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Poland: Difficulties Arise In Continuing Radical Reforms

Prague, 5 November 1998 (RFE/RL) -- Addressing Solidarity's National Congress in September (25th), Polish Prime Minister Jerzy Buzek said that his Solidarity-affiliated government had done more in one year than its left-wing predecessor did in four.

Buzek noted his government had launched major reforms in administration, education, pension, health care, and taxation.

Poland's current cabinet, formed in a coalition of the Solidarity Electoral Action (AWS) and the Freedom Union (UW), doubtless deserves much credit for its efforts, particularly when compared with the cautious approach of the previous, left-wing government of the Democratic Left Alliance (SLD) and the Polish Peasant Party.

But Buzek's assessment loses some of its luster if one takes a closer look at what it has actually done.

Hailed as a radical step toward the decentralization of power, administrative reform nearly failed when it came to determining the number and competence of provinces. The government's initial proposal of dividing the country into 12 economically viable regions failed when faced with opposition by local communities, the parliamentary opposition, the president, and even some coalition deputies who opted to defend local rather than government interests.

In the end, 16 provinces were created, but with severely reduced prospects for economic self-sufficiency.

The reform of the health care system has also raised doubts and apprehensions. It sets up so-called patient funds to be financed by employees' mandatory contributions equaling 7.5 percent of their gross income. Opponents of the reform argue that the contribution should be at least 11 percent in order to support the health care system adequately.

Tax reform, which Buzek mentioned as one of his cabinet's achievements, serves, in fact, to highlight the political discord within the government coalition and may be viewed as a frustrated attempt to carry out radical change in present-day Poland.

Originally, UW leader Leszek Balcerowicz, who is deputy premier and finance minister in Buzek's cabinet, proposed the reform. Balcerowicz is the architect of the so-called "shock therapy" in 1990 that introduced free market policies and put the country on the path of sustained economic growth.

Earlier this year Balcerowicz prepared a white paper on tax reform --another form of "shock therapy" or a "tax revolution." It proposed to abolish the current three-tier tax system and gradually introduce a flat income tax rate of 22 percent in 2000. Poland's current tax rates are 19, 30, and 40 percent, depending on income.

In 1999, individual tax rates were to be set at 22 and 32 percent, with all tax exemptions to be abolished. In order to soften the impact of the reform on the poorest groups in society who would see their tax rate rise from 19 percent to 22 percent, Balcerowicz envisioned an increase in tax-free income. Corporate taxes were to be lowered from the current 36 percent to 22 percent in 2002.

The reforms were conceived as a measure to stimulate the economy. High taxes kill an entrepreneurial spirit, Balcerowicz argued. And introducing a flat tax rate would boost economic growth, release the as yet untapped reserves of social energy, and create new jobs. Balcerowicz's proposal provoked harsh criticism from both the left and the right of the political spectrum. The post-communist SLD called it "immoral," saying it benefited the wealthy and punished the middle and low income groups. The AWS, arguing that the tax system should be "family-friendly," pushed for tax exemptions for families with a large number of children.

The cabinet, dominated by AWS politicians, finally rejected the reform. Last month, the government submitted to the parliament a tax reform bill providing only for the abolition of tax relief for private investors and those building their own homes and for the reduction of the corporate tax from 36 percent to 32 percent. More radical measures have been postponed until 2000.

Balcerowicz's failure may suggest that present-day Poland may already be, for largely political reasons, beyond the stage where it is possible to launch new "economic revolutions."