The economic and legal consequences between choosing public debt or increasing tax burden
Foggia, 25th September 2014

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

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Definition of public debt in the economic literature
.:
 the sum of the state’s borrows which are to repay

D. Begg, S. Fischer, R. Dornbusch,
t. 2, Warsaw 1995, p. 68.

 financial liabilities of the authorities ( state, municipal and local) connected with loans,
.
S. Owsiak, Finanse publiczne. Teoria i praktyka, [ Public Finance.
Theory and Practise ], Warsaw 2006, p. 330.

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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
H. Litwińczuk (ed.), Warsaw 2007, p. 121
.
… [in:] Finance Law, E. Chojna-Duch,

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[1]
The pinpointing of this procedure was stated in the Stability and
European Union Finances , Warsaw 2004, p. 59-66.

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

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.

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

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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).

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

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

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

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

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

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The choice between public debt and taxation depends on
.:
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 the contemporary economic situation, the amount of public debt, the aims of economic policy.

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

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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.

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

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 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.

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

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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 45degree line, where a given percentage of income goes to the same percentage of population).

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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)

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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)

Thank you for your attention.

Faculty Law and Administration Erasmus
Coordinator dr. hab. iur. Krystyna Nizioł email: kniziol@mec.univ.szczecin.pl