dr. hab. iur. Krystyna NiziołUniversity of Szczecin

Faculty of Law and Administration

The economic and legal consequences between choosing

public debt or increasing tax burden

Foggia, 25th September 2014

The Plan Definition of public debt Economic aspects of public debt The choice between public debt and taxation Taxation in the UE Taxation in the UE The measure for income inequality – the Gini coefficient The measure for income inequality – the Gini coefficient

and the Lorenz Curveand the Lorenz Curve

Economic definition of public debt

Definition of public debt in the economic literature e.g.:

the sum of the state’s borrows which are to repay

D. Begg, S. Fischer, R. Dornbusch, Ekonomia, [Economics] t. 2, Warsaw 1995, p. 68.

financial liabilities of the authorities (i.e. state, municipal and local) connected with loans,

S. Owsiak, Finanse publiczne. Teoria i praktyka, [Public Finance. Theory and Practise], Warsaw 2006, p. 330.

Economic definition of public debt

Definition of public debt in the Polish finance literature e.g.:

aggregated and consolidated value of the liabilities of entities belonging to the public sector (from different titles)

M. Bitner, E. Chojna – Duch, Dług publiczny i deficyt… [in:] Finance Law, E. Chojna-Duch, H. Litwińczuk (ed.), Warsaw 2007, p. 121.

Definition of public debt

In the EU financial law the term ‘public debt’ may be defined in connection with excessive deficit procedure (EDP).

The excessive deficit procedure is applied to all European Union member states[1].

[1] The pinpointing of this procedure was stated in the Stability and Growth Pact applied by all EU member states. Though, its restrictive part does not refer to states which are not members of the Economic and Monetary Union, being subject to derogation in that respect, L. Oręziak, European Union Finances, Warsaw 2004, p. 59-66.

It was established by Article 126 of the Treaty on the Functioning of the European Union (further referred to as TFU).

One of the reference values of this procedure is the 60% criterion for the ratio of government debt to gross domestic product at market prices (GDP), set in Article 1 of the Protocol regarding the excessive deficit procedure and annexed to TFU.

Definition of public debt in the EU

Constitution of the Republic of Poland bans on contracting loans and granting guaranties and sureties resulting in the public debt exceeding 3/5 of GDP (Article 216(5)).

*The Public Finance Sector Debt Management Strategy in the years 2014-2017, Warsaw 2013, passim.

Public debt – basic legal regulations (Polish regulations)Constitution of the Republic of Poland

Budget deficit – the difference between income and expenditure of the state budget.

Economic aspects of public debt

Deficit of the public finance sector (equivalent of general government sector in European Union Law) - negative difference between public income and public expenditures of the public finance sector (after consolidation i.e. after eliminating cash flows between entities belonging to this sector).

Economic aspects of public debt

The principle of balanced budget – the budget balance is the difference between budget’s revenues and spending. A positive balance is called a budget surplus, and a negative balance is called a budget deficit.

Economic aspects of public debt

Budget expense should equal budget incomes over the course of an accounting period, usually one year.

Economic aspects of public debt

Economic consequences of public debt and taxation are similar; choosing one of them depends on, inter alia, contemporary rate of taxation, the spending we want to finance in this way and its economic consequence.

Economic aspects of public debt

Incurring public debt inter alia[1]: we receive financial means at once and the cost

of servicing public debt is spread in time, but it usually leads to increase of tax rate,

creditors can choose the amount of obligations they want to buy,

creditors can choose the time of buying obligations,

transfers budget incomes form tax to the creditors – in form of debt servicing costs.

[1] R. Rybarski, Nauka skarbowości [The Science of Finanse], Warsaw 1935, p. 363-364; P.M. Gaudemet, J. Molinier, Finanse publiczne, [Public Finance], Warsaw 2000, p. 358-363.

Economic aspects of public debt

Incurring public debt inter alia[1]: debt burden for the next generations, causes decrease of global spending power, can be an instrument of changing the structure of

economy (e.g. financing of capital spending).

[1] R. Rybarski, Nauka skarbowości [The Science of Finanse], Warsaw 1935, p. 363-364; P.M. Gaudemet, J. Molinier, Finanse publiczne, [Public Finance], Warsaw 2000, p. 358-363.

Economic aspects of public debt

Government debt to GDP ratio (source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22072014-AP/EN/2-22072014-AP-EN.PDF)

Changes in government debt to GDP ratio (source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22072014-AP/EN/2-22072014-AP-EN.PDF)

The choice between public debt and taxation depends on e.g.:

the contemporary economic situation, the amount of public debt, the aims of economic policy.

The choice between public debt and taxation

‘The best prove for original, different character of both kinds of financing – public loan and tax – is that the choice one of them is the most delicate problem of the finance policy. Its solution depends on the justification of the reason of taking the public loan.’[1]

[1] P.M. Gaudemet, J. Molinier, Finanse publiczne [Public Finance], Warszawa 2000, p. 363.

The choice between public debt and taxation

Taxation[1] inter alia: - lack of cost connected with servicing of public debt, - tax is obligatory public imposition, - after paying a tax taxpayer can spend less money for

buying goods (his disposable income is smaller), - exceeding the limit of taxation burden could cause the

decrease of budget’s tax incomes (dependence illustrated by curve of Laffer).

[1] H. Dalton, Zasady skarbowości, [The Principles of Public Finance] Łódź 1948, p. 216; P.M. Gaudemet, J. Molinier, Finanse publiczne [Public Finance], Warszawa 2000, p. 358-363.

TaxationTaxation

The Laffer Curve (source:http://www.economicsonline.co.uk).

Taxation[1] inter alia: - impoverishment of taxpayer, - tax burden of contemporary generation, - increase of indirect taxation is inflationery - tax

shifting to prices of goods (e.g. VAT).

[1] H. Dalton, Zasady skarbowości, [The Principles of Public Finance] Łódź 1948, p. 216; P.M. Gaudemet, J. Molinier, Finanse publiczne, Warszawa 2000, p. 358-363.

Taxation

Taxation

Tax burden – the total amount of tax paid by an particular group of people, an industry, etc., especially as compared to what other groups, industries, etc., pay.

 

Taxation in the UE - Taxation in the UE - revenue structure by type of tax (Taxation trends in the EU, Luxembourg 2014, p. 22)

Taxation in the UE - Taxation in the UE - revenue structure by type of tax (Taxation trends in the EU, Luxembourg 2014, p. 22)

Taxation in the UE - Taxation in the UE - revenue structure by type of tax (Taxation trends in the EU, Luxembourg 2014, p. 22)

Implicit tax rate on labour

Implicit tax rate on labour - ratio of taxes and social security contributions on employed labour income to total compensation of employees.

The Lorenz Curve (source: http://www.datavis.ca/milestones/index.php?group=1900%2B)

The Gini coefficient

The most widely used measure for income inequality is the Gini coefficient which measures the area between the Lorenz curve (which plots the cumulative distribution of income - the percentage of income going to a given percentage of the population, when the latter is ranked according to income levels) and the line of complete equality (the 45-degree line, where a given percentage of income goes to the same percentage of population).

The Gini coefficient

The maximum possible value of the Gini coefficient is 1 (when one individual has all the income in a country), while the lowest value is 0 (when everyone has the same income).

The Gini coefficient is shown together with 95% confidence intervals. In the EU, the value of the Gini coefficient in 2010 ranged from 0.24 (in Slovenia and Sweden) to 0.35 (in Bulgaria and Latvia). Other countries at the top of the ranking were Portugal (0.34) together with another five countries, where the value of the Gini coefficient was around 0.33.

(source: http://ec.europa.eu/social/main.jsp?catId=1050&intPageId=1870&langId=en)

The Gini coefficient

The Netherlands and Czech Republic have Ginis that are only slightly higher than Slovenia's (around 0.25). Other countries can be broadly divided into two groups, with France, Southern European countries, the Anglo-Saxon countries and some EU12 countries (Baltic states, Poland, Romania and Bulgaria) having Ginis of between 0.31 and 0.33, and other EU15 countries having values of between 0.25 and 0.29.

(source: http://ec.europa.eu/social/main.jsp?catId=1050&intPageId=1870&langId=en)

Gini coefficients and 95% confidence intervals for disposable household income in EU Member States, 2010 income year (source: http://ec.europa.eu/social/main.jsp?catId=1050&intPageId=1870&langId=en)

Gini coefficient (source: http://www.economist.com/node/17929013#sthash.vzJME5B8.dpbs)

Thank you for your attention.

Erasmus at Faculty of Law and AdministrationUniversity of Szczecin

Faculty Law and Administration Erasmus Coordinator

dr. hab. iur. Krystyna Nizioł email: kniziol@mec.univ.szczecin.pl