|

More Regulation – Less Revenue for the State

FMRS 1 1

Complicated, difficult to interpret and frequently changing law becomes an increasing barrier in the Polish economy.

The legislative system in Poland has for many years failed to meet the expectations regarding its basic function – a high-quality law-making instrument. As a consequence, many laws and other legal acts are prepared without a sufficient number of expert opinions or proper consultation with all interested parties. This leads to a frequent situation wherein the short term from the introduction of the new regulation some provisions require changes or improvement. This is happening because some significant aspects and some negative effects have not been taken into account. As a result, there are many regulations that bring unintended effects. In That Which Is Seen and That Which Is Not Seen Frederic Bastiat shows that besides the obvious consequences of economic acts and regulations there are other consequences that are not seen at first glance. Many unintended consequences of laws could be avoided in time if the legislative process included a full impact assessment of the laws introduced. On the other hand, there are many cases where there is a lack of in-depth economic and social evaluation of the regulations.

Unintended effects of regulations in Poland

  1. Cigarette excise tax increases

Continuous increases in excise duty rates on cigarettes prove how unreflective some legislative changes can be. Excise taxes are one of the main tax sources of budget revenues. If used wisely, they have a significant impact on public finances. However, the aggressive application of this tax is counterproductive.

Between 2004 and 2014 the excise duty on a pack of cigarettes increased by approximately 200 percent while budget revenues did not grow at such a fast pace. This is due to the shadow economy the share of which in tobacco products grew year by year causing significant reductions in the state budget. 2013 was significant in this respect when despite another increase in the exercise duty on cigarettes budget revenues from the excise duty on tobacco products decreased by about 400 million Polish zloty compared to a year prior turning out to be as much as 2.2 billion Polish zloty lower than originally planned by the ministry of finance. Therefore, the effects of the increase in the excise duty on cigarettes in 2013 resulted in the breaking point of the Laffer Curve being exceeded. The share of the informal economy in the tobacco market in 2013 was about 25 percent.

  1. Alcohol excise taxes decrease

The positive example is the case related to the multiple reductions of excise duty on alcohol. It shows that the most important aspect is to determine the golden mean between the tax rate and the needs of the public finances. Between 1995 and 2001 the excise duty on alcohol increased by a total of about 200 percent while at the same time the annual revenues from exercise duty on spirits decreased by about 750 million Polish zloty. The negative consequences of raising tax rates have been felt by both the state budget and the private sector. The shadow economy grew significantly along with the rise in excess due to rates. However, since 2002 a number of significant excise tax reductions were enacted which translated into a long-term upward trend in revenues from these products to the level of 6.5 billion Polish zloty in 2009. Through this action, the circle of entities paying excess duty was expanded while reducing the shadow economy. Despite this positive experience in 2013, the excise duty on ethyl alcohol was again increased by 15 another.

  1. The bank tax

Another example of unintended effects of regulation is the so-called bank tax from 2016. The tax is paid not only by banks but also other financial institutions in the amount of up to almost five percent of the value of all assets held. The main purpose of this levy is to generate additional budget revenues thanks to which it is possible to implement a number of government programs. Apart from increasing the pool of public funds, the new tax was supposed to burden banks’ operations financially thus reducing their profitability. When proceeding with the regulation the government assumed that banks would sacrifice their profits in order to pay the taxes. However, this did not happen. In reality, another indirect tax was introduced which hit citizens’ assets. The banks immediately reacted to the additional burdens by reducing interest rates on deposits and increasing the cost of the loan. In addition, they also started to increase the costs and commissions related to other banking products and did not change the approach to date.

  1. “Pharmacy for a pharmacist” regulation

Attention should be paid to the current situation which is the result of the changes to the pharmaceutical law from 2017 completely overturning the Polish pharmacy market. The changes introduced very restrictive rules for opening new generally accessible pharmacies. The new facility must cover at least 3 000 residents and be at least 500 meters from an existing pharmacy. The most significant change however was the introduction of the pharmacy for a pharmacist principle whereby the owner of a pharmacy may only be a pharmacist or a partnership of pharmacies. Considering that before the amendment a pharmacy could be operated by an entrepreneur the current system is one of the most restrictive closed systems in Europe in which strict ownership and quantitative geographic and demographic restrictions are enforced.

After more than three years of operation of the pharmacy for a pharmacist regulation, it is clear that none of the objectives presented in the justification to the act has been achieved. One of them was the increase in the number of pharmacies in villages and small towns which is not happening at all. On the contrary, the liquidation of pharmacy facilities has most affected villages and small towns where access to pharmaceutical services is usually difficult. Since the entry into force of the pharmacy for pharmacist principle the only functioning 86 pharmacy facility have been closed in villages and small towns and in their place, no new drug supply has appeared. In addition, until 2020 almost 1 200 pharmacy outlets have disappeared from the market throughout Poland.

Conclusion

Complicated, difficult to interpret and frequently changing law becomes an increasing barrier in the Polish economy. The most developed world economies have been trying for many years to minimize regulatory barriers both in the regulations already in force and the creation of new ones. One of the main instruments they use is the practical knowledge and experience of representatives of the social side in creating regulations. Political short-sightedness should be avoided. We can only hope that the public and thus politicians will pay more attention to the effects of regulations, including the unintended consequences.

For privacy reasons YouTube needs your permission to be loaded. For more details, please see our Privacy Policy.
I Accept

Author

  • Marcin Nowacki

    Marcin Nowacki is the Vice President of the Union of Entrepreneurs and Employers, and the Head Manager for the International Affairs in Warsaw Enterprise Institute. Marcin is also an active entrepreneur.

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

Do you like the article?

We are glad you do! Please consider donating if you want to read more articles like this one.

Related

Share this article!
Join our community and stay updated!