Reforming Tax Expenditure Programs in Poland

28 Pages Posted: 20 Apr 2016

Date Written: November 30, 1999

Abstract

Tax expenditure programs that Poland introduced in 1992 to compensate lower-income taxpayers for the withdrawal of subsidies have proliferated-making the normative tax system difficult for the average taxpayer to understand, reducing the tax base, and benefiting the higher-income taxpayers more than the taxpayers they were originally designed to help.

Poland has recently begun reforming its tax program. In December 1999 it announced a gradual reduction in the corporate income tax rate, from 34 percent in 1999 to 22 percent in 2004. Value added and excise taxes are being harmonized with European Union directives, which means higher value added tax rates on unprocessed foodstuffs, municipal services, and construction material, and higher excise rates on tobacco and alcohol. The reform of personal income tax law has been delayed, because of concern about the fairness of a rate reduction for higher-income taxpayers and hesitation about the government's proposal to remove or scale down existing tax expenditure programs.

Poland's personal income tax expenditure programs, introduced in 1992, have received growing attention as the cost of the programs has increased. Originally they were intended to compensate lower-income taxpayers for the withdrawal of price subsidies. But most of them are extremely regressive, benefiting higher-income taxpayers.

Tax expenditures are reductions in tax liabilities that result from preferential provisions, such as deductions, exemptions, credits, deferrals, preferential tax rates, and exclusions from taxation. They are effective government spending channeled through the tax system, usually as substitutes for direct government spending to achieve fiscal and political objectives.

Cavalcanti and Li contend that strengthening the administration of Poland's tax expenditure programs is the first step toward making them effective and equitable, limiting their costs, and preventing the tax base from shrinking. They discuss options for increasing the scrutiny of the tax expenditure programs, defining their opportunity costs and effect on the tax system.

Currently these programs enjoy a funding advantage over direct spending programs because they are not subject to systematic review. To limit the expansion of these programs and reduce their less desirable effects on the system, Cavalcanti and Li suggest defining a benchmark tax structure, establishing sunset dates for the programs, forecasting their costs, and reviewing their economic effectiveness, efficiency, and equity by comparing them with direct expenditures and subsidies.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to understand the quality of fiscal adjustment in Central and Eastern Europe. The authors may be contacted at ccavalcanti@worldbank.org or zli@worldbank.org.

Suggested Citation

Cavalcanti, Carlos and Swift, Zhicheng Li, Reforming Tax Expenditure Programs in Poland (November 30, 1999). Available at SSRN: https://ssrn.com/abstract=632535

Carlos Cavalcanti (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Zhicheng Li Swift

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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