Tax Reliefs as Safeguards Against Excessive Taxation

Abstract

Theoretical background: Literature indicates that high marginal tax rates elicit significant resistance from taxpayers, contributing to income underreporting and tax evasion. Taxpayer responses vary, as each individual possesses a distinct Laffer curve. When fiscal burdens are perceived as excessive, legal tax avoidance strategies are favored by taxpayers, who view them as ethically permissible, unlike illegal tax evasion, which is considered hazardous. If excessive burdens drive taxpayers into the shadow economy, long-term adverse consequences may arise, including the hysteresis effect (persistence of tax evasion driven by learning) and the snowball effect (social conformity leading to increased cheating). Tax reliefs, particularly deductions from the tax base, diminish progression and serve as a mechanism to mitigate incentives for illegal evasion.

Purpose of the article: This article aims to analyze the extent to which tax reliefs, specifically those necessitating additional expenditures, can function as mechanisms to reduce incentives for tax evasion. The study examines the correlation between the number of taxpayers transitioning to the second tax bracket and the utilization of specific reliefs to identify those safeguards against excessive taxation levels.

Research methods: The research utilized annual Personal Income Tax (PIT) settlement data published by the Ministry of Finance, spanning the period from 2007 to 2023. The analysis differentiated between lump-sum reliefs (automatic, e.g., child relief) and deductions (contingent upon expenditure, e.g., IKZE, disability expenses, donations). Due to the non-stationarity of the initial time series data, the study assessed the relationship by analyzing the correlation between the change (first difference) in the number of taxpayers in the second tax bracket and the change in the number of individuals claiming specific tax reliefs.

Main findings: The analysis revealed a strong, statistically significant correlation between the transition to the second tax bracket and the increased utilization of the disability relief, the Individual Retirement Security Account (IKZE) relief, and deductions for donations for religious purposes. Conversely, no significant correlation was found for automatic reliefs (child relief) or deductions not primarily motivated by tax incentives (blood donation relief). The findings indicate that taxpayers in the higher bracket favor deductions for expenses they would have incurred anyway (disability relief) or for those linked to additional individual benefits (IKZE). Tax benefits become valuable and justify the associated costs only at elevated marginal tax rates. The utilization rates of such deductions can serve as a useful indicator for fiscal authorities to evaluate taxpayers' perceptions of their tax burden.