The present economy and tax systems
significantly increase the costs of work. These systems when applied to simple
goods and small business leave to the workers 20 to 30% of buying power they
would have in the traditional economy conditions. This figure might be viewed as the index of economic freedom. Its
average level is 25%, which means that the systems take away from the workers
75% of the results of their work. The following calculations have been
done on the basis of the statuary rates of charges and contributions in Poland
in year 2002 and with many assumptions about the imposed costs of
administration.
In this article we will discuss a problem
of how much sugar a sugar manufacturer should produce in order to afford to eat
a spoonful of that sugar. Similarly, we aim at calculating how many meals cooks
must cook to buy themselves one, how many clients a hairdressers should attend
to in order to have their own hair done or how many pairs of shoes shoemakers
should produce to have their own pairs repaired.
We are
interested, of course, in solving these questions in the conditions of
professional economy in which majority of us function manufacturing and
purchasing goods and services. We do not claim that sugar producers cannot eat
the sugar they have produced or cooks cannot eat what the have prepared. There
is nothing wrong in hairdressers’ doing their own hair or shoemakers’ repairing
their own shoes. However, that is not the point. What we are aiming at in this
article is working out the expenses that present economy charges to employers
and employees.
For majority tax duties seem to be
basically the income tax and VAT (in Poland income tax rates are 19-40%, the
basic VAT tax rate being 22%, the lower rate being 7% rarely 3% or 0%)[1].
It seems that individuals deprived of 19-40% of their income buy goods that are
0-22% more expensive i.e. having earned 1000 PLN pays 190-400 PLN to the Inland
Revenue and for the money they are left with they can buy goods whose price has
been put 22% up. They earn from 600 to 810 PLN and what they had produced
themselves they can purchase for maximum 1220 PLN. In order to buy a product
made by themselves they must produce 1.5 or 2 such products. Tax system seems
to deprive the poorest of one third of their income and the richer of one half.
However, the reality is different. Apart
from these taxes there are other obligatory contributions, various payments and
bureaucratic requirements that generate additional costs. It is believed that
these charges are for workers’ good i.e. their security. The collected taxes
are directed to various funds that finance various services such as medical
care, old age and work incapacity pension, compensatory allowances etc. We will
not discuss neither the corruption, the misuse of these funds nor the factual
availability of these services. Further calculation will be performed with the
assumption that workers are healthy or use private medical care institutions
and do not expect any pension. Simply, they do not benefit from any funds
financed by the taxes they pay. However, discussing the results we will point
out the role of these contributions, which are actually payments for future
services.
Now
we will proceed to estimate how many meals a cook may buy or how much sugar a
sugar manufacturer may consume. Let’s concentrate on cooks and assume that they
work in a catering business, they organize, produce and deliver food so simply
speaking they are responsible for every task. To make it easier let’s leave out
the material costs assuming that all materials needed for the production are
free of charge - you may freely hunt, pick or gather anything you need. The
only costs considered are the labor costs.
If
the cooks worked in the conditions of traditional economy i.e. outside a
company, without tax obligation, then having produced a thousand of meals in a
month they would have this thousand. They would probably eat a hundred, pay a
rent with another hundred, they would exchange two hundred for clothing or
other necessary goods, they would give three hundred to their families and they
would be left with three hundred or in the worst situation with a hundred
because of possible tribute for some plunderers. Now let’s employ the same cooks
producing a thousand of meals a month in a company and count how many meals
they are left with this time. To make the calculation easier we will resort to
monetary units. Let’s assume that a cook who produces one thousand of meals
earns 1000 PLN.
The Wages
A
worker’s wage is connected with many contributions and obligatory payments.
First, there is an old age pension contribution – 2*9.76%. Employers contribute
tax deductible 9.76% of the workers’ gross income and another 9.76% they
include in their costs. The workers earn now 100% - 9.76% = 90.24% which is
902.40 PLN out of 1000 PLN and the employers costs are 100%+9.76% =109.76%
which is 1097, 60 PLN.
Next
comes the work incapacity pension contribution – 6.5%, which is contributed by
both the employers and the employees. The employees are lefty with 83.74%
(837.40 PLN) and the employers spend 116.26% (162.60 PLN).
Then
there is a sickness allowance contribution – 2.45% payable by the employees and
work injury compensations – 1.62% payable by the employers. Now the employees
have 81.29% of the gross income and the employers must spend 117.88% of the
fixed wage. Health insurance contribution is another obligatory payment - 7.75%
of the net income – 7.75% *81.29% = 6.3% of the gross income. This contribution
is transferred to the Regional Sickness Funds and it decreases the salary to
74.99% but later it also reduces the income tax.
Then
there is the obligatory contribution to the Labor Fund – 2.45% and to the
Guaranteed Employee Benefits Fund – 0.08%. When summed up it gives 2.53% and
now the employers pay 1204.10 PLN.
These are all contribution that might be
taken in to account. We put aside and we will leave out those contributions
that but we neglect then because they do not apply to small companies e.g. to
the State Handicapped Persons Rehabilitation Fund.
Now
let’s calculate the income tax of individuals which ranges from 19 – 40% and it
is 43.18 PLN a month which is 518.16 PLN a year.
If
cooks earn up to 37024 PLN a year they have to pay income tax deductible 19% of
their gross income. If they earn more than 74048 PLN they are likely to pay 40%
of income tax. Our cooks who earn 1000 PLN a month and 12000 PLN a year are in
19% tax bracket. But to make our calculations more general we will now take as an
example cooks who earn more than 74048 PLN a year which is 6170.67PLN a month.
The higher their incomes the bigger the likelihood of 40% income tax.
The
19% income tax is calculated on the basis of the gross income, which has been
decreased by the contribution to the national insurance – 18.71% and by the
costs of drawing an income - 96.26 PLN. Having deduced also the contribution to
the Sickness Funds our cook with 1000 PLN gross income pays 30.10 PLN of income
tax.
The
40% income tax is also calculated on the basis of the gross income and again is
decreased by the costs of drawing an income – 96.26 PLN and Sickness Funds
contribution. If our cook is in 40% tax brackets because of the previous high
income they has to pay 180.60 PLN of income tax.
To sum up, when an employee has 1000 PLN
gross income the employers have to spend 1204.10 PLN and the employees earn in
fact from 569.30 to 719.80 PLN, which is 47% to 60% of the money spent by the
employers for wages.
The
calculation of taxes and other payments, monitoring of the frequent changes in
the tax law, obtaining the explanations and advice, hiring barristers and
solicitors, keeping records, as well as filling the forms, all require
administrative staff to deal with that. This staff is also necessary for
performing other tasks but we are interested in these costs that are somehow
imposed on by the government. Let’s assume that the administrative staff earns
only half of the money earned by the cooks for fulfilling the government’s
requirements. So when employing one cook an employer has to spend half the
money spent on this cook on the administrative staff – 602.05 PLN[2]. Now
the company spends 1806.15 PLN for every employed cook.
Miscellaneous regulations concerning
labor, environment, health and other issues force employers to establish
various funds. Let’s assume that to fulfill these regulations an employer
spends an equal amount of money to the already spent on administration[3]. Now the company spends 2408.20 PLN.
Although the employers usually spend some
more money on materials, rent and other bills we will not take these expenses
in to account. The reason for that is that cooks working on their own have to
pay similar bills and in our calculations we aim at comparing two situations –
of self-employed cooks and employees.
If we assume that the company does not make any profit, does not have to pay
the income tax and 2480.20 PLN is all the money it has to spend on a cook who
earns from 569.30 to 719.80 PLN. Then a thousand of meals cost the company
2480.20 PLN. Thus a price of one meal is 2.41 PLN.
However, that
is not all yet. In order to sell the meals legally the company has to add VAT
to the price and later on pay it to the Inland Revenue. VAT rate usually
constitutes 22% of the net price but in case of some products the rate is 7%,
3% or even 0%. To have the costs returned the company has to sell the meal for
2.41 PLN + 22% * 2.41 PLN = 2.41 PLN + 0.53 PLN = 2.94 PLN[4] or 2.41 PLN + 7% = 2.58 PLN[5].
The meal is then sold for 2.94 PLN or 2.58
PLN but the cook gets for the preparation of that meal from 0.57 PLN to 0.72
PLN of net income. Having cooked one thousand of such meals the cook can afford
to buy from 194 to 279 of these meals. Thus in fact they have from 19.4% to
24.5% of what they have produced.
To buy one self-made meal they have to
prepare 3.4 to 5.2[6] of these meals. Usually it is about 4. Similarly
shoemakers have to mend four pairs of shoes to have their pair repaired or
sugar producers have to manufacture four kilos to purchase one.
How much
sugar in sugar then? The above calculation proves that minimum 19.4% and
maximum 29.9%. The remaining 70.1% to 80.6% is consumed by the state.
In our calculations we assumed that the
administrational costs constitute 50% of the cook’s salary, and other costs
again 50 % of the cook’s salary.
Although this has been arbitrarily done, the costs are
realistic. The production staff’s wages consume 50% and the other staff‘s
salaries 25% of the overhead. This system favors the cooks but is rather a rare
one. In most cases the profit mark-up is much higher. However, we are not
interested in the employers’ greed and in our discussion an employer is to be
disinterested. We aim at presenting the costs imposed on the employer by the
state.
What
would happen if all additional costs were decreased twice so that the
administrative costs would constitute 25% of the money spent on the production
workers, and other compulsory costs would also be reduced to 50% of the
original? Then the cooks would get from 25.8% to 32.75% of the money spent by
the company on their employment. It turns out that the workers usually get from
1/3 to 1/5 of what they have produced which means that they have to produce on
average 4 units of a product in order to afford one. Tax and administrative
liabilities amount to 75%.
The above results might be a bit
understated since various costs have not been taken into account e.g. costs of
materials and transport, rent, advertisement, salaries of the management staff,
fines, bribes and many others. However, the result might be also slightly
overstated because some tax allowances were not taken in to account. These
allowances actually rarely decrease low income and only insignificantly alter
high income therefore they were ignored.
For
some people the compulsory contributions to the mentioned funds might be
questionable and viewed as exploitation. However, some times it happens that
some of us do get some of these benefits. An average employee obtains with same
delay a part of these contributions (454.20PLN), which are in fact quite high
when compared to an income raging from 569.30PLN to 719.8PLN. Let see what
would happened if the money from these contributions was directed directly to
the employees who would take on insurance by themselves and would use privet
medical care institutions. They would earn 454.20PLN more – from 1023.50PLN to
1174.00PLN. They could also afford to purchase from 34,8% to 48.8% of what they
have produced that is from 1/3 to 1/5[7]. If
only one half of the contributions were transferred to the employees then they
would get from 27.1% to 32.2% of what they have manufactured.
It
turns out that even if we have free materials and generous employers the
employees have to produce four times more than they want to buy. Economy leaves
them 25% of what they have produced. The remaining 75% is consumed by the
system.
Conclusion
Some
people fulfill their needs outside the official market. They repair their
equipment by themselves they also build their own houses, produce food etc. It
is obvious that not everything might be produced in this way; refrigerators, TV
sets are just some of those products that have to be manufactured. However, in
case of the simple goods and simple services the imposed requirements waste the
results of work.
It is
hard to produce a car, a computer or electricity in the conditions of the
traditional economy. Complex goods require developed infrastructure and that is
expensive. While manufacturing goods a worker earns only a small fraction of
the worked up value and what is more in extreme situation workers are totally
redundant since machines can substitute them. Infrastructure needed for the
production of more complex goods is also needed for the production of simple
goods. The same regulations and taxes apply to canteens as well as to computer
factories[8].
Simple goods and services: meals, home repairs, and gardening services as well
as babysitting, advising etc. might be purchased and produced outside the
highly organized trade structure. A service and a purchase are taxable and come
within a commercial law that imposes many expensive obligations; neighborly
favors or barters do not.
Let’s
assume that cleaning of a room has the commercial value of one meal. A hungry
cleaner can eat a meal in exchange for cleaning the cook’s room. When the cook
and the cleaner do not know each other the cleaner has to clean a few rooms to
eat a meal and the cook must cook a few meals to have the room cleaned. The
lack of connections, family or neighborly help and barter do impoverish people.
It forces them to work more and results in their consuming less.
The
mutual aid and self-employment have recently been very popular in many
countries. Mutual aid societies and systems of social barters have been
established there as well as some local currencies. The governments usually
support such enterprises especially when these ventures are undertaken in the
neglected areas or among the unemployed people. However, sometimes there are
attempts to interpret the traditional economy in the direction of gray market.
It is partly justifiable since the modern tax systems are very efficient when
applied to the official incomes and turnovers but they are virtually helpless
when facing the household or some local communities. Viewing as many activities
as possible as economic is certainly very profitable for the Inland Revenue.
Since the neighborly barters and local cooperation create the possibility of
improving the life conditions of neglected communities or stimulating the
ignored regions such systems are approved of in majority of countries.
Another
question is whether such tolerance of self-organization will not endanger
public finances. Firstly, the budget loses very little[9].
Secondly, it is rather a very remote perspective and thirdly, people seem not
to be very interested in getting rid of the complex goods and while purchasing
these goods they automatically pay taxes and finance the budget. Someone in a
family or in a community has to earn money to finance the purchase of some of
the indispensable products from the ‘outside’. However, resignation from
acquiring simple goods enables people to get them much cheaper and in result
makes them richer and less overworked.
If
the neoliberal visions where 80% of society is redundant, self-employment and
mutual aid might be for many the only way of comfortable life. They can wait
for some help from the government – benefits, allowances, military service,
public works; they can join the gray market or the criminal world; or they can
organize such a surrounding in which they are not redundant and they do not
need anything from the government. Although they do not increase the budget
their enterprise will turn out cheaper and simpler for the government since
this would eliminate crime and need for the benefits.
[1] Exempt from taxes are services
connected with agriculture, fishery, forestry, some transport, education,
health and recreation services. Some meat, poultry, milk products have 3% tax
rate. 7% tax rate refers to some food products and products for children, some
communal services, some fuels, energy, building works and materials. The
remaining products and services have the basic 22% tax rate. Additionally some
fuel, alcohol, tobacco products as well as energy, cars, yachts are taxed by
excise.
[2] There is usually fewer administrative staff but they earn more than the production staff. Besides we have added to the administrative staff’s income the salaries of management staff and the owners’ profits, which have been ascetically assumed to be half the money earned by the production staff. It must be point out that the provisions against numerous dangers that result from hundreds of tax, economy and administration laws lead to additional costs. The remunerations of managers and owners’ profit are partly the compensations for the risk that results from the law system.
[3] There emerge the costs that result
from the organization of administrative work: computers, books, courses, legal
advice, local taxes, stamp, administration and local charges. We took in to
account all necessary costs of cash registers, Health and Safety Work
legislation, medical examinations, insurances and other required by law
services.
[4] In the catering business VAT of meals constitutes 7% and in case of the beverages it is 22%. In our speculations we resort, in majority of cases, to the basic tax rate – 22%. However from time to time we present the calculations based on other rates.
[5] To be more precise the company
transfers VAT to the Inland Revenue reduced by VAT that is included in the
costs which in our example is very small since it refers only to the additional
costs for which we assigned 602.50zl. VAT does not concern administrative costs
as well as some purchases. However, some in some other cases VAT rate is lower
than 22%. Having assumed that the company can deduct 22% of VAT from the half
of the spent money (602.50zl) we obtain 66.28zl, which can be deducted. It
gives us 7gr. for one meal. The actual VAT is then reduced to 53gr – 7gr = 46gr
but the price of the meal stays unchanged.
[6] When the VAT rate is 22% then it is
4.1 to 5.2; when it is 7% then f 3.6 to 4.5 and when 0% then – 3.4 to 4.2.
[7] We leave out all administrative
costs, wastefulness, debauchery, taxes paid, old age pension, work incapacity
pension, taxes including the prices of medical services, medicines, transfer
and bank charges, etc.
[8] We leave out some simplified tax
forms of small business such as agricultural tax.
[9] It is important to notice that an employee is impoverished not only because of the budget but rather the system that is Faulty. Taxes constitute just a little fraction of the calculated price of the meals (2.41 –2.94zl), (VAT which is paid by the employer and the purveyors) from 7gr to 53gr, income tax (of production and administrative staff) from 5 to 27gr and generously calculated additional costs that constitute ¼ of the administrative costs (7.5gr). Now it is visible that the Inland Revenue consumes from 19 to 87,5gr deducted from the product’s price while the employee from 57 to 72gr. The greatest part of the price is constituted by the costs of the system, which increases the budget. The system is ineffective. From 8 to 30 % of the product’s price reaches the Inland Revenue and only 25% the employee. Out of 75zl, which is taken away from the employee, the Inland Revenue has only from 8 to 30zl - 11 to 40% of what the employer has deducted from the employee’s wage. The remaining part is consumed by the prodigal system, which like entropy degenerates public finances.