The quest for a better tomorrow

The day when the new police law comes into force coincides with the monthly overview of Poland’s new rulers’ attainments. As a relatively unpopular foreign-language blogger, I consider my place at the list of enemies of the good change is near the bottom, so I feel free to share my thoughts.

On 19 January the Polish prime minister participated in a debate on threats for democracy in Poland. The course of the debate and its repercussions were a debacle of liberals and a huge victory for Mrs Szydło (whose hollow words and declarations made much better impression than worthless utterances of leftist and liberal deputies) and for all EU-sceptical politicians who put in superb stunt as allies of PiS. The timing of the debate coincided with the news of several refugee rapes in Germany being concealed from the public, a water to the mill of those claiming Germany has no right to interfere into functioning of democracy in Poland if in the name of political correctness they covered up crimes committed by jobless rabble…

On Monday the banking tax came into effect. The draft of the retail trade tax is now in the phase of public consultation and nearly everyone involved tears a strip off it. In the shape it is put forward the biggest retailers who were supposed to bear the burden of the tax are likely to be beneficiaries of it. The most dreadful part of the tax which might be a nail to the coffin of small retailers and which might send several people unemployed is the highertax rate for turnover generated on Saturdays, Sundays and on bank holidays. This will also mean end of cheaper petrol over weekends (it is less costly because many company cars can be fuelled up only during the working week), bigger discrepancies between prices working-week and weekend prices (typical practice for repricing food produces in Auchan) and generally lower competition, since some retailers will drop off. Customer beware, you will pay the bill anyway!

By the way, formally each draft law undergoes public consultation under the lawmaking process. Sound commendably, but I wonder when any amendment proposed by the opposition or any other entity participating in the consultation is included into any final legal act.

The PLN 500 child allowance draft law is also being consulted. There was a short discord between the ministry of finance and the government, but Mr Szałamacha was swiftly taken to the task. Funding for the generous giving away is secured for 2016, when the programme will be serviced only over nine months and when one-off proceeds of PLN 9 billion from LTE frequency auction are to flow in, but streams of revenues which will finance the allowance from 2017 onwards have not been defined. Besides, politicians of PiS keep on appealing to the wealthiest Poles not to apply for the allowance, instead of setting an income cap above which parents would not be entitled to the benefit.

Besides, worth mentioning pace of works on the draft bears testimony to the greatest lie of the pre-election campaign. On 20 October 2015, as the TV debate between Mrs Kopacz and Mrs Szydło was drawing to a close, Mrs Szydło showed a blue file with ready drafts of new laws. She also told she would show the documents during a conference right after the debate. Needless to say subsequently Mrs Szydło only waved the file and has never showed any draft law. An excellent PR stunt, I wonder only why everyone, including journalists and politicians from today’s opposition, has fallen for it no one has taken the trouble to check out what the content of the file was?

And just recently PO came up with a counter-proposal of an even more generous pro-family agenda of giving out PLN 500 for every child, regardless of income per person in a household. Jaw drops open. If the biggest, in terms of number of deputies, party in the opposition, keeps on fooling about like this, in a year they will enjoy support below 10% in the polls. In the meantime Nowoczesna.pl is losing its vigour. In the long run Mr Petru and his partisans are unlikely to retain support above 20% and if they miraculously manage to win the election, they will lose power quickly. Affluent and resourceful people who want lean and efficient state, in other words liberal electorate, make up a tiny, though growing, percentage of voters.

After Standard and Poor's downgraded Poland’s rating, Fitch and Moody’s have announced reviews of Poland’s rating within 12 months and warned of possible downgrades for reasons far more substantive than those behind S&P’s move. As two other rating agencies point out, generous government spending calls into question fiscal balance and in the long-run is likely to decrease creditworthiness of Poland.

The government is getting to grips with the ailments of state-owned coal mines. During the campaign PiS promised not to close any mine and not to make redundant any miner. After the reality check strongly unionised miners, in order to help the government meet its promises, will have to accept salary cuts. Good luck!

Finally the Smolensk crash stands a chance to be scrutinised properly! The new team of experts, some of which even have notion about intricacies of aviation, but none of them has experience in investigating civil nor military passenger airplane crashes, is to carry out an unbiased investigation and definitely will not set any hypothesis in advance; exactly like Mr Macierewicz who signed a decree setting up the team and subsequently during the conference on which establishing the team was announced, adjudicated there had been an explosion which blew up the Tu-154 plane some fifteen or eighteen metres above ground level.

Three weeks into public media takeover, apart from a few spectacular lay-offs, the change I witness is less spectacular than many expected. The extent to which TVP is PiS biased is similar to how TVN is anti-PiS biased. Different views are presented and guests with different views are invited, but the bottom line message delicately instructs audience how to shape their opinion. Nevertheless, fortunately TVP has not stooped to the level of TV Republika, lousy propaganda which would drastically decrease popularity of TVP.

Banking tax

In the eve of the day when Polish financial sector is encumbered with a newly levied asset tax, worth looking at whys and wherefores of the new source of revenues for the government budget.

The concept of additionally taxing financial institutions is a relatively new concept which traces back to 2009, months after several banks in developed countries had been saved by governments from going under. The general rationale for putting extra taxation on the financial sector was:

- precluding banks from getting involved in speculative transactions and

- partly compensating taxpayers whose money had been used for bank bail-outs.

The primary premise is hence not to raise more money to the government budget, but to influence behaviour of the nasty institutions. To pursue such goals, banks taxes have either:

- profits on speculative transactions or

- liabilities, other than equity and client deposits,

as tax base.

Such construction puts banks off engaging in frequent, risky speculative transactions (tax payable eats up the whole profit on a deal which renders such operations senseless) and persuades banks to seek most stable sources of funding and minimise their reliance on inter-bank loans.

Bearing in mind the above, it is hard to discern similarities Poland and developed countries where special tax for financial sector has been put in place. Firstly, the conduct of the Polish banking sector has been beyond reproach. Commercial banks in Poland have contained their business to the essence of banking, i.e. taking deposits and granting loans. No bank has been involved in speculative trading on a large scale (not fully matched client positions in banks’ books are too low to threaten banks’ solvency) nor in investments in dicey securities. No bank has ever had to bailed out from taxpayers’ money, nor even has been on a verge of insolvency. Commercial banks are strongly capitalised, have solidly performing credit portfolios and ensure clients’ deposits are safe. A bit of bitter word could be said of co-operative banks and credit unions, whose bankruptcies have been witnessed recently far too frequently. Lack of proper supervision of KNF on credit unions until 2012 and years of poor management are taking their toll on ill-run small financial institutions.

The main sin of commercial banks is that they indeed many times have not played their cards right and have not treated clients honestly. The example of CHF-mortgages foisted upon naïve borrowers, not eligible for such products, was just a tip of the iceberg. The other sin are excessive, compared to other sectors of the economy, after-tax earnings of the whole banking sector, reaching PLN 15 billion per year. An industry which produces no tangible goods for a laymen should not be allowed to continue to be a money-making machine, so let’s bring it to the heel.

The reason why banks and other financial institutions will be taxed in Poland is not to punish them for their misconduct, but to quickly raise money for merry social spending promised by the new government, actually for one 500 PLN child allowance programme. Most people believe fat cats from banks and their foreign owners are a perfect scapegoat, since it is the easiest to take away money from where there is plenty of them. Choice of tax base also reflects on taking the path of least resistance. In Poland the tax will be charged on banks’ total assets less equity less held government-issued securities less PLN 4 billion securities and the annual rate will be 0.44%.

Now let’s dissect some details on the tax:

1. State-owned banks will be tax-exempt. Currently the only bank eligible for such status is BGK (PKO BP is only state-controlled) – the government will not tax itself and its debt!

2. The PLN 4 billion allowance means favourable treatment for co-operative banks and credit unions whose conduct raises the most reservations. Good to see the government wants to enhance competition on banking services market and prevent the largest banks from growing too big to fail (top10 already are), but such mechanism means transfer of money from well-run to ill-run institutions.

3. The biggest drawback of the tax is equal tax rate for all assets, regardless of how risky they are (except for assets bearing sovereign risk). This means that the tax rate on a mortgage loan with LTV of 50% is equal to the tax rate on unsecured cash loan. This means the tax rate on a short-term loan to a prime corporate client will be equal to the tax rate on a long-term loan for a start-up (such are sometimes granted). The tax rate will be the same, while how much banks earn on different assets reflects those assets’ risk profiles. Equal tax rate is likely to push banks towards more risky lending, since income on the safest assets will not be satisfactory. Oddly enough, I have not heard this argument raised in the public discourse.

Now let’s examine where the impact of the tax will be the biggest. Common sense after reading point 3 from the paragraph below, or pure command of maths should tell you banks’ clients will feel the effects the most on products with relatively low risk and low margins. From what I observe, the costs will be passed on to customers in three ways:

1. Through higher prices of basic banking services which are inevitable for all individual and corporate clients (account fees, debit cards fees, transfer charges),

2. Through higher margins on mortgage loans, the least risky credit product offered in the retail banking. With automobile loans or cash loans where margins reach several hundred basis points and fees, commissions and obligatory insurance make up sizeable income, impact of 44 basis points banking tax will not be felt much. For mortgage loans running until now on margins even below 150 basis points the tax will eat up one third of the income. No wonder banks in unison have increased the cost of mortgage lending.

3. Through higher margins on loans for corporate clients with decent financing standing. Large companies until recently could easily obtain short-term funding for not much more than 44 basis points over WIBOR. Customers from that segment will have to accept higher cost of financing.

Now I wonder whether proponents of the tax in their calculations of budget proceeds have taken into account:

- lower CIT proceeds (higher interest cost and banking fees for businesses translates into lower tax base),

- lower VAT proceeds (households taking out new loans will spend and invest less),

- impact on GDP of worse performance of the property market (actually as a whole I view the impact positive, since cheaper properties are easier to buy without debt).

Negative selection (preference of banks to shift towards more risky assets with higher income potential) is just one aftermath of the new tax. The other is that for large-volume (>PLN 50 million) single credit exposures, especially those in foreign currencies, it will make sense to arrange the loan in Poland, but to establish as a lender another bank from a Polish bank’s capital group. Works on implementing such solutions are pending and I estimate this method of circumventing the new law might deplete the tax proceeds by several hundred million zlotys.

The only country in the EU to have followed the path of taxing banks’ assets is Hungary. The price to pay was heavy contraction in lending dynamics, spilling over to the whole economy. For no apparent reasons Hungarians are pulling out from the tax by decreasing its rate year-on-year.

Time to bite the bullet on it. Banking sector has been getting on well for many years, its returns are also impressive. The very idea of above-average taxation on it, as long as it is brought off wisely (a good example is copper tax for KGHM), would not bring banks to their knees (the very tax, passed onto clients would neither do). To make it wisely, i.e. without flawed disincentives, I would put forward two measures, more difficult to carry through than just taxing assets. Firstly, cut down on opportunities to transfer money to head offices via royalties, costs of services and other payments that artificially boost expenses and decrease pre-tax profits. Secondly, apply a higher CIT rate to financial institutions, but tax profits, not assets. I realise the latter is at odds with the former, so combining the two solutions does not appear too fortunate, but shows the direction which would bring the least harm to the economy.

The banking tax itself will not be an excessive burden, but if its effects are compounded by conversion of mortgage loans denominated in foreign currencies into PLN at “fair rate”, repercussions for the banking sector might be dire, since losses of PLN 30 billion of the industry as a whole would mean some smaller banks could go insolvent and their owners taking losses and walking away, leaving the Polish government and financial watchdog with the mess.

Worth noting what the “fair rate” is, since in the debate on president Duda’s proposal nobody has actually explained what the economic sense of this “fair rate”, calculated individually for every debtor is. In plain Polish, the fair rate is the CHF/PLN exchange rate to which CHF/PLN would need to soar right after loan disbursement and at which it would need to be fixed over loan’s life until now, to make sum of instalments in CHF and PLN (assuming the same loan margins and without discounting to account for time value of money) equal. In simple words the “fair rate” is the one at which a CHF-debtor is neither better-off nor worse-off than PLN-debtor.

Moreover next bankruptcies of ill-run credit unions are in the offing in the coming months. The Bank Guarantee Fund, with reserves accumulated since 2001, has been depleted by payments to aggrieved depositors (folks are lucky to benefit from Bank Guarantee Fund protection since recently thanks to prudent policies of the previous government) and the Fund now passes the hat round between banks to make up for the outflows.

The banking sector had its golden years in Poland. Those times will never come back and good for us, since if wealth is unequally divided between financial intermediation and real economy, economic development will not be sustainable. But if we go into another extreme and knock down institutions which facilitate flow of funds between depositors and borrowers, taking the credit risk away, we will knock down the whole economy. Bleak times ahead.

Taxpayer beware

Taxpayer, beware

Not that recently one of regional tax office branches boasted about soaring tax collection rates, as a result of simplifying the language in which letters to taxpayers are written. Plain Polish works miracles, yet workings of tax administration as a whole still could do with some improvements.

I have not expected to receive any letter from the tax office. Since I earned my first money in 2007 until last week, I had not got any, yet on Monday I found this in the letterbox…

In principle, you could argue whether it is written in plain Polish. For me the missive is generally comprehensive, although I had to read it twice to get the message. It could have been shortened, I suppose, cause brevity as a rule adds clarity.

Before filing the tax return I double-checked it, especially personal data and tax calculations, yet as it turned out, I missed one thing – after putting KRS (national register of legal entities) number I failed to write the amount of tax I wished to be transferred to a beneficiary (charity, foundation, etc). I don’t know why, I thought it was obvious, if I wish to donate 1%, it is 1%. The situation proves you might wish to donate less than 1% and must specify the exact amount even if the don’t wish to make any haircuts…

A quick glance at webpages dedicated to tax accounting does not give the answer how exactly to clear the issue, but the letter instructs clearly not to tamper with 1% donations. In order to find out how to get the amendment right I call the contact person in the tax office the next day. The lady informs me I need to submit: 1) an amended tax return, 2) a written justification why the amendment is being on made (on a special form) and lets me know I may not now write the correct amount to be donated to a beneficiary, since after 30 April it is too late, so the only way to straighten things out is to fill the two fields (KRS number and amount) blank.

OK, I screwed it up, lesson learnt, apologies to the ones not better off. Since I filed the tax returns in person, I need to make the correction personally as well. The tax office is opened from 8 a.m. to 4 p.m., so has exactly the same opening hours as my “usual” working hours, hence the most reasonable way to visit it is to decide to turn up to work later. I pick up the documents and when in the office, I go exactly to the room of the person who sent me the letter to me. She checks the amendment forms, says it is OK, enters it into the system, I am about to leave and…

…I am stopped in my tracks. “Sir will not leave now, sir has not filed sir’s personal income tax return for 2013”. “What the f**k?”, I think. I turn back and argue this must be an error. The lady insists the computer sees all my tax returns, except the one for fiscal 2013… I kindly ask the lady not to write relevant summons (with threats of severe fines for shirking the duty of tax accounting) and promise to return in half an hours with relevant documents confirming I am clear with the tax office.

I rush to the car, at home I quickly find two documents which confirm I entitled the Employer do fill the tax return (PIT-12) on my behalf and the very return (PIT-40) sent to the tax office by the Employer. I copy the documents in case the tax officials want to keep it, grab them and drive back to the tax office.

The lady greets me with lovely smile on her face. “I found it”, she exclaims, “your accounts have been done by your employer, the Employer”, she says. “Indeed”, I sigh…

The whole story actual looks to have brought no benefits – wasted paper, waster time of clerks from the tax office, my wasted time, my unnecessary stress. Water to the mill of a ruthless bureaucratic machine… The tax office branch in Piaseczno has a splendid new building I had a chance to sightsee. The modernity of the edifice could however go together with smart work done inside it…

It’s the economy, stupid

Thorough economic debate is a phenomenon so seldom witnessed in the public discourse in Poland that any reason seems justified to spark it off. Recently the widespread discussion has been triggered by Mrs Beata Szydło, candidate for the prime minister if PiS wins the autumn parliamentary election, who unfolded key points of her party’s economic agenda. As it often happens ahead of the election, politicians tend to be open-handed in their promises, but this time the generosity might have gone too far, since both politicians and economic pundits have taken the trouble to quantify the promises and check whether the figures hold water…

Politicians of PiS claim their ideas are absolutely feasible and the spending spree they propose will be matched by new sources of budget revenues. Their opponents from the Civic Platform and most experts point out the calculations of PiS are flawed and reckless inclination to throw about money would head Poland towards where Greece is now. Let’s have a look then on how much happiness the Lawful and the Just wish to give Poles if they get hold of power.

1)      Raising tax allowance to PLN 8,000 from current PLN 3,091.

- Truth be told, tax allowance in Poland is one of the lowest in Europe and well below the poverty line, plus it has not been increased along with inflation since 2009. But if are to compare ourselves against other European countries, we also need to take notice of the fact tax rates are higher there than in Poland.

- My proposal is then to simplify the tax system and bring in more effective progression by introducing an even higher tax allowance, let’s say PLN 16,000 and introduce a flat personal income tax rate of 32% (the current highest rate). Thus we would achieve effective tax progression, since the tax rate for an individual would be somewhere between 0% and 32% and increase linearly along with earnings.

- Cost of the proposal estimated by me: 24,400,000 * 18% * (PLN 8,000 – PLN 3,091) = PLN 21,560,328,000

- assumptions: 1) number of personal income tax payers: 24,400,000, 2) marginal tax rate: 18%,

- shortcomings of my assumptions: 1) multiplier effects from higher tax income and GDP growth on account of higher consumption are not taken into account, 2) other tax credits, e.g. child allowance also have been neglected.

2) Giving a child benefit for every second and next child of PLN 500 per month.

- My only question here is how to define the second and next children. Calculations are impeded by unclear definition of a child (until what age your offspring is a child and whether this depends on whether they learn or earn?, on the basis of what criteria the children would be counted – what if a woman has three children with three different men, or the other way round, i.e. a man has children with three different women?)

- I find the very concept ludicrous and see nothing else in it but pure giving away money from the public purse rather than encouraging people to have children.

- Cost of the proposal estimated by me: 10,879,729 * 40% * PLN 500 * 12 months = PLN 26,111,349,600

- assumptions: 1) a child is person aged less than 18 (if students are taken into account the cost would shoot up well above 30 billion PLN), 2) population of Poland is 38,580,600, 28.2% of which are not adults, 3) 40% of children would be eligible for the benefit – this is only an educated guess,

- shortcomings of my assumptions: 1) it is not clear, whether parents of students would also be entitled to benefits, 2) it is not clear when a child is “second and next”, 3) it is very hard to determine how many children would be “co-financed” with this benefit, 4) potential taxation of the benefit (or lack of it, of effects of tax deductions associated with it) is unknown, 5) multiplier effects have been neglected as well.

According to my estimations, only the two proposals would cost the budget around 48 billion  PLN yearly (vs. 29 billion PLN yearly according to calculations by PiS). If you look at the number of assumptions I have made and number of shortcomings I have listed, no wonder figures given by experts vary so much. To be fair, unless you reveal your (simplifying) assumptions and maths behind your calculations, you cannot hope to sound credible to me in the public discourse.

I do not dare to come up with a ballpark figure for the shortfall caused by reversing the pension age increase. The deficit in the government budget (which subsidises the social security system) by 2020 would probably not be substantial, yet thereafter (bear in mind in 2019 Poles either kick PiS out of the politics or it will be as entrenched as Mr Orban’s party in Hungary) outcomes of tampering with the pension age would be disastrous (also because tap with EU money will run dry in 2020).

On the other side of the budget, authors of PiS’ economic agenda point at three core funding sources for the merry expenditure programme.

1) The bank tax, to be levied on banks’ assets.

- My comment (disclaimer: I am a banking sector employee and my financial well-being might be jeopardised by the bank tax): such tax should penalise banks and other financial institutions for being involved in operations that do not contribute to well-being of a society, predominantly those which stray from the concept of traditional commercial banking (taking deposits and granting loans). I also wonder what the tax base would be: would those be total assets (including cash, treasury bonds, PPE, etc.), only financial assets, or maybe the tax base would be limited to the loan portfolio and whether there would be any risk weights on assets. Since the banking sector does not enjoy good publicity in Poland (banks have given ample reasons for being held in disregard), the idea of cutting back their mammoth profits with yet another tax should take fancy of many voters. On the other hands, most banks in Poland are controlled by foreign financial groups which have come to terms with the fact banking in Poland is no longer such great gold mine as it used to be. They will pass on the tax onto customers and since they will in unison have to bear the new burden, in unison they will raise fees and commissions for their customers, so in this very particular situation the arguments of PiS that free market and forces of competition will not let banks’ clients feel the impact of the new tax, are a daydream.

- Revenues from the proposal estimated by me: 1,500,000,000,000 * 0.39% = 5,850,000,000 PLN

- Assumptions: 1) total assets of the Polish banking sector: 1.5 trillion PLN (total financial sector’s assets in 2013 of PLN 2.1 trillion * 68% share of banks * 1.05 growth dynamics), 2) tax rate of 0.39% yearly, most often mentioned.

- shortcomings of my assumptions: 1) tax base and scope of entities subject to taxation have not been defined, 2) lower tax rates have been already mentioned by politicians of PiS since they slowly being to realise the bank tax proposal, compounded with relief for CHF-mortgage borrowers, could knock down some of the banks and necessitate a state-funded bail-out for depositors if their foreign owners decide to wash their hands clean of the Polish businesses.

2) Supermarket tax, being a turnover tax levied on retail chains with yearly sales above PLN 1 billion.

- My comments: the big chains of hyper-, supermarkets and discount shops, omnipresent in Poland and by dint of their economies of scale, offering less wealthy Poles an opportunity to buy stuff cheaply, also have become a scapegoat. A frequent argument in the debate on those shops is that taxes they pay are miniscule in relation to their revenues. Indeed, this is true, since most of those chains operate on very thin margins, yet their earnings are high due to scale of activity. For some of those chains, net margin is 1%, i.e. net profit of a company makes up 1% of total sales. Shareholders of such retail chains will have a choice either to increase prices of goods and pass on the tax to clients (more probable) or to wind down their businesses (impracticable). The former option is even more likely to materialise for the same reason as with banks – all big chains will be affected in the same way and therefore will react in the same way.

- Revenues from the proposal estimated by me: 150,000,000,000 * 1% = 1,500,000,000

- Assumptions: 1) total sales revenues of all big retail chains in Poland: 150 billion PLN, 2) tax rate of 1%

- Shortcomings of my assumptions: 1) publicly available data I cite are outdated (and thus biased downward) and may not cover all stores, since many companies decide not to disclose how much they earn (also resulting in downward bias), 2) the tax rate is unknown, but might vary from 0.5% to 2.0% according to some proposals.

3) The third and the broadest proposal is to increase the efficiency of tax collection system, curb tax evasion, crack down on illegitimate VAT reclaims. All the ideas are commendable and I wish well anyone who would take up doing so, yet I am sceptical about the effect and also would not dare to estimate the resultant additional budget revenues, nevertheless the figure of 50 billion PLN seems over-optimistic.

Interestingly, none of the critics of the PiS-designed giving-away scheme has noticed a crucial causation, namely the more money citizens have in their pockets, the higher the money supply. Growth in money supply, if not accompanied by proportionate growth in output, results in increased inflation. This in turn, assuming the central bank is independent, leads to higher interest rates with all consequences…

And interestingly, hypocrites from PiS, who allegedly care so much about the poorest, do little to redistribute wealth from those well-off. The proposal to reinstate the third tax bracket has been declined, probably to appease Mr Gowin (who has finally fallen into place and does not bring discredit on PO), yet this decision does not matter much, since those who potentially could be affected by signing the third tax bracket into law do not pay the personal income tax at all. 32% marginal tax rate affects in Poland the upper-middle class, around 2% of all personal income tax payers, those are usually senior managers at corporations, whose positions are too low to make them eligible for a managerial contract. Most of the people who really earn a lot (above 300,000 PLN before tax per year) are not employed under regular job contracts, but are sole proprietors who perform a contract for their employer. Outcomes for the state budget – marginal tax rate is 19% rather than 32%, social security contributions they pay are miniscule (in return they will receive a tiny pension benefit, but with such earnings would who cares?), same as health service system contributions. Taxes might be low for actual entrepreneurs, but the practice of paying corporate income taxes by corporate executives who are not entrepreneurs and do not risk their own money to develop their business ought to be finally put to an end!

My grandfather’s neighbour gives him outdated issues of Fakt, the leading Polish tabloid. Yesterday, while at my grandpa’s I grabbed one such paper and found this article… Maybe what Mr Sienkiewicz (cynically) says is the key to the door:

Przeciętny Kowalski patrzy na te autostrady, estakady, na ten dworzec, na cokolwiek innego… Jego podstawowe pytanie jest: a co ja z tego kurwa mam?! Gdzie jest ten pieniądz u mnie w portfelu? A nie że ma wypierdolonego orlika przed oknami, bo on ma w dupie tego orlika, podobnie ma tę autostradę w dupie! Bo dla niego jest pytanie o efekt rozbudzonych aspiracji, jak się rozbudziło aspiracje, to są pewne konsekwencje. Najpierw są takie aspiracje, aby państwo było bardziej umyte i bardziej przypominało to, co ma na Zachodzie albo co sobie wyobraża. A potem się aspiracje przesuwają do własnego portfela. I jest pytanie, co ja z tego mam.

Yes, Poland has remarkably moved ahead in terms of infrastructure. I travel a lot around the country these days and appreciate the possibility to get to Gdansk or Krakow by train within 3 hours, enjoy driving new motorways and expressways, but the progress has little impact on the standard of living of an average Pole. I follow the “Decrepit Poland” page on facebook. Authors of the page publish several photos a day to give lie to the propaganda story Poland has been ruined and needs to be rebuilt from scratch. Photos show progress, but are selective; round the corner beautiful market square gives way to dilapidated houses and inhabitants of provincial towns now care more how much they can buy in a shop for money they earn than whether the centre of the town has been refurbished.

Recent travels make me also wonder whether I also live in an ivory tower, how much I have in common with ordinary people living in Zgierz where I was on Friday. How much do I have in common with inhabitants of Wałbrzych where I’m heading tomorrow. Origins of PiS recent surge in support and PO’s waning popularity is the former’s ability to at least pretend they are close to ordinary people.

Trust in banking sector lost?

It was supposed to be a busy weekend and turned out to be even more busy than I had expected, so just a short note…

The bombshell of the week was the decision to levy a one-off tax on bank deposits in Cyprus. The tidings such a measure was about to be introduced struck me out of the blue. I was aware banks registered in the Mediterranean island divided between Greek and Turkish zones were ailing, I knew Polish banks for months had refused to accept letter of credits and guarantees issued by Cypriot banks, I realised how big exposure of those banks to Greek bonds was, I knew the country enjoyed the status of tax haven, thus attracting businessmen who eagerly had registered their holding companies there.

And now this small economy is on a brink of collapse, chiefly due to fragility of its overgrown banking system and reliance on income from low-rate taxation. The country will probably recover, with substantial help in form of emergency loans, but its citizens will be bearing the brunt of the crisis for years to come.

The recent plan to seize a percentage of deposits amassed in Cypriot banks is an unprecedented expedient undermining trust in banking sector. For years people have been taught to put their money to banks, as this guaranteed safety. Polish banking law defines banking activity as such where risk is taken away from a depositor by an entity having the status of ‘bank’. All developed countries have deposit insurance system which serves as safety valve preventing depositors from rushing to banks en masse to withdraw their money.

This seems to be the thing of the past. It turns out if a country is on a string of creditors, in order to avoid insolvency the country has to meet even the most unlawful requirements lenders come up with… After days of haggling and fighting growing social unrest, Cypriot government today reached a deal with EU / INF creditors. The one-off tax of 4% or 20% will be levied only on deposits above 100,000 EUR (the only question is whether it will cover only surplus above the threshold) and recent news say nothing of any form of compensation for depositors.

Exactly… The most interesting thing about the whole media coverage of Cyprus bank tax is that in most cases the aspect of compensation has been omitted. Several economists spoke about a brazen rip-off, while few stressed depositors at least a few days ago were planned to be given shares in their banks in return. This reveals the other side of the coin. If somebody does not need their money within a few months, this might turn out to be a great deal. If the price at which shares are granted reflect the banks’ dire standing and those bank are restructured successfully, depositors will earn a superb return. Why almost nobody mentioned this? In such shape, the Cyprus bank tax would be a classic example of conversion of debt to equity. Raising capital and reducing liabilities of banks would increase their resilience and help rebuild trust in them. With such compensation scheme in place, the whole plan hangs together and I would dare to say, is well-devised. Oddly enough, I am one of the few fellows discerning upsides of the operation; the operation which again proves the easiest way to raise money is to go where money can be found easily…

Hot autumn in politics

Looking at recent posts you might have inferred subject matters brought up recently depart more and more from what the blog should be mostly about. Time to get back to the core…

To politics…

The pre-election campaign has been in overdrive for a few weeks but I somehow do not feel that in three weeks I will go to the polls. This campaign in a way looks lacklustre for me, nothing really exciting has been going on. I do not know if it is good or bad, maybe I have too little time to keep track of the events in politics, but this campaign appears to me much different that all the recent ones (those in the run-up to parliamentary elections in 2005 and 2007 and before early presidential election last year).

The first remarkable thing is that two fellow bloggers are running for parliament. Toyah goes in for a seat in the lower house from constituency Katowice from Prawo i Sprawiedliwość (hereinafter PiS) list, while Paulina can be found on Warsaw’s lists of Ruch Poparcia Palikota. I will not have a chance to vote for any of them, I actually do not know personally anyone from the lists in my constituency.

A few months ago it was quite sure that Platforma Obywatelska (hereinafter PO) would be the odds-on favourite of the autumn election. Today, as the most recent polls show the biggest oppositional party, PiS has caught up with the ruling PO and support for the latter is in some polls is less than five percentage points lower than for the former. Actually it is not an astonishing tendency. PO’s victory would be the first ever win of the ruling party in Poland after 1989. Each time before, Poles were sick of previous governments and wanted something other, but that is a negligible factor. Never before have Poles been so divided in terms of political views. There was a strong hatred towards PiS in 2007, now there is a strong hatred, but mostly towards PO, hostility towards PiS is still alive, media still favour PO, but electorate of PiS has built up strong backing and keeps growing in power. It is no longer passé to admit publicly one votes for PiS, in this respect things look much better than in 2007 when voters of stepping down PiS were really despised and it was cool to vote for PO. Today those who back Mr Kaczynski can hold their heads up high.

I see some reasons why support for PiS is on the rise:

- people are sick of success propaganda pursued by the current government and run out of patience,

- the issue of Smolensk has been shelved,

- the new strategy of the party sets out to build a new image of open-minded, moderate party which wants to develop Poland on foundations of traditional values in a modern way,

- plus again it promises the moon in terms of economics, as if they were capable of cracking down on rising costs of living, unemployment, etc.

And there is reason why I do not understand it. All other parties take part in debates, while PiS members only organise press conferences of give interviews, they do not want to discuss with other parties. Supporters of PiS say it is because media are biased, opponents claim in turn PiS members know they are not prepared for a substantial debate. The truth lies… Do not hope to find it out… It lies where it lies…

I sometimes dare to think PiS wants to lose the election and focus on fighting for ultimate power in 2015, taking over the whole power (majority of two-third in the parliament plus their president). It could be even quite convenient to them to let PO run Poland through the end of the impending second wave of economic crisis, repeat hackneyed theses of Poland in a total downfall, chaos, ruled by incompetent people.

The campaign and politics as a whole abounds in inept pronouncements. The most noteworthy examples from the recent months are:

24 August – PiS deputy and ecomomic expert Beata Szydło says in Tok FM radio Polish GDP is shrinking (in the second quarter of 2011 it rose by 4.3% year-on-year).

26 August – PiS deputy Adam Hofman comments on the new clip of Polskie Stronnictwo Ludowe (hereinafter PSL) saying guys from the countryside came to the capital and go bananas.

Early days of September – member of Monetary Policy Council, Zyta Gilowska, former finance minister in PiS-led government publicly backs PiS and declares her readiness to take part in a debate with the incumbent finance minister on public finance. Such activity would have been a blatant violation of central bank independence and derogation of Polish central banking law. This move wound me up as an economist and on 7 September I was going to write a short note to condemn her misdemeanour. Eventually on the same day, during the ending session of the council Zyta Gilowska was probably taken to the task by the president of the central bank, came to her senses and backed out of the idea of engaging in political activity.

14 September – Mr Rostowski, from the ruling PO, during his speech in the European Parliament scaremongers claiming that if the EU fails to overcome the ongoing economic crisis, it will lead not only to social unrest, but may end up with war over the coming decade. Are there things you can think of, but shouldn’t mention?

16 September – Grzegorz Napieralski, leader of Sojusz Lewicy Demokratycznej (hereinafter SLD) calls PO to create a government if PiS wins the election. The perplexing idea is quickly and rightly retorted by the prime minister Donald Tusk who reminds Mr Napieralski that only Poles have a right to decide who will form the government. If PiS gets the biggest percent of votes it should build a new government. Who would dare to enter a coalition with them is a totally different story…

Of course this coverage is biased, but still less biased than posts on other blogs…

Now a quick look at agendas of two parties that have a chance to win the election.

PO wants to press ahead with modernisation of Poland with the method of small steps. No big liberal reforms, no difficult choices. PO underlines what it claims to have done over last 4 years and silently concedes its defeats. Unlike SLD it does not focus on reviving memories of IV RP nor wants to put Jarosław Kaczyński and Zbigniew Ziobro before the Constitutional Tribunal. In a word – realpolitik…

PiS also has an agenda, but it consists mainly of:

a) criticising feckless PO-led government,

b) taking pride in achievements of PiS-led government.

But seriously, as a biased recipient I have to say it is simply incoherent and lacks details. Let’s examine some parts of their economic agenda.

PiS wants to levy an additional tax on banks. At least one candidate of this party says banks are evil and if only possible would love to wipe them out. Coming back to the bank tax, no one says on what (equity, total assets, deposits, net income) the tax would be paid, but in the meantime PiS wants to boost banks’ income by extending the Rodzina na Swoim programme, under which the state pays half of the interest on mortgage loans to families who buy a new flat or house and meet specific criteria. The programme boosts demand on properties and consequently also property prices go up. This means the beneficiaries of the subsidies for the borrowers are (1) developers which can sell flats at higher prices and earn more and (2) banks which can charge clients higher margins (it is proved that loans under Rodzina na Swoim have higher margins, because cost for a client is lower than for a non-subsidised loan anyway). If property prices rise, fewer people can afford to buy a flat without a mortgage, so more people have to go to banks plus they have to borrow more. And so the banks earn more and debt burdens of households increase…

It is easy to say banks enslave people, but how does it impinge on the contribution PiS wants to make? Another thing I like in the agenda of PiS and speeches delivered by Mr Kaczyński is the phrases pieniądze się muszą znaleźć (money has to be found) and są zasoby do których można sięgnąć (there are resources that can be tapped). I have not heard until now where that money is, nor what those resources are. Pooling wool over poor voters’ eyes all the way… Or if somebody could enlighten me…?

Mr Kaczyński is of the opinion that the rich, not the poor should bear higher tax burdens. So why the heck did his party (with support of PO) resolve to cut the income tax marginal rates by 8 percentage points for the richest, by 12 percentage points for well-earning ones and by one, mere one percentage post for most Poles? Why did they cut sickness benefit contribution (składka rentowa) and grant tax deductible amount for each child under such conditions that the poorest could not deduct any amount? Key beneficiaries of all those moves are the well-off, it would be quite natural if those changes were pushed through by libreal PO, but they were passed in times of Polska Solidarna. Jarosław Kaczyński surely solidarised with the better-off.

If PO wins… Someone will surely say the election has been rigged.

If PiS wins… Someone will surely call Poles idiots, morons, etc.

If PiS wins… Life will be much more exciting.

If PiS wins… Maybe I will set up a Polish language blog on politics…

I do not think victory of Mr Kaczyński party would be a disaster, but I do not want it for Poland.  I do not want my country to follow the path of Hungary under Mr Orban’s administration. As much and as little.

Taxation and justice - again

Prompted by yesterday's discussion with a fellow blogger on the donation tax, I settled on revisiting the topic of justice in taxation, once brought up here... This time the aspect of effectiveness will not be touched upon, but instead I will try to focus on justice.

From my short research done while cycling around I conclude there are four main bases of taxation.

1. The mere being or existence, as in the case of poll tax. The concept can be traced back to middle ages and assumes that everyone should pay the same amount of tax, regardless of their income and wealth. Today this form of taxation is generally deemed to be unfair, as people's and entities' ability to bear the burden of taxation varies, depending on their income or wealth, and is hardly ever used by local or state governments to raise revenues.

2. Consumption, with the most popular VAT. I have to say I would struggle to provide you with a rationale of this form of taxation, but it surely can be categorised as an effective way of collecting money, as value added tax, or sales tax is hard to avoid. When it comes to justice, here it is quite possible to adjust the tax rate to taxpayers' ability to pay taxes to their capacity to bear tax burdens. Basic goods, such as bread, diary products, medicines, utility services can be taxed at lower rate, while cars, petrol, foreign trips and other luxurious goods can be taxed at the higher rate, as their consumers can afford to spend more on them. The state can tamper with VAT rates to affect the structure of consumption, e.g. merit goods may have a low tax rate levied, while demerit goods will have not only higher VAT rate, but also another tax, especially for sinners, imposed. The tool is effective and no wonder Polish government, when at a pinch, decided to raise VAT rather than income taxes.

3. Wealth. I don't even know if there is a Polish equivalent of 'wealth tax', as this tax does not function in Poland at all. This form gives much room for tax avoidance, as the wealthiest people would move their assets to tax havens. The concept behind this is that the well-off should somehow share their wealth with the poorer. I am generally against it, as people should be taxed as they are coming into wealth, not as they are already wealthy. A proper property tax is not used in Poland. I would be glad to see it levied, as it would bring prices on property market into balance. Prices would surely fall and better reflect real values or properties.

4. Income. The broadest issue, so I'll take the liberty of omitting corporate taxes and focus on four forms of personal taxes.

A) Personal income tax. It is generally accepted that flat and progressive taxes are said to be most fair. Tax rates and brackets are supplemented with tax deductibes items and tax allowances. My own take on the best personal tax system has been laid out in the post linked at the beginning and has not changed since then.

B) Capital gains tax. Is a standard in all civilised countries. There have been proposals to scrap it in Poland, as when it had been introduced in 2001 it had been meant to be a temporary measure to bring people on spending in economic slowdown, then in stayed on. My sense of justice incites me to a strong disapproval when I hear proposals to lift it; for two reasons. Firstly, I live in an area when lots of ex-farmers sold their plots of land for millions of zlotys in 1990s and 2000s and now they don't have to go to work every day and toil away nine hours a day as I do, but they sit on their arses and live off interest of the money their got from selling the land. If my work was taxed and their income not, that would be despicable. Secondly, I am a stock market speculator. With a bit of knowledge and luck it might be a great way to earn (or lose) quickly a lot of money without much effort. I would be a slap on the faces of all hard-working people, if I and the likes of me didn't have to pay tax on our 'murky dealings'. The main argument agianst capital gains tax is that it creates a 'double taxation', which is wrong, because you once earn some money and you pay income tax, then you invest that money and pay tax only on the interest or gains you earn.

C) Inheritance tax. The government of Law and Justice lifted this form of tax for the closest relatives of the deceased. From my point of view, this wasn't a fairly good decision. An inheritance is a windfall, your wealth increases, although you usually haven't put any effort into working for it. Therefore I think this tax should be levied even on the closest relatives, but they should pay a lower rate than people who have been bequeathed something by a person from outside their family.

D) Donation tax. If you are given some money, property or anything that has a significant value for free, this is also a windfall. As in the case of inheritance tax, this is also a form of coming into some wealth without making an effort. In Poland closest relatives are also exempted from donation tax payments. It is not fair actually, often children get money, flats or cars from their parents, but they haven't contributed to creation of such wealth. This means children form well-off families are better-off in comparison to those who have to accumulate their wealth on their own. Thank God donations from third parties are taxed, but taxation rates are in Poland lower or similar to the ones on income taxes. In my opinion they should be higher, as those who put effort into coming into wealth, should be tax at lower rates than ones who simply get the money.

Voices of disagreement are strongly encouraged! Nothing does as good as exchange of opinions!

On crosses, rants, presidents and would-be presidents

But before I dwell on the current issues my apologies to Adthelad. Regrettably, I did not find time to watch “The Trap” so understandably I cannot review it today. When will it happen? Hmmm… Pending…

I had a second busy week at work, but everything seems to indicate the pressure is going to ease up a bit in the coming days so maybe three evenings will be enough to watch three parts of the documentary, jot down some key points and remarks and then put it together and share on the blog with the readers.

From the beginning of the year weather has had many swings and has surprised Poles many times. This week’s stars were storms and downpours: one on Tuesday, another yesterday. If meteorologists are right, today we should expect a repetition of yesterday’s show. I have guests today, so there might be a bit of a problem, or a necessity to put them up overnight.

This week has been extremely hot in the politics. On Tuesday Poland witnessed an attempt to move the cross from outside the presidential palace. The operation was scheduled for that day, as an agreement between the scouts (who had put up the cross), the Church (cross is a religious symbol) and the presidential office (it is their premise) has been reached. Predictably, unrelenting defenders of the cross (excellent rant by fellow blogger Scatts, I fully back him) blocked the whole operation, the state gave in and the cross is still left outside the palace and a group of weirdoes are still guarding it. Many leftist and liberal commentators hailed the Tuesday events as the failure of Polish state. I partly agree, for the following reasons:

1. Poland is theoretically a secular state so this symbol should not be present in a public space, in front of one the most important official edifices, but on the other hand it is no longer a religious symbol, it is a purely political symbol. The cranks who scuffled with the police on Tuesday called priests “communist secret service agents in disguise” and named scouts “Bolsheviks”, as befits truly religious Catholics. They pray during their sentry, but I wonder to whom – I do not think to God, this is the shrine to late president Kaczynski, I suppose. The cross is a political symbol (and no mistake?).

2. Why can a group of people appropriate a public place and a cross they didn’t even put up. In most countries such an illegal assembly outside a public building (unless there’s a reason for it, as it was during the mourning in April) would be gently scattered to four winds. Here, as the defenders of the cross point out with unhidden satisfaction, the System was totally HELPLESS. The System was overcome, the anarchy is victorious. But it is not the fact that this cross is still there that fills me with dread. I don’t care if there is a cross, two crosses, one thousand crosses and how many PiS-lovers chain themselves to them. There is a Polish proverb which goes roughly: “Let them bite your finger and they’ll eat your whole arm”. I am afraid once the state has succumbed to their claims, they will be impudently eager to break other laws.

3. And there is a reason why I am content the cross is still there. Bearing in mind how dogged its defenders are, the operation of moving it to a nearby church would end up with a bloodshed and those injured would be made martyrs. And sorry to say that, I would not swallow it. I heard double Dutch about martyrs who died in a plane crash (or rather were murdered by the System) and I would surely lose my temper if heard about a PiS-believer wounded or, Heaven forbid, killed by the functionaries of the System.

BTW – look at how Moscow looks today – the fog over the capital of Russia is the best evidence to support the hypothesis that Russians can create fog and they did it in Smolensk on 10 April ;)

I fully understand why Mr Komorowski is reluctant to move into the presidential palace. I would also feel uneasy if outside my house picketed a group of people who would call me a traitor or find me an illegitimate president.

PO once again proved to be too timorous to get to grips with some contentious issues. Two months ago I thought PO was in line with my moderate social views. SLD with its ostentatious anti-clericalism was too leftist for me. Today, if the only criterion for voting for a party were social views and I did not give a damn about the economy, I would vote for SLD…

A propos economy. What do you make of the plans of VAT hike? Am I one of the minority who think it is necessary and justified. In my perception of economic policy a balanced budget and low public debt are more likely to guarantee sustainable economic growth than low taxes which generate deficits. I have never been optimistic about moves of PiS-led government which cut taxes and other burdens when the economy was booming. Such moves are apposite when economy is in the doldrums to stimulate it, not when the growth is running at 5 or 6 per cent per year. It was like adding fuel to the fire and it contributed to current budget setbacks. Everyone knows Polish social security system is ailing, but is it a reason to cut its revenues (sickness benefit contribution) without cutting down on expenses? The same about taxes – taxation rates went down and at the same time government spending was boosted. What do I make – the objective of the government should be to generate budget surplus, through both raising taxes and retrenchments. Low level of public debt means government is unlikely to increase taxes and this certainty creates a really friendly environment for businesses. The move made by PiS in 2006 was very short-sighted and those who benefited from it surely were not the voters of the party.

Breaking news – Mr Kaczynski’s statement on the Mr Komorowski’s swearing-in ceremony.

For those who do not know yet, Mr Kaczynski was absent at that ceremony. One version is that he had to pick up his mother from a hospital (I wonder if he used a private car for it and paid for it from his own purse) and surely fortuitously arranged for the day when the ceremony was scheduled to be held, the other is, as deputy Mariusz Błaszczak had said, that Mr Kaczynski’s absence was obvious in the light of how critical PO politicians were about his brother. Hang on, is it not normal in democracy to be critical about someone else’s rule?

Now some quotes from Mr Kaczynski’s today’s appearance.

1. To zaprzysiężenie było wynikiem śmierci mojego brata i i moich bliskich (That swearing-in was an implication of my brother’s and my relatives’ deaths)
Rebuttal: If you had become a president it would also have been because of their deaths. If your brother was alive he would run for presidency, not you!

2. Sądzę, iż w dużej mierze został on wybrany prezydentem przez nieporozumienie, bo jestem przekonany, że bardzo wiele osób, które na niego głosowały zapateryzmu w Polsce nie chce (I think it was a considerable misunderstaning that Mr Komorowski was elected a president, I am convinced many of his voters do not want Zapatero-like policies in Poland).
Rebuttal: Mr Komorowski is too timid to take steps characteristic for leftist social agendas, but he was elected because many leftist voters put a cross against him to choose the lesser of two evils. As far as I can see around, most Poles want the cross to be removed from outside the palace, but they do their bits and do not protest, those who want the cross to stay there make the noise. It would have been a misunderstanding if you had been elected a president. Mr Komorowski did not lie about his Catholicism and has not used religion to wage a war against “enemies” (you love that word, do not you, it is one of your favourites). You told stories to Poles about your change and returned to the rhetoric of aggression after the lost election. If you had won, you would have done the same, it is natural for you. The result of recent election many Poles put stock in your change. Soon, when they realise you are just a mendacious man with lust for power, the support for your lousy party drops. And after all rows over the cross the one who gains will be SLD.

Over. Just a month ago I did not bear any grudge against PiS, its voters and acolytes, today I would hold back from declaring that. I think I lost my temper.

Investments and morality

The concept of moral spine, when taking investment decisions, usually neglected, is strongly emphasised in principles of Islamic banking. It seems it is one of sparse significant examples when ethics affects financial system on a level of banks, brokerage firms and other entities that are involved in large-scale banking operations. Their codes of practices forbid earning (excessive) interest, investments in shares of companies whose core business is deemed to be unethical, or trading in derivatives which are said not to be a real money. As you drill down in the superficial description from wikipedia, you will see the system is full of loopholes that enable to get round the rules.

And in our non-Islamic world, are there any rules? I worked out a short (and subjective) list of investments I would refrain from. I wouldn’t list there derivatives as Muslims do. Those financial instruments have been conjured up for three purposes: to hedge risks, take risks and speculate. As long as you don’t beg anyone for help because you have lost your capital this investment is ethical, but if try to socialise the losses or shift the costs of your flawed decision to someone else, who is not guilty, you are a typical product of modern “distorted capitalism”, “remnant of what used to be capitalism”, or whatever we have witnessed during the last financial crisis is. This stance can be described shortly: as long as your business goes well you tell the state and regulators to mind their own business, when your house of cards collapses, you seek their protection. A fine example of hypocrisy…

The first type of what I find unethical is not even an investment, because what I disapprove of is a pure speculation on real estate. If you buy a house or a flat to live in it, everything is alright, even if its price soars. If you buy a flat to pass it on to your child who is now in a nursery school, you do not do anything wrong, even if you will be subletting it for twenty years. But if you buy it only to sell it in a few years and take profits, I denounce your investment. By taking such a decision you contribute to rising real estate prices and make flats less affordable for other people, who will become slaves of mortgages for next thirty years. Dwelling is after all one of basis needs of a human being. Speculation deprives many individuals of their chance to have their own one.

Your own flat or house is your biggest financial asset, so it is an investment, but I wonder what would happen if mortgage became almost totally unavailable. How much would flats in Warsaw cost? The scenario doesn’t bring a picture in bright colours – flats would be bought be rich people who would let and the rest would have no choice but to rent it, rents would go up then. Not a good future prospect anyway.

The second type is a pure investment, unfortunately very common and used as a benchmark of risk-free rate of return. The government bonds. You keep your money in a bank, bank pays you interest from what it has earned from other clients – customers whose folly made them take out consumer loans or enterprises which had taken out loans to develop their businesses and have a higher rate of return than interest paid on the credit. This system of brokerage works well, mostly as the bank is the institution which takes a risk. Meanwhile you pay taxes and your neighbour buys government bonds. Interest he earns is financed from taxes you pay on what you earn as a worker as well as from your capital gains tax.

If you want to invest your money, do it on the market, let it work for a private business, don’t sponge on fellow taxpayers. State is not a saving bank, it’s role is to maintain law and order, provide public goods, depending on you economic views its role should be limited to minimum or cover a spectre of spheres like education, health care, social security. But it should not be a participant of financial markets. Another story is that it also should not spend more that it can afford to and consequently issue bonds. But as a balanced budget idea enthusiast I can talk my head off and I bet the day I die some of my neighbours will have their money invested in gilts. Damn it!

If I have touched upon taxation, I cannot leave out the new popular method of tax avoidance – antybelki – bank deposit which are constructed in a way that you don’t have to pay capital gains tax – either it is an insurance policy or the interest is paid daily and if it doesn’t exceed 2.50 PLN, calculated tax is rounded down to 0 PLN. It is absolutely legal, but if moral? You will save some money, but state budget will lose its revenue. Who will lose? A monster called “State” who lives in a cave and gobbles poor taxpayers? No, your neighbours will lose, your friends will lose, your family will lose, you will lose and the next generations will lose. They will have to pay higher taxes, because current lower revenues means higher budget deficit in the future. I realise the workings of Polish state are far cry from perfect, costs of maintaining bureaucratic apparatus are tremendous, but many public goods are finance from public purse, if you want to consume them, you shouldn’t evade paying taxes. (though the rational decision is not to pay taxes, because you’ll get them anyway).

My apologies to my readers. In the second year of blogging posting frequency will not be as high it used to be. But I pledge to try to focus on quality and publish at least two concise posts each week. I’m simply more busy this term and have less time for writing (what doesn’t mean less time for musing about politics, economy and society).

The capitalism, taken apart

My big thanks to professor Marek Garbicz from Warsaw School of Economics for a big dose of factual knowledge and critical approach.

I appreciate every opportunity to come up against the wacky or peculiar outlooks on the economic system. The extreme examples, both from the right (in economic terms the radical liberalism) and from the left (socialism, verging on communism) sometimes make me laugh, sometimes infuriate, but they are the most valuable, when they bring me on to reflections or egg me on to gainsay them. In Polish, there’s a adage that says the truth lies in between. In truth, it lies where it really lies and nowhere else.

This time we’ll dwell on the contents of “Let’s Make Money” film, released in 2008 (in Poland in 2009, at cinemas from September). Unlike many of such films it hasn’t been shot by an American leftist intellectual, but it’s a work of an Austrian director.

In brief, it’s a bit longish attempt to harp on the vexed questions of development economics (Why do some countries develop faster than others? Why are some of them rich and the other poor?) and more or less deft depiction of the impact the globalisation has on different countries.

The most apparent is the issue of beneficiaries and losers of the process. The world has been ruled by the superpowers for centuries. They arranged it, set the rules, conquered new lands, competed against one another, shared their spheres of influences. In the twentieth century they set up organisations, aimed at maintaining peace, rule of law, democracy and for economic stability. I’m not naïve, I lean towards the view of Adam Smith, who said people are driven mostly by their egoism. Well-developed countries will firstly pursue their own interest, just later on they’ll mind the performance of poorer countries, whenever it’s advantageous to them. For instance, if a poor country is abundant in natural resources or they could profit from trade partnership.

What can be done to help the poorer countries grow? Can they catch up with the most developed ones? Is the convergence hypothesis true? If I can suggest anything, look at the development as on a dynamic process. What underlies the current economic situation is rooted in the past and can be dated back to renaissance era. Those countries which are better equipped in physical capital, human capital, knowledge and institutions (what in economics means “rules of the game”) have a head start, so maybe a divergence instead?

There are many schools of handling economic growth.
Firstly, a separation from the world economy. It didn’t work out, as the technologies in the countries where it had been implemented had been too poor.
Secondly, an export strategy – boost your exports, prohibit imports, protect your own industry, fight through competitiveness. This approach has been rather successfully adopted in the East Asia.
Thirdly, one in line with Washington Consensus, followed also by Poland, time will tell if it was a correct decision, now it’s still too early to judge it.

The third one is (as the wikipedia entry also shows) the most controversial. For me, its assumptions are praiseworthy, only officiousness in the implementation can wreak the economy. The film points at four aspects of Washington Consensus recommendations.
1) Deregulation – which is generally beneficial is the policymakers don’t make one step too far. Hence, there are the justified fields, where a certain dose of regulation is essential to preclude a bigger disaster.
2) Liberalisation – in the long term favourable to everyone, but the film director points out that unconstrained capital flows are the biggest evil. Indeed, the speculative money is used to make more money and its contribution to tangible output and social benefits from liberalised capital markets are tiny.
3) No state intervention – here they misrepresented the assumptions or followed the visions of some market fundamentalists. State’s activity should stimulate growth, draw in foreign investors, so the education or infrastructure provision shouldn’t be handed over to private sector. Even the early night-watchman concepts (as the first one, by Adam Smith) postulate active role of the state in these fields.
4) Privatisation. Quite important, but not the most. Even Milton Friedman, who twenty years ago advised to privatise, privatise and privatise, in the last days of his life admitted the most important role in the transitional economies should’ve been played by institutions. What lack of good rules of the game means? Just look at the example of Russia – mob and oligarchy (or state) have a hold over the country’s richness.

When is a privatisation good then?
- When state property is not sold in haste.
- When the rules (tenders, etc.) are transparent.
- When state property is sold for decent price.
- When the industry will be more efficient after turning private. It’s a paradigm, but how about the markets when there’s room for only one supplier and every citizen is obliged to consume them, like waterworks, sewerage. The state enterprise is likely to be run worse, for some built-in reasons, but, if provided by law, it won’t be profit-oriented, so it will deliver more goods at lower price.

“Buy when the blood spills on the trading floor”. What’s so reprehensible in this approach? Every speculator knows the best moment to buy is when the stocks are undervalued. Those who spotted a turning point in February or March won! When should we buy then? When the bull market ends? Someone has to do it, but those are mostly the small, inexperienced investors, who join the game when it’s actually over. It don’t get where the authors of the film saw the cynicism of that statement.

“Three million empty flats and houses on Spanish coast”. The property bubble grew robust in Spain, real estate prices would go up by more than twenty per cent per year. Investments in real estate are considered safe and profitable, in the long term. Long term profitability is one of those entrenched dogmas. Investments in stocks are according to the past data the most profitable – you’ll hear it from any financial advisor (they get the highest commission when they sell products linked to equity investments). Why then, some economists (like prof. Sławiński) easily undermine this assertion by pointing out that in the long term the probability of a big bull market is higher?

Back to real estate – I’m wary of this kind of capital investment. The reason is simple – every man needs a dwelling, but the speculation drives the property prices up and makes them unaffordable for many people. Much depends on the source of the speculative capital. If like in Poland between 2005 and 2007, prices soared because of domestic demand, situation is not that bad. In such a scenario, domestic demand is stimulated by low interest rates and liberal credit policy, what leads up to what the author of this blog has devised and described as “affordability paradox”. Let’s consider the following example. A buyer wants to buy a flat which costs 200 000 zlotys, but he has amassed only 120 000, what stands for 60% of the price. Creditworthiness criteria are tight and he cannot get a loan, he has to put aside money, the money he saves still works on the compound interest principle, some time later he can buy a flat without running up debts. But there’s a catch. This reasoning is correct only if the restrictions on access to credit are not lifted. If it happens, the same flat may soon cost 400 000 zlotys (the better access to mortgage loans has created additional demand) and our buyer can afford to buy that flat, even though it’s two times more expensive. A lot of economists claim everything’s alright. Prices are higher but he can afford a flat. But who sees a burden of a huge loan which will be being paid off for twenty five or thirty years? Repayments will decrease his discretionary income, so he will consume less for all that time. The credit is sometimes ball and chain – what if Mr buyer loses his job or his child goes down with an illness which would require a costly therapy? Would a bank take into account his unfavourable situation or would it foreclose his flat and turn him out?

In Poland, I’ve heard many times that flat prices are prohibitive. Indeed, five years ago, a person with considerable, but not very high savings could afford to buy a flat or house without taking out a loan, today it’s hardly ever possible. In Berlin, a square metre of a flat in a panel building block, similar to many in Warsaw, costs around 800 Euro, in Warsaw, on average two and a half times more (let alone the purchasing power of a Berliner and a Varsovian – I wonder how many square metres of a flat in a high-rise from the eighties can the former and the latter buy for their monthly salary). The price in Berlin probably reflects the intrinsic value of a property. In Warsaw the prices have been put up both by insufficient supply and excessive demand.

Back to Spain, those flat and houses, all in luxurious estates, in the prestigious coastal areas, are uninhabited. They were built and bought not to be dwelled, nor even to hire, but to earn on their growing market value. Any asset that should fetch a real profit has to be cashed in, so those who sold their properties off to the other fools, raked the profits in, the ones who bought before the bubble popped, were left with useless flat in Spain. Meanwhile millions of domestic buyers found the real estate in their country unaffordable – they were the victims of speculation… In a few years, property market will get back to its equilibrium. The huge supply of empty flats will bring the prices down and they’ll be bought sooner or later for a reasonable price.

And finally the tax havens. I strongly believe the existence of such spots stems from the common perception of the taxes, not only from greed. For centuries they have been perceived as the biggest possible evil, tax avoidance has not been treated as misdemeanour, people have sought ways to reduce their taxable incomes, what led to many absurdities. Before the Poland’s accession to the EU, many firms were inflating their costs, just to have a smaller profit and a smaller tax. Then, when they put in for grants from the EU or for bank loans, their applications were rejected, cause nobody wanted to finance unprofitable businesses. Few people realise that what they get for paid taxes are public services like infrastructure, education, health care. The other point are the costs of redistribution, its justice or effectiveness, let alone the quality. But the fact is that we get something from the state. Nothing’s for free, but some crafty fellows try to take advantage at the other’s expense, this is called free riding.

But look at it from the tax haven’s perspective. A country attracts zillions and even if taxation rates are very low, the revenues they take are not to be sneezed at, so that they can fare very well. On the other hand, the money taxed in a tax haven is not collected in the country of its origin. Consequently, the budgets of those countries the capital flees suffer, governments run up higher debts which will have to be paid in taxes by the next generations.

At long last. THE END.

Effectiveness or justice – in taxation

During my studies I’ve almost always been taught those two things are mutually exclusive on the macroeconomic level. Nevertheless, economic policy-makers still strive for a fair balance between those two features people expect from the economy.

Today I’ve been pondering upon combining effectiveness and justice in taxation. Effectiveness is usually defined as obtaining as much as possible from the certain resources, or using as little resources as possible to obtain the certain effect. In case of taxes the effects might be collected revenues, the resources might be acted as by the taxation rate, but also costs of running the collection system, or the influence of taxation rate on economic activity. Justice, in turn, refers to the fair distribution or redistribution of goods, based on the given criteria. When it comes to taxes, the considered issue is the taxation system (the most popular ones are progressive and linear).

Still the most relevant criterion taken into account when speaking about effectiveness is the bearing, which the taxation rate has on economic activity. If taxes are low, people are more motivated to work and less likely to evade them – in such countries the level of redistribution is low, usually, because when a country is a tax haven, it draws capital from abroad and small per cent of big sums bring ample revenues. The theory of higher revenues from cutting taxes has been elaborated on by an economic advisor of Ronald Reagan – Mr Laffer, who devised a Laffer curve. Higher taxes are linked to the higher rate of redistribution and as it is argued – they tend to discourage people from working. Some critics of high taxes claim also they put people off earning more – here I can’t agree – cause there are thresholds, over which the additional income is taxed at higher rate, I think it never happens that the higher taxation rate applies to the whole income after exceeding a threshold.

There are plenty of criteria, according to which justice in taxation is perceived. In two most frequent ones the individuals should pay the same per cent of their income (flat tax) or the richer should pay higher share of their earnings (progressive tax). Flat tax is often misidentified with the system where everyone pays the same amount of money in a form of taxes. Such systems are the thing of the past these days – but in case of flat taxes the richer still pay more than the poor, but their burdens rise linearly.

As we went through with the theory, it is time to present my proposal for taxation system in Poland, which in my opinion is a fair combination of effectiveness and justice. I would put forward a flat tax with rate of around 18 – 22 per cent and annual tax allowance of 10 – 12 thousand złotys, with no other deductions and relieves (worth considering are different thresholds of deductible income for single taxpayers, couples and payers with dependants). Rings a bell? Yes, this is similar to the first proposals of American economists from the late seventies. This would introduce an element of justice – the system would be simple, would not discourage people from working and would give much less room for abuses and tax evasion. Under a new system, with the flat rate of 20 per cent and deductible amount of 10 thousand zlotys, the effective taxation rates for a payer:
- who earns 1 000 zł a month would be (12000-10000)*0,2/12000=3,33%
- who earns 2 000 zł a month would be (24000-10000)*0,2/24000=11,67%
- who earns 3 000 zł a month would be (36000-10000)*0,2/36000=14,44%
- who earns 8 000 zł a month would be (96000-10000)*0,2/96000=17,92%
- who earns 15 000 zł a month would be (180000-10000)*0,2/180000=18,88%
Such system would decrease the tax burdens for the poorest, provide the fair, “creeping” progression and would guarantee considerably low taxes for the richer. No deductions and exemptions would mean that tax declaration forms could, as proposed, consist of one page. Much could be saved on the tax collection system – just imagine most of those people currently working for IRS who carry papers from one pile to another and hinder your life, are sacked. The army of clerks given the boot would result in lower budget expenditures for tax collection apparatus. However, some of the saved money should be spent on enforcement tax police – in my opinion tax evasion should be severely punished and penalties should be severe enough to dissuade taxpayers from tax avoidance.

Why is it impossible to put my idea into practise?
Firstly, ordinary citizens perceive it unjust, though in my view this is the most just solution
Secondly, the rich prefer the systems which create the illusion of justice but give a lot of room for abuse, that’s why in the States a CEO of a big company has a lower effective taxation rate than his secretary – he can afford to hire a specialist who’ll reduce his income.
Thirdly, regarding corporate income taxes, there is a big business of tax advisory services, tax optimisation solutions and consultancy firms – such great lobby has a vested interest in the status-quo of the present complicated corporate tax law, on which they can make money.