European Commission Protects Polish Consumers against Bad Decisions of the Government

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Caden Crawford via flickr || Creative Commons

The EC’s decision to start an in-depth investigation into Poland’s tax on the retail sector is undoubtedly right as this additional tax imposed on large stores is unjustified and harmful. It should be up to a consumer’s individual choice where to go shopping. Politicians’ idea of the progressive rates which would discourage people from choosing bigger retailers will not only restrict consumers’ choice, but can also be detrimental to development of the Polish economy.

Since implementation of the new tax, concerns whether it complies with the EU legislation have been presented. A similar tax introduced in Hungary had been put into question by the European Commission before. Parliament adapting new legislations, for which there are significant doubts about their compliance with the EU law, only deepens the legal chaos in Poland, forcing entrepreneurs to constantly face with changing rules.

We have already discussed the pitfalls and lack of justification for the tax on retail sales in FOR 12/2016 Analysis, followed by the press release posted on June 3, 2016, in which we pointed out that introducing this new tax will be costly for consumers, employees of retail sector and Polish economy as a whole.

European Commission advocates the opening of that investigation with a claim that “(….) the progressive rates based on turnover give companies with a low turnover a selective advantage over their competitors in breach of EU state aid rules.’ 1 These concerns are justified as one of the declared outcomes of the retail sector tax, according to the official documents, was to ”enhance the competitiveness of micro, small and medium-sized businesses in comparison to large retailers”. 2

Income tax imposed on certain individuals is sometimes supported by the fact that diversification of tax rates has a redistributive goal. Some believe that with a high level of income, another PLN 1000 or euro of income has minimum impact on increase in utility. Thus, it is more effective to redistribute these money to those who earn less and for whom it would be much more beneficial. However, in case of diversified tax rates on companies, such argument cannot be applied at all. Indeed, states have no interest in promoting inefficient companies by forwarding them income made by their more productive competitors. In capitalism, weaker entities exit markets, while stronger boost their production and take over their employees, which is one of the main mechanisms to increase productivity (Melitz and Ottaviano, 2008; Melitz, 2003). In the FOR’s report “Next 25 years” (2015) we expressed our concerns about the possibility that in Poland this important mechanism, stimulating productivity, could be artificially suppressed by interventions of the government.

Therefore, artificial support for business expansions by the state is harmful to consumers as well as to the economy. One of the most significant engines of economic growth and rising standards of living are: specialization and economies of scale – it means that larger corporations are often able to produce and later sale their products more efficiently than the smaller companies do. As a result they offer lower prices. This is why buyers rather choose cars provided by global corporations instead of vehicles produced in local manufactories. For the same reason, the majority of people buy mass-produced clothes supplied by large companies, instead of visiting tailors. Situation is similar in the retail sector – a large scale of activity enables organizing the logistics and production processes better. In addition, higher business performance both increases wages of workers and finally tax revenues. Thus, the government should not artificially promote less efficient market participants at the expense of larger and more efficient ones. Whether a consumer prefers to buy a hand-made car, clothes from a tailor or do groceries in a small store, should be left to his or her individual consideration. On the other hand, if she or he prefers to purchase a mass-produced car, clothes from a global corporation or do shopping in large supermarkets, the state should not punish his or her decisions by additional tax.

As Central Statistical Office data shows, the smallest retail sector companies have lowest investments and sales and their employees earn less than in larger entities. Unfortunately, data on the smallest companies (up to 9 employees) are available only at a higher level of aggregation – data about enterprises engaged in retail trade, wholesale trade and those in sale/repair of motor vehicles are presented together. What is the most striking, is very low efficiency of enterprises employing up to 9 people:

  • Turnover per employee in these companies is PLN 371,000 per year, while in larger corporations it is more than double (over PLN 849,000). Medium-size companies (50-249 employees) have the highest income per employee.

  • Low turnover and investment rates indicate both low productivity and low wages in microcompanies – only PLN 2200 average pre-tax wage, compared with over PLN 3400 pre-tax average wage in larger companies in this sector. Moreover, according to the state labor inspectorate, smaller enterprises are the most likely to violate the workers’ rights and labor code.3

Table 1. Non-financial enterprises in trade and repair of motor vehicles (by number of employees, 2014)

Income per employee (PLN)

Investments per employee (PLN)

The average monthly salary (PLN)

Number of companies

Total 655 230 9 875 3 298

497 223

0-9 371 463 3 613 2 242

476 197

10-49 849 294 13 018 3 456

17 528

50-249 1 066 671 15 214 4 077

3 057

250+ 893 494 18 215 3 710

441

Source: FOR calculations based on Central Statistical Office (GUS) data

More detailed information include only the retail trade in 2015. The CSO publishes detailed data for companies employing 10 or more people (Table 2). From this point of view, it is difficult to determine which entities are the most efficient. The comparison may be additionally complicated by the fact that some companies operate as franchises of large retail chains. Their productivity is high due to their access to network resources (suppliers, marketing, organizational knowledge), but the CSO data displays them as separate companies. What also draws attention, is that investments are concentrated in the largest entities, and they are the ones which mostly pay new retail tax, which is now under the EC investigation. It is why these large entities with higher investments should not be punished as it detrimental to the Polish economy with low and still falling investments.

Table 2. Financial outcome of enterprises employing more than 10 people, whose main activity is retail trade, by number of employees, 2015

Income per employee (PLN)

Income tax per employee (PLN)

Investments per employee (PLN)

Total 507 545

2 028

10 004

10-49 626 214

2 086

5 552

50-249 421 563

1 090

6 236

250+ 503 212

2 270

12 070

Source: FOR calculations based on Central Statistical Office (GUS) data

Translated by Aleksandra Świerczyńska

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