10 .Before 1999, an employer was obligated to settle on its own his part of the contribution for employees and the employees' contribution (deducted from employees' wages).As a consequence, the contributions of the employee and the employer were not included in the employee wage.The situation changed in 1999, when the employees' gross wages were increased by the amount of compulsory social security contributions in the part which employees had to pay themselves.
the effective PIt rate depends not only on the set tax brackets, but also on the scope of taxpayers' participation in tax deductions.Therefore, in the study period,   the change of the effective tax burden rate is illustrated in Figure 1.The figure shows the effective tax rate in the study period with a differentiation on particular tax brackets and sources of revenue.
The most significant differences among effective tax rates for particular tax brackets were observable in the taxpayers' group whose revenues came exclusively from running their own businesses or work in a freelance profession.In the study period, the average effective tax burden rates in subsequent tax brackets were appropriately 11.8%, 16.0% and 29.8% for these taxpayers.the greatest difference occurred in 1997 and 1998 when in tax bracket I the burden was appropriately 11.1% and 9.7% and in tax bracket III it was 34.5% and 32.4%. the difference between effective tax rates and regulated tax rates was smallest in the group of pensioners having their revenues exclusively from their pensions.this group of taxpayers paid a relatively high tax in tax brackets I and II, and it was paradoxically very low in bracket III (the highest).a lot of similarities can be observed in the group of taxpayers whose revenues came exclusively from permanent employment contracts where costs deductible from revenue in PIt settlement are fixed by regulations.The situation was different in the group of taxpayers having revenue from many different sources where the effective tax burden in tax brackets I and II was low and in tax bracket III was high.The flexible costs deduction from the revenue caused a situation when taxpayers running their own business had a notably smaller tax burden in tax brackets I and II. the explanation lies in the fact that they can pay taxes according to the lower tax rates than would be expected from revenue if they can prove appropriately high costs.taxpayers from this group left in the tax bracket III are those who could not prove sufficient costs which would shift them to a lower tax bracket.
In almost the whole period (with an exception of year 2003), taxpayers falling to tax bracket I and getting revenues exclusively from running their own private businesses or working in a freelance profession paid the lowest PIt. an average effective tax rate for this group was only 11.8%, while the rate regulated in the law for bracket I was 19-20%.Particularly, in 1995 and 1998 this burden was notably reduced due to a massive participation in tax deductions, and additionally in 1998 with the reduction of rate for the bracket I tax from 20% to 19%.In the last five years of the study period, for this group of taxpayers the effective tax rate significantly rose and was approaching the effective tax rate of other groups of taxpayers.
The other taxpayer groups, such as people on permanent contracts, pensioners or having revenues from many sources, had a similar tax burden in the study period.the effective rate was appropriately 14.7%, 14.5% and 14.4% for the mentioned groups in tax bracket I. Effective tax rates for these groups decreased in 1999 when they approached the effective tax rates of taxpayers receiving revenues only from their own private businesses.almost all conclusions from the analysis of taxpayers falling in tax bracket I are applicable to taxpayers falling in tax bracket II.Taxpayers of tax bracket II, who paid the lowest taxes, were those running their own private businesses or working in a freelance profession.the effective tax rate in their case was on average 16% (while the regulated rate was 30% for this bracket).the highest effective tax rates had taxpayers receiving revenues exclusively from their pensions.the effective tax rates for taxpayers employed on permanent contracts were similar to those of pensioners and higher than for the first two groups mentioned above.However, for the same reason as in the case of taxpayers falling in tax bracket I, all groups of taxpayers falling in tax bracket II had a notably lower effective tax rate in 1995 and 1996.Since 1998, differences in the effective tax rates among all the mentioned groups have been gradually decreasing.
the situation is different in the case of taxpayers falling in tax bracket III. the statistics show that the group of taxpayers who had the highest effective tax rates in the study period received revenues from running their own private businesses.the effective rate in this case was 29.8%, while the rate regulated in the law for this tax bracket was 40%.these rates were particularly high in 1997, 1998 and 2001 when they were respectively 34.5%, 32.4% and 33%.It was connected to changes in regulations related to tax deductions.Some possibilities of tax deductions were removed from the tax law in these years (e.g. elimination of investment deductions since 2001).In tax bracket III, the effective rate was lowest for taxpayers receiving revenues exclusively from their pensions.
Many changes in the effective tax rates for all groups and for all tax brackets have their roots in changes of the personal income tax law.Before 1996, there existed many tax deductions regulated by the law.these deductions did not depend on the kind of the revenue source, therefore they had a remarkable impact on the effective tax rates lowering them.Since 1999, differences between taxpayer groups in tax brackets I and II have become unnoticeable, and their values have dropped below a 1% point.

taxpayers, income and tax partition
the evaluation of PIt impact on the process of wealth redistribution in Poland requires research on the structure of taxpayers, income and tax in relation to the sources of revenue.Such research gives knowledge about the differentiation of the income and the tax burden in the country.Some parts of research results are presented in table 4 as the average values for the period 1993-2003.
In the group of taxpayers receiving revenues exclusively from a single source, the majority are pensioners or taxpayers receiving revenues from permanent contracts.However, it should be stressed that these groups of taxpayers have costs calculated on the basis of regulations in the law.Such costs are usually fixed, and they are a symbolic amount or even they are completely not considered in income calculation (like for pensions).
In 1993-2003, taxpayers receiving revenues exclusively from permanent contracts had a comparable participation in the total number of taxpayers (25.9%), total revenue (26%) and the total collected tax amount (24.9%).However, some differences appear in a section along the tax brackets.these taxpayers show the highest participation in tax bracket II where their share in the total number of taxpayers was 27%, whereas in tax bracket I their share was 26%.Only in tax bracket I their average income was higher than the average for the bracket, but in both tax brackets I and II their tax burden was higher than the average.In tax bracket III, their income was lower than the average, and the tax burden was also lower than the average.taxpayers receiving revenue from pensions were the second most numerous group (32.7% of the total number of taxpayers), but their income was only 21.4% of the total income, and their participation in the total tax amount was on average only 18.8%.these numbers imply that this group has a lower income and simultaneously pays a higher personal income tax in comparison to other groups of taxpayers.at the same time, this group of taxpayers had the most numerous representation in tax bracket I.During the period 1993-2003, their participation in the total number of taxpayers from tax bracket I was on average 34.6%.Pensioners were the group of taxpayers whose tax burden of income was the greatest in tax bracket II.
taxpayers receiving revenues exclusively from running their own private business or working in a freelance profession had the smallest share in the total number of PIT payers, but their income was more than 4.5% of the total income and their paid taxes were 6.7% of the total collected PIT.these taxpayers were partitioned among the tax brackets into unequal groups.they were most numerous in tax bracket I, but their input to the collected tax was the highest in tax bracket III.In bracket III, they made only 0.22% of the total number of taxpayers, but their income was 2.9% of the total income in this bracket, and the paid tax was 5.22% of the total PIt col-lected in this bracket.So, this very small group of taxpayers had the highest income and paid the highest PIt.In tax brackets I and II, this group of taxpayers was small.However, their income was also higher than the average.Because of the flexible costs calculation in tax returns, their tax burden was lower than the average in tax brackets I and the II.
In the study period, taxpayers receiving revenues from more than one source showed the largest participation in the total number of taxpayers (37.4%), the total income (47.1%)and the total PIt collected amount (48.9%).this principle was retained in a section done through tax brackets.the statistics presented here and prepared for this research prove that their income was higher than the average in tax brackets I and II.However, their PIT paid in these brackets was lower than the average.
The research on taxpayers, income and collected PIt presented in this paper reveals a sharp progression of PIt.It is especially visible for a small group of taxpayers from tax bracket III and receiving revenues from running their own private business or working in a freelance profession.Paradoxically, pensioners, whose income is the smallest among all groups in Poland, paid a higher PIT relative to their revenue and above the average.this numerous group of taxpayers participated in almost 20% of the total collected PIt.conclusions results of this research prove a strong dependence of tax burden on the source of revenue regardless of the revenue amount.this dependence has roots in the method of costs inclusion in personal income calculation.Some sources of revenue are privileged with a very flexible system of costs deduction from the revenue when the income is calculated.Therefore, in these cases, even if the revenue is high, the calculated income, which is a base for PIT, may be significantly lower.In such a system, some sources of revenue were privileged, whereas the others were discriminated.this undermines the general character of PIt.
In the study period, groups of taxpayers from tax brackets I and II and running their own private businesses or working in a freelance profession or having revenues from many sources paid the lowest taxes.These groups could use the flexible system of costs inclusion in their income and tax calculation.It significantly reduced their tax burden, while pensioners and employees working on permanent contracts could not profit fully from this cost inclusion system in calculating their income.therefore, these groups in tax brackets I and II paid effectively the highest PIt of all.this principle reverses in tax bracket III, because taxpayers running their own private businesses or having revenues from many sources just could not escape to a lower tax bracket because they could not prove sufficient costs.As a consequence, their income was fully exposed to the highest tax rate in this bracket.recent years have intensified this trend for the last of the mentioned groups because the removal of a number of tax deductions (like investment deductions) made their effective tax burden higher.
Summarizing the situation in Poland, taxpayers with the highest income make an exhaustive use of tax reductions.there are situations when well-off people benefit more than people with a relatively minor income.It happens even if most of deductions have been aimed generally at all taxpayers.Such a situation reduces the impression of the system fairness.Because tax deductions reduce budgetary revenues, the foregone revenues have to be compensated for by other taxes or / and higher rates.Therefore, the system of deductions and relief, on the one hand, supports the special gains (e. g. house building), however, on the other, it generates costs.It is possible that the reduction of tax rate for tax bracket I and the removal of some tax exemptions and deductions would make the Polish personal income tax more transparent, equal and simple.

Figure 1 .
Figure 1. the effective Pit rate according to sources of revenue and tax brackets in 1993-2003 S o u r c e : the information of Polish Ministry of Finance about accounting for PIT in particular years.
than one source this rate has fluctuated very significantly.

Table 4 . Structure of taxpayers, income and tax according to the tax brackets and sources of revenue, in 1993-2003 (%) sources of income taxpayers income tax tax bracket i ii iii total i ii iii total i ii iii total
So ur ce: the information of Polish Ministry of Finance about accounting for PIT in particular years.