A Jagiellonian Club expert in a Radio WNET interview on the assumptions of the Polish Order and whether it really affects the middle class.

Photo credit: printscreen / Radio WNET

We have dr. Marcin Kędzierski, a political scientist associated with the Jagiellonian Club on the line. Hello.

Hello, although I would prefer to say economist, as that is my primary qualification.

An economist, perhaps that's even better, because we're going to talk about economics a little bit, well perhaps quite a bit. The Polish Order was announced on Saturday by the Law and Justice Party. And we keep talking about it because there is something to talk about. The main dispute axis revolves around whether this programme will destroy the Polish middle class or, on the contrary, empower it. Did you have a chance to take a good look at the proposals set forth therein? Well they are evolving and changing, because there are no laws yet, they will still change a little, there will be consultations, but we know the outlines, and from these outlines what conclusion on this matter can you share with us?

Let me start by pointing out that there are no guarantees that these proposals will come into force. They still have a very long political way to go, so for the time being we are treating this as a bit of a, maybe not academic, but nevertheless theoretical discussion until we see actual bills. But if one were to assess these assumptions in the context of the middle class, one would have to ask a fundamental question as to who the middle class is, because these definitions, which have been appearing en force on social media in recent days, diverge significantly. There are definitions which say that the middle class are people who own property, who can afford to go several months without working and without earning an income, who can afford two trips abroad a year, that is, winter holidays and summer holidays, and we could probably find a few other attributes. On the other hand we can also find such definitions, and I refer to the definition proposed by the Polish Economic Institute, where the middle class is defined as people whose take-home household income is between PLN 1,500 and PLN 4,500. Now, if you think that people who earn, for example, PLN 15,000 net are in the middle class in Poland, you have to be aware that these represent some 1-2% of the richest taxpayers. Let's not look at the average, because the average salary does not take into account companies with less than 10 employees, because they are not classified by the CSO, if we look at the median, according to the latest official data from 2019, as we are still waiting for the current data, but if we look at what the Ministry of Finance publishes on the basis of the taxpayers' microdata, that is, how much income each taxpayer earns, this median will be closer to PLN 3 thousand net. That is, half of all Poles earn less than PLN 3,000 a month, and this is really the measure that shows the scale of income in Poland. It is not for me to decide what the middle class is, because everyone can adopt their own definition, but it seems to me that the statement that solutions which will hit a few percent of the richest Poles will in fact hit the middle class is a possible interpretation, but not necessarily the correct one.

Another doubt that has been raised is the oppression of businesses. These changes around the health insurance contribution, and the fact that it cannot be deducted from income, represent a significant increase in operating costs for sole traders.

That is true. There are some arguments for and some against such contributions. Again, it is a purely ideological choice. From my perspective, it is a privilege – the fact that those who are self-employed can take advantage of a preferential rate for contributions both for health and social insurance. The idea behind such a solution was that these people, by accumulating capital, could invest, create jobs and contribute to economic growth. That was the logic behind this idea. Whereas if we look at data, we do not really see a significant increase in private investments in Poland. Even if there are public or European investment funds, it is often the case that there is a phenomenon of crowding out, which means that companies invest only what they have to, that which they get from European funds, and they simply consume their earlier investments. Polish companies also save a very large part of their money in bank accounts, I do not remember at the moment exactly what the balance in these accounts is, but it will be somewhere between 250 and 300 billion, and it may even be higher, because the support within the pandemic shields went largely to the accounts of companies, it did not go to employees.

According to the Ministry of Finance, Polish companies now have more money in their accounts than they had before the pandemic. Not all of them, of course, but all in all they have more.

This is why I say that if before the pandemic it was about 270 billion, today it could be over 300 billion.

I would go back to the self-employed, because the question is who they are. There are doubts here as well. Some say that these are can be poor people and they will have to subsidise the system. Do we have a picture of who the sole traders are?

This is a very good question, as the group is very diverse. These are highly paid professionals – IT specialists, lawyers, many doctors choose this form of employment – but there are also people, for example, providing cleaning services, providing security services, in other words, people who earn the lowest salaries in the country.

People forced to work as self-employed?

Yes. Today, the contribution is calculated on the basis of the average salary, so those who earn the least, pay a proportionally higher contribution than the 9% of their real income. Of course, those who pay several thousand a month pay significantly less, because today the rate is less than PLN 400 a month. And if it actually amounts to 9% of income, well, if someone earns PLN 15,000 gross per month, they will have to pay a contribution of PLN 1350, which is, let us say, a thousand zlotys more per month. However, there are relatively few people in Poland who earn PLN 15 thousand gross per month. And certainly the question of whether this is fair arises. I would say that this is a kind of a privilege that these people enjoy and now the state is deciding to take this privilege away from them and introduce some kind of equality. Let us remember that they will not pay relatively more than the poor. They will pay the same amount, which means that we will de facto have a flat health insurance contribution.

The flat rate, that economic liberals have so often called for advocating that flat taxes are good. Well, here we have a flat contribution, but it would seem the logic should be similar. Flat means equal in percentage terms, and it turns out that flat rates are only good if they are not to the detriment of the richest.

This is part of a broader discussion, as here we are mixing up two issues. Because we are talking about a tax and contribution system, more broadly called a system of public tributes. However, the logic behind taxes is slightly different to that behind contributions. Especially that we have pension contributions, we have individual pension accounts, so it is a bit of a modification if we consider that this is a solidarity system where there is no such individual treatment, and we have introduced it. Apart from that, a tax is always undefined, a contribution has a defined purpose, thus the difference between taxes and contributions. And, of course, there are proposals, like the proposal when the Good Change came to power, which was prepared by the former chief economist of the Ministry of Finance, and today one of the main critics of the government, that is Dr Sławomir Dudek, the so-called single tax proposal, that is, the introduction of a single tax on all income. That idea did not entail standardising contributions, but such ideas are also being put forward, and they are also ideas which have caused a great deal of controversy among entrepreneurs, because, for example, people who rent property today pay a tax rate of perhaps 12%, which is lower than the 19% flat tax on natural persons conducting business. So there are many nuances, but I would warn against adopting a dramatic tone, saying that this is daylight robbery or some kind of theft, precisely because this is a certain social agreement, and if we agree that these funds for the health service need to be increased and we see such a social need, then everyone should contribute to this as equally as possible. And I see no reason why entrepreneurs, lawyers, barristers, doctors, in other words people who earn several dozen or tens of thousands of zlotys should not pay a thousand zlotys more. Again, this is a subjective feeling, but it's a thousand zlotys more for a person who earns 10-11 thousand zlotys a month, it's obviously painful, however ...

It won't ruin anyone nor will it force anyone to live on the streets...

It was the same when people were screaming that they will move their businesses to the Czech Republic. I want to say that the tax wedge in the Czech Republic is bigger than in Poland. In Poland, it is between 35 and 40% for the richest people, and it is definitely lower than in West European countries, but it is also lower than in the Czech Republic or Hungary, so saying that people will move their businesses to the Czech Republic is, in my opinion, just propaganda.

One more question. Is this a restoration of European normality or to be specific, an introduction of European normality into the Polish tax and contribution system, or not?

Once again this is a controversial issue. I believe that a progressive tax system is optimal and I would prefer the government to introduce ordinary tax progression, not progression seemingly through the back door via the health insurance premium. I understand the reasons why experts from the Ministry of Finance decided on such a solution, because politically today there is probably no option to introduce ordinary progression, a higher progression, which more than a few percent of taxpayers would fall into, because this progression in Poland is largely fictitious, because the vast majority pay a lower tax rate. However, this does generate some controversy, for example for local authorities, and there is also a need for additional relief for some taxpayers between PLN 7,000 and PLN 10,000 gross, so that they do not lose out at the expense of those who are slightly richer, because unfortunately this is how the system will be structured. It will be very complex. I do not know how this will be set forth in the bill. And it will raise questions. This is not an optimal approach, I would prefer an ordinary progression, but I also understand why such an ordinary progression is not happening, the ruling party is hostage to its declarations that it will not raise taxes until the end of its term. Because today one can say that essentially it did not increase taxes, but changes the way they are accounted for.

And it increased the contribution. Doctor Maciej Kędzierski was a morning guest on Radio Wnet. Thank you kindly for your time.

Thank you!