Eastern Europe
Taxing entrepreneurs

In Discussion Paper No. 1166, Maciej Grabowski and Stephen Smith consider the taxation of small business and entrepreneurial incomes in Poland. In both transition economies and existing West European market economies, the efficient taxation of entrepreneurial incomes presents particular difficulties, partly due to the absence of clearly defined `borderlines', for example between labour and capital incomes, and between business expenses and private consumption. The treatment of income volatility, of social insurance contributions, and of inheritance by the tax system can easily have a non-neutral impact on the balance between entrepreneurial investment and other investments. The paper considers how these problems could be addressed, and outlines a number of issues specific to the taxation of entrepreneurs in transition economies.

The most severe transition difficulties concern the lack of good valuation evidence from market transactions. One practical implication of this is that floorspace taxes and other non- value measures should be preferred to real estate taxes wherever possible. The shortage of administrative resources may also have implications for the design of policy. In particular, scarce administrative resources should be concentrated on large revenue sources, leaving smaller firms subject to simply-administered presumptive and lump-sum taxes. Policy should also take account of longer-run objectives and constraints. The opportunity exists to make decisions now regarding the long-run structure of taxes on capital incomes and assets without the major adjustment costs that such decisions will involve later, once the private sector has adjusted to the existing tax regime.

The Taxation of Entrepreneurial Income in a Transition Economy: Issues Raised by Experience in Poland
Maciej Grabowski and Stephen Smith

Discussion Paper No. 1166, March 1995 (FE)