The art of taxation consists in so plucking the goose
as to obtain the largest possible amount of feathers
with the smallest possible amount of hissing.
— Jean-Baptiste Colbert
Benjamin Franklin stated that in this world only death and taxes are certain. This last position in particular deserves attention, as it is surrounded by a mist of mystery and, at the same time, a threat connected with clear actions of tax offices, which are not very clear for a normal person.
In the first quarter of each year there are millions of letters with PIT forms circulating in Poland, millions of people filling (seemingly simple, yet complicated) tax returns. However, we should not complain about taxes, because high taxes mean high salaries.
Let us therefore not fight taxation – taxation is a contribution to the country that educates us, cares for our health, internal and external security, the administration of all this, roads and bridges, the environment and diplomacy, and so on. A rich country means rich citizens who pay their taxes on their wealth
Therefore, with all due respect for taxes, yet stimulated by the ideas of our contemporary Robin Hood with the idea to take from the rich and give to the poor, we should consider the sense of some tax operations, their counter-productive nature, and costly collection. We will not solve all the tax nuances with a single press article, but a debate should be launched on simplifying the system.
The most controversial is income tax. Its main disadvantage, highlighted by Prof. Gniazdowski from the Adam Smith Center (and more controversially by EP Janusz Korwin-Mikke) and many others, is its anti-business activity.
The entire system is being put in place to choke out as many taxes as possible from businesses so that these “evil capitalists” would be deprived of as much as possible. As a result, even the most honest have to play games with costs, so as to pay the hated CIT. The simplest solution would be to abolish CIT, especially as the overwhelming majority of this tax is aimed at the coffers of large corporations, while small and medium-sized enterprises in their masses work on a minimum of income and accounting losses.
However (in connection with the last holiday of the Tax Office on 30 April), we should pay attention to PIT. In the first quarter of each year, the post office delivers millions of registered letters, preceded by an extensive work of accountants inserting completed forms into envelopes.
Then, there is the next formidable task of the officials: verifying the data from the sent declarations with the data stored in the computers of the offices. The funniest thing about PIT is that the whole army of people “serves”, in fact, only those who exceed the tax threshold (85,528 of taxpayers annually) and those who earn income from various sources – the lion’s share of PIT is filled out on paper, because it does not enter the market: it is a pure burden on the employer transferred in the form of advance payments to the tax office.
In 2016, 97% of all PIT taxpayers did not exceed the tax threshold, 63.5% of tax sources were derivatives of salaries from the employment relationship, and 25. 5% were derivatives of pensions. PIT is a complex tax.
In fact, it charges the employer, but in all countries where PIT is in force, it is surrounded by additional regulations, reliefs, exemptions, and restrictions relating to the employee. In order to reconstruct or eliminate this tax, it would also be necessary to change the mechanisms of financing local governments, as in Poland almost 40% of this tax is transferred to municipalities.
It is obvious that in the era of computerisation, a number of issues can be simplified, such as, for example, the introduction of a long-awaited cumulative fee for all liabilities related to net salaries (ZUS, health insurance etc.). For an employer it counts how much she/he has to pay, for an employee it counts how much she/he gets in hand.
Would it not be easier to separate all these elements of the net wage burden from the employee and the employer? After all, we have computers! The employer pays the salary and at the same time transfers the accumulated derivatives to a relevant collective account with simultaneous information to the database of the tax office and the Social Insurance Institution.
This service should be provided automatically by a bank providing the remuneration. We gain full automaticity of payments, the entrepreneur is forced to make timely payments to the Social Insurance Institution, fewer transfers, etc. In the case of cash withdrawals, the entrepreneur would operate in the old complicated mode. In the case of PITs, the empty circulation of money related to taxes of budget employees, pensioners, and people receiving various benefits should be simplified.
All these payments are burdened with tribute on the State Treasury or public institutions. Salaries in budget units amount to over PLN 33 bn, ZUS and KRUS payments for pensioners are well over PLN 200 bn. Of these two amounts, the same budget, which pays citizens through its institutions, receives income tax from them amounting to over PLN 40 bn zlotys (!). You may take a look at the data and see that the total personal income tax is just over PLN 83 bn (in 2016), so almost 50% of the tax revenue is paid by the state to itself.
After all, even unemployment benefits are subject to this tax. One may ask: What are the costs to society of trading PLN 40 bn empty money?
It seems that the abolition of PIT, at least for the salaries of employees of the budget sector, pensioners, and recipients of benefits, could be settled by a single legal act modifying also the payments to the levels of net salaries. In the same act, PIT deductions boroughs could be replaced by an equivalent subsidy from the state budget paid by tax offices to borough’s offices in proportion to the cumulated net salaries of these people living in a given borough.
Well, someone will say: let’s allow for the circulation of empty money for workers in the budget area, pensioners, and recipients of benefits, and let the capital pay if they want to exploit workers. It does not make any sense, but what is the state budget to be made of if not taxes?
The answer is simple. There is one group of taxes which is related to economic turnover – in the Polish case it is excise tax and VAT. While excise duties are typical turnover taxes on luxury consumer goods or, as in the case of alcohol and cigarettes, on poisons, which will in the long run increase health spending, VAT is more profound. This French invention, introduced in the middle of the 20th century, is now with the exception of the USA almost all over the world (there are 20 other exceptions: Vatican, San Marino, Qatar, Kuwait, among others).
Unlike turnover tax, which is calculated on the basis of a company’s revenue, this tax only applies to value added, i. e. the company’s contribution to economic turnover. Despite its theoretical simplicity, VAT causes a headache for finance ministers because of its potential to evade or extort it through fictitious trade in goods.
VAT also causes a headache for businesses, since the overwhelming majority of VAT payments are made on an accrual basis: the obligation to pay arises when an invoice is issued. Although the company is only obliged to account for VAT next month or quarterly, when payment for the account does not arrive, this may mean that financial liquidity is lost and, as a result, serious disruptions may occur.
The VAT Act introduced the possibility to settle this tax on a cash basis, i. e. at the time of payment, but this applies only to “small taxpayers” whose sales do not exceed EUR 1. 2 million. Could the collection of VAT be simplified? Could the state budget be better protected against fraud such as tax carousels? Is there a better solution than the reverse VAT introduced a few years ago? It seems that a general solution could be to switch all VAT collection and refund operations to cash accounting.
It is enough for banks to introduce a tax settlement account next to the settlement account. Remittances for VAT payers would have two items: net and gross, so the net amount would go to the current account and the amount of tax to the VAT account. In case of lack of money, a debit would appear on the VAT account, and the missing amount would be covered from the settlement account and reimbursed together with transfers from counterparties. From the moment the VAT account was reset to zero, it would again be automatically credited with this tax.
Within the European community, clearing would work in a similar way, with a payment order to the bank having to be made for additional information on the foreign counterpart so that the banking computer can transmit information on the transaction to the relevant institutions for statistical purposes. VAT in trade with countries outside the EU would be paid together with customs duty and excise duty at import, and for export it would be paid in the same way as in the case of trade within the EU.
The VAT account of an entrepreneur would, in fact, be a sub-account of the tax office. In the case of a positive balance, the tax would be transferred automatically to the account of the tax office on a monthly or quarterly basis. In the case of negative balances lasting over a long period (e. g. as a result of the investment process), the refund would be granted following a negotiated procedure with the tax office – a negative VAT balance means that the company does not provide any added value and therefore its activity is questionable. By supporting economic investment, the State could help it by providing VAT loans for the first phase of its development, which would be collected during “good times”.
Is it worth raising tax issues at the very moment when the Constitution for Business is currently coming into force in Poland and when the President has just opened a debate on the new shape of the Constitution of the Republic of Poland? The answer seems obvious, especially for the people starting their own business.
The current legal system governing the interface between business and state administration is far too complicated, and interpretation of the law often depends on individual decisions of the tax authorities and courts. In order to function in this thicket of regulations, highly paid advisors are needed. Unfortunately, they often capitulate when faced with the hostile attitude of officials (an example is the collapse of MGM SA).
The tax collection system should be simple, understandable to everyone, and easy to navigate in. Office staff operating within a good and friendly system will also become friendly because they will have no other option. The presented solutions do not have to be introduced on a revolutionary basis, but through a voluntary transition to a more efficient way for entrepreneurs.
The proposals are beneficial for all parties involved in the process – especially for the banks, which may charge a small commission on the operation, hoping that a large turnover will turn it into a substantial profit compensating for the investment outlays related to the software modification.