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%). 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.
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. 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. 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 or 2.41 PLN + 7% = 2.58 PLN.
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 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. 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.
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. 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. 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.
 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.
 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.
 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.
 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.
 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.
 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.
 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.
 We leave out some simplified tax forms of small business such as agricultural tax.
 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.