Stabilising effects of PIT and social security contributions in Poland in 2000–2008 and 2008–1015 – results of empirical research

The aim of the research was to investigate the efficiency of PIT as an automatic stabiliser in Poland in 2000-2008 when there were three tax rate bands and in 2008-20014 when two personal income tax rate bands were introduced.

Statistical data and model

To measure the PIT effectiveness in smoothing consumption fluctuations the methodology based on estimation of short-term elasticities of PIT and social security contributions with respect to GDP was used (Mackiewicz and Krajewski 2008, 18-23).

To investigate the PIT and social security contributions effectiveness in smoothing consumption (and output) fluctuations the following formula was used:

where: cp - marginal propensity to consume resulting from temporary changes of income, esus y- short-term elasticity of social security contributions with respect to GDP, SUS/Y- share of social security contributions revenues in GDP, zpiTY- shortterm elasticity of PIT revenues with respect to GDP, PIT/Y- share of PIT revenues in GDP.

where: eEY- short-term elasticity of employment with respect to GDP measured as the impact of cyclical changes in employment on tax revenues (Van den Noord 2000,22), sWE - short-term elasticity of the average salaxy with respect to employment, sprTW- elasticity of PIT revenues per one worker with respect to the average salary.

Coefficient zpn w was estimated by calculating for each threshold the ratio of marginal tax rate to average tax rate, and then calculating weighted average, where the weights are the level of tax revenues gained from respective thresholds:

where: w - share of tax revenues from taxpayers belonging to j threshold in total PIT revenues, MTR - marginal tax rate for j threshold, ATR - effective (average) tax rate for j threshold.

Analysis concerning effects of output changes on employment changes was based on Okun’s Law. The following dynamic version of equation was used (Crivelli et al. 2010, 5):

where: Z- rate of employment growth; PKB - rate of GDP growth; t- year number; /- quarter number; a0 - constant, pj- coefficient measuring elasticity of employment with respect to GDP, e- residual, s- lag of dependent variable, s= 1,...,4,

p- lag of independent variable, P = 1,.. .,4, у - shoi-t-term elasticities of unemployment rate changes with respect to output changes.

Lags in equation (7.4) are included because employers need time to adjust changes in employment in response to output changes. It makes that short-term employment-output elasticities may be different from long term ones.

Estimating the impact of employment changes on average real earnings was based on the Phillips Curve. The concept behind the Phillips Curve states the employment growth has a predictable effect on real earnings growth. In the shortterm the level of real earnings depends on the level of employment and productivity. To estimate short-term elasticity of earnings with respect to employment in 2000-2008 and 2009-2014, the following equation was used:

where: vr- level of real earnings, Z- level of employment, / - year number; /- quarter number; Y/Z- productivity, pr coefficient describing elasticity of real earnings with respect to real employment growth, p2- coefficient describing elasticity of real earnings with respect to real productivity.

To estimate the impact force of PIT revenues on cyclical fluctuations smoothing, the level of marginal propensity to consume out of temporary income should be calculated (cp) To calculate cp coefficient, Friedman's consumption function was estimated:

where: C = individual consumption (in min Polish zloty), 7 = disposable income calculated as GDP minus income taxes (in min Polish zloty).

Coefficient p( reflects marginal propensity to consume out of permanent income changes. As mentioned above, to analyse the passive fiscal policy effectiveness, marginal propensity to consume out of temporary income (reflecting output fluctuations during business cycle) should be taken into account. The coefficient cp can be estimated using the following formula:

( д w D )

where: ■ — J- elasticity of consumption with respect to disposable income,

estimated as coefficient pj in equation 7.6.

Provided that employment growth leads to social security contribution proportional growth and newly employed workers have the same income distribution as until now employed, elasticity of average social security contribution with respect to average pay rate equals 1. Then, the short-term elasticity of social security contributions with respect to GDP formula is as following (Giorno et al. 1995,48):

Data used in the paper is taken from the Central Statistical Office (CSO) database: Quarterly Macroeconomic Indicators and Ministiy of Finance annual data concerning marginal and average tax rates. To estimate marginal propensity to consume, CSO data concerning individual consumption and disposable income in 2000-2008 and 2009-2014 were used. To estimate the model the ordinary least square regression (OLS) was used. Each equation was estimated separately for the period 2000-2008 and 2009-2014.

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