In pursuit of tax equity: lessons from VAT rate structure adjustment in Poland

• Published in: Financial theory and practice Vol. 39; no. 2; pp. 115 - 137
• Main Authors: Świstak, Artur, Wawrzak, Sebastian, Alińska, Agnieszka
• Format: Journal Article Paper
• Language: English
• Published: Institut za javne financije 01.06.2015; Institute of Public Finance
• Subjects: Fiscal equity; Fiscal policy; Food products; household consumption; Household expenditure; income distribution; Poland; Polish tax reform experience; tax progressivity; Tax systems; Taxation; value added tax; value added tax; household consumption; income distribution; tax progressivity; VAT reduced rates; Polish tax reform experience; Value-added taxes; VAT reduced rates
• DOI: 10.3326/fintp.39.2.1
• ISSN: 1846-887X; 1845-9757

In 2011, in the aftermath of the economic crisis, Poland increased its value added tax rates. Despite an already large VAT policy gap, further rate differentiation was used to address distributional concerns and to protect the most vulnerable households. We find that the changes to the VAT rate structure hardly improved the overall progressivity of the VAT and the tax system as a whole. While providing only minimal relief to the poor, taxation of food products at a super reduced rate greatly subsidized the richer households. With a small change to the income tax structure, the government could have secured more progressivity at a lower cost in terms of revenue foregone.