People who earn little usually keep their savings in highly taxed bank accounts, while the more prosperous people invest most of their financial resources in investment funds, pension funds and in shares, which are often taxed at lower rates in OECD countries. The taxation of residential properties for rent is relatively high and higher than the taxation of real estate used for one’s own needs.
These and other differences in the marginal and effective tax rate (the marginal tax rate — the tax rate that applies to the next unit of the taxable income; the effective tax rate — the tax rate that is actually paid after all the tax breaks and exemptions are taken into account) of various types of assets that constitute household savings are another factor in the deepening income and wealth inequality.
Another general conclusion from the OECD Tax Policy Studies report entitled “Taxation of Household Savings”, concerns the pursuit of so-called tax neutrality, i.e. lack of differentiation of the tax burdens depending on the type of taxable assets. Complete neutrality is not possible in practice, but societies can and should strive for it. One of the ways towards reaching this goal could be inflation indexation, that is, increasing the nominal tax burdens in line with the inflation rate, combined with consistent imposition of taxes on all assets.
However, the imposition of taxes on personal retirement savings, which should be excluded from the principle of tax neutrality, requires a lot of deliberation and reflection. The financing of retirement benefits and the rapid build-up of long-term liabilities in this respect is already a huge problem and a challenge for the majority of developed countries. This encourages authorities to introduce tax concessions for people who are saving for their old age.
OECD experts believe that the more effective and generous the public pension systems financed from mandatory contributions, the fewer such concessions should be awarded. The tax preferences for retirement savings should take into account the income status of the taxpayers. Tax credits should be applied in place of tax deductions, so as not to favor wealthier people who have a lot more tax liabilities from which deductions can be made. In the conclusions of the study a hypothetical ideal situation is also described in which the tax credits in respect of the retirement savings for the given year are reimbursed (paid out in cash) in the event that the given individuals have not generated the appropriate tax liabilities due to insufficient income.
Polish tax authorities are not very greedy compared to their OECD counterparts
The authors of the study made an attempt to estimate the marginal effective tax rate (METR) in OECD countries and in several additional nations. In Poland that rate is rather moderate and would amount to 25.8 per cent in the model for persons earning the national average wage. Similar tax burdens are found in the Czech Republic, Hungary and Slovakia.
The wealthier the given country and the easier it is to access all sorts of capital, the higher the savings taxes. Turkey is an exception to this rule. On the other extreme there is Germany, whose government does not impose taxes on any income from capital other than income from renting residential real estate. The German tax authorities apparently have a very good tax system in place, because despite its generosity towards savers, in the past year Germany achieved a budget surplus of EUR37bn.
In Poland, the practice of saving money is not a well-established habit. This is also due to the fact that communism (half of a century during which the country was cut off from all sorts of markets), resulted in a permanent loss of financial knowledge and skills among the older generations. A consequence of this is the structure of savings in Poland, which most often take the most simple form of bank deposits.
Poles mostly keep their savings in banks
At the end of December 2017, the total value of savings of Polish households amounted to PLN1.386 trillion (approx. EUR320bn), with current and fixed-term bank deposits accounting for more than a half of that amount (PLN753bn, EUR174bn). Other savings items primarily included investment funds (PLN130bn, EUR30bn), Open Pension Funds (almost PLN180bn, EUR41.5bn), shares of companies listed on the Warsaw Stock Exchange (approx. PLN57bn, EUR13.2bn), and Treasury bonds (PLN16bn, EUR3.7bn).
If the cash in circulation in the amount of PLN200bn (approx. EUR46.1bn) is added to this summary, as well as the unlisted shares and other financial assets not disclosed by the holders, then the total amount of gross savings of Polish households (that is, without subtracting the liabilities which mainly include loans) is heading towards PLN2 trillion (EUR461.4bn).
Since 2002, the main tool used for the taxation of Polish savers has been the so-called Belka tax, i.e. the capital gains tax. While introducing the tax, Marek Belka, who was the Prime Minister at the time, solemnly assured that the new tax would only be temporary, but he probably knew that this promise would not be kept. This tax is still in place and no subsequent government has ever seriously considered abolishing it, despite the fact that the savings rate in Poland, and therefore also the country’s investment potential, is horribly low.
According to the OECD, in 2016 household savings accounted for only 1.67 per cent of the so-called disposable income (i.e. income after taxation) of Polish households. Meanwhile, in the United States such savings accounted for 5.04 per cent, in the Eurozone for 5.4 per cent, and in Germany for 9.69 per cent of the disposable income.
However, a comparison with the rich societies and countries, which are overflowing with an abundance of capital and whose accumulated assets cannot be compared with Polish realities, does not show as much as, for example, the data for Mexico. The latter is a developing market trying to catch up with the affluent world just like Poland, but the savings in that country account for as many as 15.45 per cent of household disposable income. The concerns of Polish economists are further magnified by the fact that in the period 2011-2015 the household saving ratio assumed negative values in Poland, which means that Polish families were consuming the previously accumulated savings. .
Many good examples to follow
The abolition of the Belka tax is probably out of the question. It would be immediately argued that such a change would deplete the budget revenues which are not keeping up with the extensive social expenditures anyway. The entitled majority of Poles would also raise an outcry that such a change would favor the rich and wealthy. However, it is possible to introduce modifications that would follow the advice of the OECD experts and other countries. There are countless financial instruments used for the purpose of saving money, so the examples below are only limited to bank deposits, which are the most popular instrument in Poland.
In Chile, South Africa, the United States, Germany, Lithuania and Iceland, some of the interest on bank deposits is tax free, while Argentina and Estonia have completely given up on the taxation of profits from holding money in bank deposits. In the South Korean version of the capital gains tax, when the total amount of the interest and dividend income is lower than KRW20m (approx. EUR15,000), a lower tax rate is applied.
A similar mechanism exists in Mexico, where higher taxation is only applied after a given person’s other income exceeds the amount of MXN 400,000 (approx. EUR17,330) and the interest income exceeds the amount of MXN 100,000 (approx. EUR4,275). Additionally, no tax is collected if the average balance on a given bank account does not exceed 5 times the minimum wage applicable in Mexico.
In the Netherlands, the first EUR24,437 of savings kept in banks are tax free. France, Norway, Spain and Colombia impose a wealth tax on the savings held in banks, but the exemptions and allowances are so high that only really wealthy people actually pay it.
Some countries apply a zero tax rate on interest income from bank deposits for taxpayers with low (67 per cent of average) and average income from wages, but simultaneously apply a high marginal effective tax rate for people with high incomes. Such a model was adopted in Chile, Germany, Iceland, Lithuania, the Netherlands, South Africa and the United Kingdom.
Lower taxation is usually the effect of excluding a certain amount from taxation. In the Netherlands that amount is almost EUR25,000 and in Lithuania the threshold is only EUR500. Of course, in terms of the wealth of the citizens, that is, the size of the so-called tax base and its structure, dominated by people without any savings in cash, Poland is much closer to Lithuania, so it should probably imitate the Lithuanians rather than the Dutch.
Any tax breaks, tax exemptions, and any tightening of tax provisions or any other forms of deviation from the basic norms and tax rates is ultimately harmful to both sides. The architects of the tax system are not able to anticipate and take into account all the circumstances and possibilities on the part of the taxpayers and their advisors. This means that any assumption of solidarity and siding with the poor will fall apart unless taxpayers are penalized. The tax authorities lose, because complicated taxes lead to very high collection costs and the receipts are usually lower than the excessive expectations. There is also growing distrust on the part of taxpayers, as the number of potential interpretations of the tax legislation increases. However, if we can’t get what we want, we should settle for what is possible.
Several months ago, Poland’s deputy Minister of Finance, Paweł Gruza announced the intention to remove the current PIT and CIT legislation and to introduce new laws on corporate income tax, personal income tax and capital income tax. Experience suggests, however, that the potential new legislation may not meet expectations of being clear and simple, legible, as unambiguous as possible, and written in a language that is plain and understandable for an average taxpayer. In such circumstances, simple exceptions in the form of tax relief for all those who are saving money in the name of increasing the domestic capital resources would certainly receive a warm, if not euphoric, welcome.