‘Klin’-ing up: reforming taxes on labour in Poland

1. ‘Klin’-ing up: reforming taxes on labour in Poland Michał Myck, DIW-Berlin (joint work with Leszek Morawski, WNE-UW)

2. Outline: • The tax “klin” (tax wedge) on labour in Poland. • Taxing labour – effect of taxes and who pays them • average and marginal taxes on labour • System of taxes on labour in Poland • Empirical evidence for Poland – how high is the ‘klin’ in Poland? • Tax reforms and reform options and the effect on the ‘klin’ in Poland. • Conclusions.

3. Taxing labour • Demand, supply and taxes – the first year textbook example, • elasticities and „allocation“ of taxes. • Taxes on labour: • Effects of average and marginal taxes (participation vs intensity of labour). • Non-linearity of the tax system and the difference between average and marginal tax rates: • tax allowances, tax credits, tax rates, thresholds, etc. • Effects of reforms on the ‘klin’ – importance of analysing marginal and average tax rates.

4. Taxing labour • What is tax on labour? • Social Security Contributions, Health Insurance, Income Tax, But: • retirement insurance (postponed consumption) (see: Disney, 2004), • indirect taxes? Tax wedge as difference between tax total labour cost and real consumption (see: Nunziata, 2005). • The tax ‘wedge’ identified as contributing to increases in unemployment in Europe (see: Nickell, 1997, 1998). • but the effect of the tax wedge relatively small (Nickell, Nunziata and Ochel, 2005): increases in the tax wedge as responsible for about 10% of the increase in unemployment in Europe between 1960s and 1990s. • High level of tax wedge on labour in transition countries (including Poland) but little empirical analysis of the problem.

5. Total labour cost, gross wage and net earnings in Poland • Gross and net wage: • SSCs and Income Tax in Poland: • SSC rates applied to „gross wage” (total labour cost minus employer‘s SSCs), • Income Tax system and Health Insurance applied to „taxable income” (i.e. net of SSCs).

6. System of taxes on labour in Poland

7. System of taxes on labour in Poland

8. Calculating marginal and average taxes • Focus on taxes on labour for each individual, thus need to take account of: • demographics • taxable income from other sources • in couples – income of the other spouse • Taxes computed with reference to the total labour cost. • Average tax rate: • Marginal tax rate:

9. Level of earnings and the marginal tax rate

10. Earnings, tax on labour and family status

11. Level and distribution of the ‘klin’ • Data from the Household Budgets’ Survey (BBGD-2005) • Sample selection: • only individuals with positive earnings, • age restriction: 18-60/65. • Analysis using SIMPL – the Polish microsimulation model • combines information about the tax and benefit system with demographic characteristics, incomes and other information in the BBGD data.

12. BBGD-2005 – sample for tax wedge analysis:

13. Marginal rates of tax on labour and family type in BBGD: Singles no children Men in two-earner couples

14. Average and marginal tax rates – cumulative frequencies Base system – 2005 (with child tax credit)

15. Reforming taxes on labour in Poland • Actual and hypothetical reforms: • Reform I – (2007) – employee disability SSC rate from 6.5 to 4.5%, • Reform II – (Jan. 2008) – employee disability SSC from 6.5% to 1.5%, employer SSC from 6.5% to 4.5%, • Reform III – two rate income tax system (18% and 32%), • Reform IV – single rate income tax system: 18% (credit adjusted), • Reform V – (Jan. 2008) – child tax credit increased to 1100 per child, • Reform VI – ‘Gilowska package’ – Reform II + Reform V, • Reform VII – 15% linear tax (without tax credits), • Reform VIII – 15% linear tax (with tax credits). • Effects of reforms on marginal and average tax rates.

16. Effects of reforms – average and marginal tax rates

17. Effects of reforms – marginal tax rates

18. Effects of reforms – average and marginal tax rates

19. Effects of reforms – average and marginal tax rates

20. Reforms and the tax wedge

21. Effects of reforms – average and marginal tax rates

22. Reforms and the tax wedge

23. Conclusion • The tax-wedge (“klin”) on labour identified in Poland as an important factor contributing to problems on the labour market. • Significant reductions in the “klin” as a result of 2007/2008 reforms (average ATR falls from 41.3% to 33.1%) • The “Gilowska” package represents a much higher reduction in the tax wedge compared to a linear 15% system (average ATR, 42.1% or 39.3%). • Further reforms still awaiting introduction. • Important issues: • who will gain from the reforms and how much (elasticities!)? • how reforms affect those who are not working (difference in the earnings distributions) • what is the future of the linear tax? • Next steps in the reforms of the tax burden on labour? • Who can introduce “major reforms” in the current political system?