The Principles of Tax Law Equality in The Context of Direct Taxation

Abstract

Aim/purpose - The purpose of this article is a presentation of the principles of tax law equality with the aim of establishing the significance of these rules for the system of direct taxation in Poland. Only forms of taxation have been selected to conduct this analysis because they offer the most transparent and variegated picture of the real tax burden. Design/methodology/approach - The article follows the method of economic comparative analysis and offers a review of available literature on the subject. Findings - This analysis proves that the choice of different types of income taxation for natural persons conducting business activity has influence on tax burden. Research implications/limitations - The system of direct taxation in Poland has problems with equality rules because of different tax rates and tax returns which are available in Polish law. Originality/value/contribution - This article presents the problem of tax law equality in the context of economic theories developed by selected economists.

Full text

Journal of Economics and Management
ISSN 1732-1948 Vol. 30 (4) • 2017
Magdalena Jarczok-Guzy
Department of Public Finance
Faculty of Finance and Insurance
University of Economics in Katowice, Poland
magdalena.guzy@ue.katowice.pl
The principles of tax law equality in the context
of direct taxation
DOI: 10.22367/jem.2017.30.04
Accepted by Editor Ewa Ziemba | Received: April 30, 2017 | Revised: September 14, 2017; October 14,
2017; October 25, 2017; October 27, 2017; October 30, 2017 | Accepted: October 31, 2017.
Abstract
Aim/purpose – The purpose of this article is a presentation of the principles of tax
law equality with the aim of establishing the significance of these rules for the system of
direct taxation in Poland. Only forms of taxation have been selected to conduct this
analysis because they offer the most transparent and variegated picture of the real tax
burden.
Design/methodology/approach – The article follows the method of economic
comparative analysis and offers a review of available literature on the subject.
Findings – This analysis proves that the choice of different types of income taxa-
tion for natural persons conducting business activity has influence on tax burden.
Research implications/limitations – The system of direct taxation in Poland has
problems with equality rules because of different tax rates and tax returns which are
available in Polish law.
Originality/value/contribution – This article presents the problem of tax law
equality in the context of economic theories developed by selected economists.
Keywords: principles of taxation, tax fairness, income tax.
JEL Classification: H25, G18.
1. Introduction
The problem of effective collection of tax revenues remains today one of
the most significant challenges for individual states, as public levies are the pri-
mary source of budget revenues. At the same time, almost every state is obliged

The principles of tax law equality in the context of direct taxation 71
to a greater or lesser degree, to pursue their overriding fiscal goal through reducing
the excessive general budget deficit in a manner that does not hamper the pro-
spects of growth for the state, and simultaneously supports business activities
[Raczkowski 2015, p. 58]. Tax law equity has been the subject for discussion
among the greatest economic thinkers for years [Gomułowicz & Mączyński
2016]. It would seem a simple matter of fact that entities achieving the same level
of income should carry the same level of tax burden. Nevertheless, this idea breeds
immediate doubts as to the right definition of income, particularly in the case of
entities conducting their business activities at substantial costs, which not in all
cases can be treated as tax deductible revenues. Another problem with the proper
calculation of income concerns the numerous credits, exemptions and reliefs ad-
mitted by tax law. Further, the issue of the tax rate has also been a matter of con-
tention. Arguably, progressive tax rates garner considerable support, but there are
also voices in favour of flat tax rates. These problems have given rise to this paper.
This article then discusses these economic theories which have exerted a consider-
able influence on the shape of the system of taxation currently in force.
The purpose of this article is a presentation of the principles of tax law equali-
ty according to selected economic theories with the aim of establishing the signifi-
cance of these principles in the current Polish system of direct taxation. The type
of direct tax, which in my opinion best illustrates the principle of tax law equality,
is the income tax. The taxpayer who conducts non-agricultural business activity is
entitled to choose from certain available options within this type of taxation. Each
of these options results in a different amount of payable tax. That is the research
gap. The existence of these differences then is the reason why such options of
income tax are the subject of our analysis. This article applies the methods of eco-
nomic analysis and surveys the available literature on the topic.
The research paper consists of four parts. The first paragraph offers a survey
of the literature on tax law equality. Secondly, the research method is presented. In
the next part of the text data on the income tax levied on natural persons conduct-
ing business activity under different taxation variants and at different periods of
time are presented and analized. The paper closes with conclusions.
2. Literature review
According to The tax ordinance act, tax is “a public, gratuitous, compulsory
and non-refundable pecuniary performance in favour of the State Treasury, voi-
vodship, county or commune budget resulting from statutory tax law” [Ustawa
z dnia 29 sierpnia 1997 r. Ordynacja podatkowa, article 6]. Building a tax policy

Magdalena Jarczok-Guzy
72
of a state is a complicated endeavour, which must take into account several as-
pects, depending on its objectives: the consolidation of the public finances, the
achievement and maintenance of the macroeconomic balance, the support of the
economic development, etc. [Cojocaru & Moisescu 2016, p. 231].
Both the structure and construction of a tax system are important for all
countries. Clear and transparent regulations contribute to the increase in foreign
investments, making the economy of a given state attractive in this respect. That
is why, taking into account the development of economy, it is important to abide
by some tax principles in the formulation of the system of taxation [Cuzovic
2009, p. 45]. These principles have been divided into several groups.
The universality of taxation may be understood to mean that taxes should
have their origin directly at their economic source, that is, they should be levied
on subjects earning income or possessing property. Tax is therefore a burden
borne by all subjects producing the object subjected to taxation [Orłowski 2013,
p. 83]. In accordance with Article 84 of the Constitution of the Republic of
Poland, “[...] everyone shall comply with his responsibilities and public duties,
including the payment of taxes, as specified by statute”. A taxpayer is defined by
statute as “a natural person, a legal entity or an organizational entity without
legal personality subject to tax liability by virtue of the tax acts” [Ustawa z dnia
29 sierpnia 1997 r. Ordynacja podatkowa, article 7]. Article 217 of the Constitu-
tion establishes legal provisions for taxation as follows: “the imposition of taxes,
as well as other public imposts, the specification of those subject to the tax and
the rates of taxation, as well as the principles for granting tax reliefs and remis-
sions, along with categories of taxpayers exempt from taxation, shall be by
means of statute” [The Constitution of the Republic of Poland 1997].
Adam Smith is widely known as one of the most important authors of prin-
ciples of a sound taxation. As early as in the 18th century, Smith formulated four
such principles or canons: equality, certainty, convenience, and the economy of
taxation. These principles were grounded in liberal economic thought, still rele-
vant today, whose representatives were also D. Ricardo, J.-B. Say and J.S. Mill.
In the second half of the 19th century in Europe, which had witnessed a rapid
economic development, a new strand of thought on sound taxation appeared,
represented primarily by A. Wagner and L. von Stein, who formulated their
principles of taxations in a considerably different way. This is also the time
when the doctrine of taxation was enriched by various ideas concerning the role
of taxes in the functioning of society and industry, which meant that taxation
acquired extra-fiscal roles, that is a social one and an economic one. Meeting the
new demands of the theory of taxes, A. Wagner modified the existing principles
and divided them into four groups: fiscal ones, economic ones, the ones concern-

The principles of tax law equality in the context of direct taxation 73
ing equity and technical ones [Sosnowski 2012, p. 60]. This article is concerned
mainly with the principle of equity.
The principle of equality of taxation is one of the most important principles
formulated by A. Smith. He replaced the concept of equity with the concept of
equality. With the view of practical implementation of this principle, A. Smith
merged two separate factors into one: that of “benefit” and that of “the ability-to-
-pay”. He made the taxable income the measure of these two factors. “A. Smith
claimed that the subjects of every state ought to contribute towards the support
of the government, as nearly as possible, in proportion to their respective abili-
ties, that is, in proportion to the revenue each of the subjects earns under the
protection of the state” [Gomułowicz & Mączyński 2016, p. 53]. The taxpayer
should primarily be paying for “the guarantees of both internal and external securi-
ty and for the administration of justice” [Gomułowicz & Mączyński 2016, p. 53].
In the area of “the ability-to-pay”, considered by A. Smith as a maxim of
taxation equity, he formulated three clear thesis [Gomułowicz & Mączyński
2016, p. 54]:
1. “It is not very unreasonable that the rich should contribute to the public ex-
pense, not only in proportion to their revenue, but something more than in
that proportion”,
2. “[...] no man should pay more in taxes than he can afford to pay”,
3. “ [...] the minimum rate of income necessary for biological survival should
fall outside of taxation”.
Smith clearly had in mind here this particular part of revenue which should
be exempted from taxation because it is considered as the minimal necessary
means of subsistence for the taxpayer. This statement is supported by yet another
point made by Smith: “The necessaries of life occasion the great expense of the
poor. They find it difficult to get food, and the greater part of their little revenue
is spent in getting it. The luxuries and vanities of life occasion the principal ex-
pense of the rich” [Arendt 2005, p. 262].
Exemptions in income taxes constitute an integral element in the process of
the design of a tax system. They allow the tax system to have non-fiscal func-
tions. The scope and amount of such exemptions reflect the state’s priorities in
fiscal policy. What needs to be stressed is the fact that such exemptions are pri-
marily given to taxpayers for social and economic reasons. Apart from that, they
may be aiming at greater equity in tax distribution, at the growth of businesses as
well as at influencing economical decisions made by taxpayers. Independently
from these aims, however, tax exemptions always result in the lowering of tax
burden and a decrease in public revenues. For these reasons, they are often con-

Magdalena Jarczok-Guzy
74
sidered as an alternative to budget expenditure, and thus the state should be ac-
tively interested in monitoring their fiscal consequences [Hybka 2014, p. 209].
David Ricardo formulated the so-called Edinburgh rule, which stated con-
cerning the taxpayers: “leave them as you find them”. This rule may be under-
stood to mean that “[...] taxation should leave everyone in a relatively similar
financial and proprietary situation in which they were before taxation” [Go-
mułowicz & Mączyński 2016, p. 66]. This rule illustrates the principle of invio-
lability of the taxpayer’s property. “The sources of tax income constitute the
basis for business activity. If overtaxation violates or outright destroys this basis,
then this will disadvantage production and obstruct the increase of general pros-
perity” [Gomułowicz & Mączyński 2016, p. 66]. Ricardo stresses here the pro-
tection of private property [Gomułowicz & Mączyński 2016, p. 66].
John Stuart Mill was another economist who discussed the principle of tax
law equality. According to him, the principle of equal treatment of taxpayers
means “an equal financial sacrifice or an equal loss in property” [Gomułowicz
& Mączyński 2016, p. 70]. “The loss in property equals in worth the loss in rev-
enues caused by the taxes levied. The level of welfare is always correlated with
revenues. For this reason, taxpayers whose revenues are equal should pay equal
taxes. What logically follows is that inequality in revenues will mean inequality
in taxes levied” [Gomułowicz & Mączyński 2016, p. 70]. Equal financial sacri-
fice of taxpayers should result in the equal diminishment of financial advantage.
Persons with the same level of revenues receive the same advantage, and this
means that they should bear equal sacrifice if they pay the same tax. Mill’s con-
cept of equal sacrifice binds the principle of tax equity with the principle of the
ability to pay [Gomułowicz & Mączyński 2016, p. 70].
Francis Ysidro Edgeworth was a continuator of Mill’s thought. He linked
the rate of taxation with the utility curve. In his view, tax burden “[...] should be
distributed in such a manner that the marginal disutility incurred by each taxpay-
er should be the same” [Gomułowicz & Mączyński 2016, p. 71]. When taxes
sustain inequality in property distribution, then the tax burden is incorrectly dis-
tributed. “Then it is necessary to increase taxation on high revenues with the aim
to create a perfect equality in welfare distribution” [Gomułowicz & Mączyński
2016, p. 71].
As early as in 1880, Adolph Wagner, a representative of the socio-political
school and the outstanding German scientist, put forward the thesis that propor-
tional taxes negatively affect the lives of the taxpayers, “[...] because the same
tax rate places unequal tax burdens on different payers. Therefore, the only fair
taxation is progressive taxation” [Povarova 2016, p. 197]. A. Wagner advocated
the universality of taxation, with a simultaneous elimination of excessive welfare

The principles of tax law equality in the context of direct taxation 75
inequalities in a given society as well as the elimination of acute poverty and
destitution, from which numerous social groups suffered, and which could not be
alleviated by the market distribution of commodities and revenues. He saw the
solution of these problems in his principles of tax law equity, that is, equality,
universality and the ability to pay. Just like J.-B. Say, Wagner supported pro-
gressive tax rates in the tax system, which meant bestowing on taxation a wel-
fare function. Apart from the fiscal and welfare function of taxation, Wagner
saw in taxes the tools with which the state can intervene in economy and poli-
tics. This meant a rejection of economic liberalism and market automatism.
These additional tasks of the state together with the realization of the ideals of
welfare and social equality demanded increased state expenditure. The means for
this expenditure should be provided by the universal tax and the reasonable,
progressive tax rates for high revenues, with a simultaneous protection of the
source of tax and a retention of the motivation to profit [Sosnowski 2012, p. 61].
Table 1 depicts all of Wagner’s tax law principles.
Table 1. The classification of tax law principles according to A. Wagner
Category Principles
Fiscal Stability
Efficiency
Flexibility
Economic The inviolability of the taxpayer’s property
The creation of motivation
The rule of one-off taxation
Social justice Universality
Equality
Technical Low-costs of taxation
Convenience
Certainty
Accuracy and transparency of tax law
Source: Based on Piontek [2003, p. 106].
The principle of tax law equity contains the principles of “vertical equity”
and “horizontal equity”. Horizontal equity means that “similarly situated taxpay-
ers should be treated equally” [Owsiak 2013, p. 190]. Developed by R.A. Mus-
grave, this principle thus has clearly a normative character. According to the
principle of equity, tax burden should be equally distributed over persons in
equal financial situation. Analogically, the principle of vertical equity demands
that “dissimilarly situated taxpayers should be treated unequally” [Owsiak 2013,
p. 190].

Magdalena Jarczok-Guzy
76
3. Research methods and procedure
In the sphere of direct taxation, the member states of the European Union
enjoy a considerable degree of formal independence. Nevertheless, in a consid-
erable number of instances it transpires that the ruling of the Court of Justice of
the European Union intervenes in tax regulations of its member states. When
these regulations impede the freedom of internal market, the ruling of the Court
obliges the state member in question to adjusts its legislature to the EU model.
The principle of free movement (except for the free movement of capital)
does not straightforwardly concern the issues of direct taxation. However, de-
spite a considerable autonomy of the EU member states in developing tax regu-
lations, the Court of Justice of the European Union with consequence rules ac-
cording to EU law, whereby the said autonomy may be limited to some degree.
Therefore, the member states should exercise their autonomy respecting the EU
legislature, and in particular for the free internal market [Lipniewicz 2015, p. 97].
Since the times of “greater equity” promoted by A. Smith, D. Ricard, J.S. Mill,
A. Wagner, direct taxes are treated as the proper means for its achievement. The
measures of the ability to pay are property and revenues. At the same time, pro-
gressive taxation has been shown to constitute one of the conditions for the fair
distribution of revenues. The problem of how to calculate the proper tax rate,
which depends on property and revenues, and which should take into considera-
tion the taxpayers’ ability to pay, has been the subject for debate among the
greatest economists. In the first place, what needs to be established is a careful
definition of income and the application of a specific tariff to a given tax base
[Gomułowicz 2013, p. 53].
In the Polish tax system, a taxpayer conducting non-agricultural business
activity possesses a choice between common tax rules and simplified tax rules.
The common tax rules include the tax on revenues according to the tax scale and
the flat rate tax. The simplified forms of taxation include the lump sum tax from
registered income and the tax card. The right to choose the form of taxation al-
lows entrepreneurs to plan their tax strategy and to optimize the taxation burden
[Ciupek 2013, p. 76].
The taxation of income according to the progressive tax scale consists in
correlating tax burden with the level of income. Tables 2 and 3 represent the
income thresholds and tax rates applicable until the end of 2016 and from the
beginning of 2017.

The principles of tax law equality in the context of direct taxation 77
Table 2. The tax scale applicable until the end of 2016
Taxable base in PLN Tax
more than up to
85,528 18% minus tax reducing amount of 556.02 PLN
85,528 14,839.02 PLN + 32% of the surplus over 85,528 PLN
Source: Based on [Ustawa z dnia 26 lipca 1991 r. o podatku dochodowym od osób fizycznych].
Table 3. The tax scale applicable from the beginning of 2017
Taxable base in PLN Tax
more than up to
85,528 18% Minus tax-reducing
amount
85,528 15,395.04 PLN + 32%
surplus over 85,528 PLN
Source: Based on [Ustawa z dnia 26 lipca 1991 r. o podatku dochodowym od osób fizycznych].
The changes, being in force from 1 January 2017 in The personal income
tax act, have introduced a new way of calculating the tax reducing amount. The
uniform amount of 556.02 PLN, valid for the progressive tax rate, has been re-
placed by a movable tax reducing amount correlated with the amount of income
earned. The detailed rules for calculating this reducing amount are given in arti-
cle 27 (1a) of The ersonal income tax act.
Within the tax scale presented above, and additionally to the tax reducing
amount, the taxpayer may further reduce the tax burden by taking advantage of
a number of tax credits. The Polish legislator offers two possibilities of applying
tax credits to personal income tax: they may be deductible from the amount of
tax or from the amount of income. The use of these various options yields differ-
ent results in the reduction of tax burden. Tax credits deductible from income
result in a lower tax base, and the tax credits deductible from the amount of tax
directly decrease the amount of tax paid, as it is deducted from the amount of tax
levied. The following tax credits may be deducted from the amount of income:
the mandatory social security contributions, the credits for charitable donations,
the expenses for rehabilitation of disabled persons, the Internet tax credit, the
research and development credit, the recovery of sums paid but not due, tax
credit for an individual retirement security account (IKZE) and housing expendi-
ture credit due on the basis of acquired rights [Palczewska 2014, p. 50].
The flat rate tax is a method of tax calculation according to which the
amount of tax due is directly proportional to the amount of tax base. This type of
tax has also been referred to as a uniform tax or proportional tax. The amount of
this tax is calculated based on a single tax rate, which means that all taxpayers to
whom this rate applies sacrifice the same proportion of their income in the form
of the tax paid. A single rate makes the tax flat because it is not correlated with

Magdalena Jarczok-Guzy
78
any tax-free amount of income or tax credits. The appearance of a tax-free
amount of income causes progression to appear in taxation. In 2004 the Polish
legislator allowed for a choice of 19 per cent flat tax levied on non-agricultural
business activity income. The taxpayer is the subject who chooses the manner of
taxation. Persons applying the flat tax to their income may not take advantage of
almost all the available tax credits and reductions. Such taxpayers may not de-
duct a tax-free amount of income nor use the joint assessment of income tax
with a spouse, nor calculate their tax as a single-parent. Yet, they are not de-
prived of the tax abolition relief, and of the right to deduct pension contributions
as well as health insurance contributions [Stanek 2016, p. 694].
Taking into account current laws and regulations of the personal income
tax, what follows is a comparative analysis of the amounts of taxes paid by two
taxpayers conducting business activity in the sphere of construction services. For
the sake of transparency of analysis, it has been assumed that those taxpayers
earned the same level of income in 2016 and 2017. Their respective revenues
and the deductible costs vary, but the final amount of income – the taxable base –
is the same. The tax due by each taxpayer is calculated according to the proper
tax scale and the flat rate in force in each of the tax years analyzed. It is assumed
that the taxpayer A calculates his taxes with the use of the flat rate, and that the
taxpayer B with the use of the progressive tax scale. The tax simulation is con-
ducted with the assumption that the amount of income, for example’s sake, is the
same. It is worth noticing at this point that both taxpayers may take the ad-
vantage of deducting their mandatory social security contributions from their
income and of deducting their health insurance contributions from the amount of
tax due. The following simulation takes these deductions into consideration.
According to the information made available by the Polish Social Insurance
Fund [ZUS 2017], the taxpayer regularly paying pension contributions as well as
voluntary health insurance contributions may deduct from income 9,257.23 PLN
in 2016 and, as it has been anticipated, 9,711.67 PLN in 2017. In turn, the de-
ductible amount of health insurance contribution (7.7%) is, respectively, 2,977.62
in 2016 and the anticipated 3,064.71 PLN in 2017. The tax rates according to the
tax scale and flat tax have been already discussed in section 1 of this article. To
simplify matters, it has been assumed that none of the taxpayers takes advantage
from other tax reliefs and credits.

The principles of tax law equality in the context of direct taxation 79
4. Research findings and discussion
4.1. The principle of tax law equality on the example
of progressive tax and flat tax in 2016 and 2017
The first comparative analysis concerns income in 2016 and the assumed
revenues and costs are represented in the table 4.
Table 4. Revenues and costs of revenues for taxpayers A and B in 2016
Taxpayer Revenues Costs of revenues Income
A 210,000 PLN 110,000 PLN 100,000 PLN
B 190,000 PLN 90,000 PLN 100,000 PLN
The Table 5 gives the results of calculations of the tax base and tax due for
both analyzed income scenarios.
Table 5. The calculation of the tax due for the taxpayer A and B in 2016
Taxpayer Number A – flat rate tax B – tax scale
Income 1 100,000 PLN 100,000 PLN
Social security contribution 2 9,257.23 PLN 9,257.23 PLN
Tax base (1-2) 3 90,742.77 PLN 90,742.77 PLN
Tax rate 4 19% 18% and 32%
Tax before the deduction of health insurance 5 17, 241.17 PLN 16,507.82 PLN
Health insurance contribution 7,75% 6 2,977.62 PLN 2,977.62 PLN
Tax due (5-6) 7 14,264 PLN 13,530 PLN
In order to calculate the amount of tax before deduction of health insurance,
the following formulas should be applied: 90,743 PLN x 19% = 17,241.17 PLN
for A and 14,839.02 PLN + 32% (90,743 − 85,528) = 16,507.82 PLN for B. In
the analysis of the results of the calculations above, it is possible to unequivocal-
ly state that the tax burden of the two taxpayers with the same tax base is not
equal. Taxpayer A, using flat rate taxation, will pay a higher tax by 734 PLN
than the taxpayer using the tax scale. The same analysis has been applied for the
anticipated tax year of 2017. Taxpayer A, using flat rate taxation, will calculate
his tax in the same way as in 2016 because tax regulations have not been amend-
ed for the flat rate tax. However, taxpayer B, calculating his tax according to the
tax scale, which has been amended, will have to recalculate his tax due. In 2017
social security contributions have also been altered. Table 6 illustrates the simu-
lated sums for the tax year of 2017.

Magdalena Jarczok-Guzy
80
Table 6. The calculation of the tax due for the taxpayer A and B in 2017
Taxpayer Number A – flat rate B – tax scale
Income 1 100,000 PLN 100,000 PLN
Social security contribution 2 9,711.67 PLN 9,711.67 PLN
Tax base (1-2) 3 90,288.33 PLN 90,288.33 PLN
Tax rate 4 19% 18% and 32%
Tax before deduction of health insurance 5 17,154.72 PLN 16,426.04 PLN
Health insurance contribution 7,75% 6 3,064.71 PLN 3,064.71 PLN
Tax due (5-6) 7 14,090 PLN 13,361 PLN
Since 2017, as the Polish legislator has established, the amount deductible
from income (the so-called tax free amount) will vary according to the amount
of income earned and will be calculated for each individual taxpayer. In the dis-
cussed example, the tax base is 90,288 PLN. This amount falls within the range
of 85,528-27,000 PLN. This range requires proper calculations of the tax-free
amount. These calculations have been carried out on the basis of the formula
specified by The personal income tax act in article 27 (1a) subparagraph 4 [Ustawa
z dnia 26 lipca 1991 r.].
*556.02 PLN – (556.02 PLN x(90,288-85,528):41,472 PLN) =
= 556.02 PLN – 63.82 PLN = 492.20 PLN
In order to calculate the amount of tax before deduction of health insurance,
the following formulas should be applied: 90,288 PLN x 19% = 17,154.72 PLN
for A and 15,395.04 PLN + 32% (90,288 − 85,528) – reducing amount of 492.20
PLN *=16,426.04 PLN for B. Table 6 shows that, despite the legal changes in
the manner of calculations of the tax reducing amount, the taxpayer following
the flat rate tax will still pay more by 729 PLN than the taxpayer who follows
the tax scale. This is not a substantial difference when compared to the tax year
of 2016. The table below represents the percentage of tax burden in the income
earned by the taxpayers, calculated according to the following formula: (tax due
for a given year/ income in a given year) x 100.
Table 7 shows that in comparison to the tax year of 2016, the percentage of
tax in the total income remained virtually unchanged, which is also confirmed in
the calculations presented in the previous tables. However, more substantial
differences arise if we compare the percentage of tax due in the different forms
of taxation, the progressive scale tax and the flat rate tax – in 2016 it is 0.8% and
in 2017, 0.7%. Assuming the same income after the change of tax law, the dif-
ference decreased by 0.1%. Similarly interesting results could certainly be yield-
ed for an income in the amount of 200,000 PLN.

The principles of tax law equality in the context of direct taxation 81
Table 7. The percentage of the tax due in the taxpayers’ income
Taxpayer/Year A – flat tax rate B – progressive scale
2016 14.3% 13.5%
2017 14.1% 13.4%
There exists yet another form of taxation of income for natural persons
conducting business activity. It is a lump-sum taxation for some sources of reve-
nues earned by natural persons. Having chosen this type of taxation and having
met a number of limitations and restrictions, the taxpayer is entitled to choose
between a fixed lump sum on registered revenues or the tax card. The latter is
applied by the Tax Office, and the income of the taxpayer has no influence on its
amount. A fixed lump sum tax on registered revenues is calculated from the
revenue considered as the tax base. This tax calculation will again be applied to
our example of taxpayer A and taxpayer B, with the assumption that their busi-
ness activity is construction services, which in turn requires the application of
5.5 % tax rate [Ustawa z dnia 20 listopada 1998 r. o zryczałtowanym podatku
dochodowym...]. Table 8 illustrates the results.
Table 8. Lump sum income tax on registered revenues in 2016
Taxpayer Number A B
Revenues 1 210,000 PLN 190,000 PLN
Social security contribution 2 9,257.23 PLN 9,257.23 PLN
Tax base (1-2) 3 200,742.77 PLN 180,742.77 PLN
Tax rate 4 5.5% 5.5%
Tax before deduction of health insurance 5 11,040.87 PLN 9,940.87 PLN
Health insurance contribution 7.75% 6 2,977.62 PLN 2,977.62 PLN
Tax due (5-6) 7 8,063 PLN 6,963 PLN
In order to calculate tax in this case before deduction of health insurance the
following formulas should be used: 200,743 PLN x 5.5% = 11,040.87 PLN for
A and 180,743 x 5.5% = 9,940.87 PLN for B. Taxpayer A under the lump sum
income tax would pay 6,201 PLN less tax then under the flat rate tax. Taxpayer
B, in turn, would reduce his tax by 6,567 PLN to that he would pay under the tax
scale. This last point of our analysis is key for the argument of this article. The
differences in tax payed under the flat tax rate and under the tax scale seem in-
significant in comparison to the amount paid under the lump sum tax on regis-
tered income. It is this discrepancy between taxes paid with accordance to com-
mon principles and the lump sum tax that raises doubt as to the degree of
application of tax law equality in the Polish taxation of income earned by natural
persons.

Magdalena Jarczok-Guzy
82
5. Conclusions
This article presents the problem of tax law equality in the context of eco-
nomic theories developed by selected economists. This issue has always been
a topic of contention. If we make the assumption that tax law equity appears
when identically situated taxpayers pay the same amount of tax, we can draw
a tentative conclusion that the Polish tax system is not at all times equitable. As
far as the scale tax and the flat tax yield similar results in the amount of tax due,
the choice of the lump sum tax has disturbed this equality. Each of the taxation
models presented is characterized by a different tax burden, but also by different
tax exemptions and reliefs, which are heavily limited in the case of the lump sum
tax. The tax itself is much lower when the number of exemptions and reliefs is
most varied. In the examples presented above, the tax due has been calculated
with the assumption that taxpayer A and B did not use any of them. The intro-
duction of exemptions and reliefs would drastically complicate our analysis, as
the very criteria for selection would present a problem. The following conclu-
sion thus suggests itself: it is the problem of exemptions and reliefs which hin-
ders the comprehensive and conclusive analysis of the issue of tax law equality.
In the cases analyzed, only the social security contributions and health contribu-
tions have been included, as they are deductible in the yearly tax return submit-
ted to The Tax Office. The question of which exemptions and reliefs the taxpay-
er will choose to apply beside these two depends on individual choices.
Through empirical research on various forms of income tax in Poland, this
article has sought to contribute to the literature on tax law equality. The conclu-
sions of this analysis may be further used by researchers and practitioners who
are concerned with the constant need of perfecting the system of taxation in its
realization of the principle of tax equality. The results of this study may be found
universally applicable in any country. Further research should be aimed at simi-
lar assessments of income tax in other countries.
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