Poland’s Proposed Special Tax Could Be Economically Disastrous

June 17, 2015

The political tides in Poland have been shifting away from the ruling party, the pro-business Civic Platform (OP), to the opposition, the conservative Law and Justice (PiS) party. The defeat of the ruling party’s ally in the presidential elections last month and scandals in the OP have set the stage for a change of leadership in the October elections.

Piotr Gliński, the PiS nominee for Prime Minister, has taken the opportunity to promote his platform well ahead of the elections. He has suggest implementing a special tax, which targets specific sectors of the economy. The tax would add a surtax to the income tax on financial institutions and retail networks. The bulk of the businesses affected by the proposed tax are foreign owned, causing business leaders to call foul.

Gliński has suggested that foreign businesses are earning super-normal profits in Poland and have room in their profit margins to support the special tax:

“Competition means that these institutions agree to a lower margin … In Poland this margin is the highest in Europe, so there is plenty of leeway."

Gliński points to Hungary’s implementation of a similar tax in July of 2010. He argues that since returns on equity for banks have been well above the Eurozone average, there were few repercussion for implementing the tax.

Fidesz, Hungary’s ruling party who proposed the special tax in 2010, was able to bring Hungary’s budget within EU limits while staving off recession with the revenues from the tax, but companies operating within the Eurozone have warned that there are long-term effects from implementing a sector specific tax.

In a letter to the European Commission, 15 large companies argued, “[The special tax] harms investment as well as the credibility in Hungary’s commitment to the European internal market.”

Fidesz’s special tax may have stabilized the Hungarian economy in the short run, but capital has been fleeing the country since the tax was implemented. From 2010 to 2014 there has been a steady decline in loans in Hungary while Poland, which has a similar economy, has seen a rapid increase in the loans made by banks over the same period.

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Both Hungary and Poland have returns to equity above the Eurozone average, but these above-average returns are reflecting the risk premium of operating in a transitioning economy. The special tax in Hungary did not reduce returns below the Eurozone average, but it likely reduce the returns below the risk-adjusted returns of foreign banks. In turn, banks reduced loans in Hungary to mitigate their exposure.

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As the Greek crisis expands and banks become more uncertain of the financial stability of the Eurozone, banks are likely to retreat to markets with stable economies and predictable tax regimes. Poland is poised to benefit from the situation as long as Gliński and PiS can keep themselves from killing the golden goose as Fidesz did in Hungary.

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