REVIEW #12: Turnover Tax in Poland: Seduction by Simple Solutions

One of the most important problems of today’s liberals and libertarians is how to translate the idea of liberty into a possible realization that would bring at least a bit of freedom. Nowadays, in a world of sophisticated systems of taxation and welfare states, it is very easy to make a mistake and thus roll over the first cube in this financial domino.

As liberals working in such political, legal, and social environments, we are exposed to the risk of looking for easy recipes to expand freedom and to increase the pace of economic development.

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One of the ideas that has recently gained the attention of the liberals in Poland is a turnover tax, which is presented as an ideal tax. Polish advocates of the turnover tax claim that it is cheap in collection, understandable and predictable to all, and tax optimization is almost impossible.

However, few people realize what an economic tragedy it would be to try to simplify the tax system in a way, which is the result of relatively little knowledge of the current legal system and stems from common legal and economic myths.

What Is the Turnover Tax?

Revenue is proceeds received by an enterprise from, among others, sales, so if the enterprise sold 10 units of goods for EUR 100 each, its revenue is EUR 1,000. If the state imposes a turnover tax on enterprises – most often referred to as rates between 0.5% and 2.5% – in this situation, the tax due will equal 5-25 cash units.

Let us assume a rate of 1.5%; the income after tax will be 985 units, and only from this amount we deduct the tax-deductible costs, i.e. salaries, machine rental or depreciation, property rental, purchase of materials or semi-finished products.

In the end, we receive income that can be used for dividend payments or further investments.

The amount of turnover tax paid is not affected by the amount of costs, the size of the margin, or whether the company made a loss. Another problem is when a company invests all its surplus funds all the time, which forces it to either credit itself to pay taxes, or slow down its investment.

It is worth pointing out here that the Polish debate talks about turnover tax as an alternative to income tax. However, it was historically a substitute for VAT where it replaced the turnover tax in 1993. It is a popular tax, especially in the economies of developing countries, where a large informal economy exists.

Among the advantages of this tax, its supporters mention the enormous simplicity. This feature consists in the lack of deciding whether a given expenditure is tax-deductible or not, thanks to which, every entrepreneur is able to calculate what their tax liability is without any problems.


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