Personal Income Tax PIT
Personal income tax (Polish: podatek dochodowy od osób fizycznych, PIT; German: Einkommensteuer; French: impôt sur le revenu des personnes physiques, IRPP) — a direct tax levied by the state on income derived by natural persons from all or specified sources within a defined accounting period. It constitutes the principal instrument of income redistribution in market economies and the primary source of budgetary revenue in the majority of developed states, simultaneously discharging fiscal, redistributive, and regulatory functions.
Theoretical Foundations
The conceptual underpinnings of income taxation derive from the ability-to-pay theory articulated by Adam Smith in The Wealth of Nations (1776), according to which subjects ought to contribute to the maintenance of government “in proportion to their respective abilities.” John Stuart Mill refined this conception through the principle of equal sacrifice, advocating progressive taxation as a method of equalizing the marginal utility of income.
Contemporary income tax theory rests upon the Schanz–Haig–Simons (SHS) comprehensive income concept, which defines income as the sum of the value of consumption and the net increase in wealth over a given period. Although theoretically coherent, this model encounters practical difficulties of implementation relating to the valuation of unrealized capital gains and imputed income.
Historical Genesis and Development
The Pre-Modern Period
Antecedents of the income tax reach back to antiquity. In Athens, the eisphora was levied upon wealthy citizens in time of war. This was, properly understood, a tax on wealth (capital) rather than on income in the modern sense — it was assessed on the estimated value of assets held and the capacity to make a financial contribution.
Medieval tax systems likewise relied principally on wealth and consumption taxes, the concept of regular taxation of income remaining unknown.
The Birth of Modern Income Taxation
The first regular income tax was introduced by the British Prime Minister William Pitt the Younger in 1799 as a measure to finance the wars against Napoleonic France. Though initially conceived as a temporary expedient, the tax was restored in 1803 by Henry Addington, again to fund military operations against France. The Pay As You Earn system (PAYE — the collection of income tax by the employer at source) was introduced in the United Kingdom in 1944 by Sir Paul Chambers, as an element of the modern fiscal architecture during the Second World War.
The United States introduced a federal income tax during the Civil War (Revenue Act of 1861); however, the Supreme Court struck it down as unconstitutional in 1895. Only the ratification of the Sixteenth Amendment in 1913 made possible the permanent establishment of a federal personal income tax.
The Twentieth-Century Expansion
The First World War transformed the income tax from an instrument encumbering elites into a mass levy. In the United Kingdom, the number of taxpayers grew from 1.2 million in 1914 to 7.8 million in 1918. The Second World War deepened this process — in the United States, the taxpayer base expanded from 4 million in 1939 to 43 million in 1945.
The postwar era was characterized by elevated marginal rates: between 1951 and 1963, the highest federal marginal rate in the United States stood at 91%. The neoliberal revolution of the 1980s, inaugurated by the Reagan and Thatcher reforms, brought radical rate reductions and the simplification of tax systems.
Legal and Economic Architecture
Personal Scope
The subjects of the tax are natural persons, with the tax obligation determined by reference to:
Tax residency — unlimited tax liability on worldwide income for residents, ascertained according to the criteria of: center of vital interests, habitual abode (typically 183 days), or citizenship (the United States, Eritrea).
Source of income — limited tax liability for non-residents on income derived within the territory of the state.
Substantive Scope
The object of taxation is income, defined as the surplus of revenues over the costs of their derivation. Tax systems diverge in their approach to the categorization of income:
The global system (comprehensive income tax) — uniform taxation of all income according to a single schedule, applied inter alia in the United States, Canada, and the United Kingdom.
The schedular system — separate taxation of distinct categories of income (employment, capital, business), characteristic of Romance-language jurisdictions and Latin America.
The dual system — progressive taxation of employment income coupled with proportional taxation of capital income, typical of the Nordic countries.
Computational Mechanisms
Rate structures are classified as:
- Proportional (flat tax) — a uniform rate irrespective of the level of income.
- Progressive — ascending marginal rates for successive income brackets.
- Degressive — a declining effective rate as income increases (rarely applied expressis verbis).
Tax preferences encompass:
- Tax-free allowances securing a subsistence minimum.
- Object-specific reliefs (for children, education, health, charitable donations).
- Deductions from income or from the tax liability.
- Exemptions for specified categories of income.
International Models
The Common Law Model
Characterized by a broad tax base, moderate progression, and an elaborate system of tax credits. The United Kingdom applies a Personal Allowance (GBP 12,570 in 2024) and three rate bands: 20%, 40%, and 45%. The American system is more complex, comprising seven federal brackets (10%–37%) together with additional state-level taxes.
The Continental Model
Distinguished by high marginal rates, a narrow tax base resulting from numerous exemptions, and integration with the social insurance system. France employs the family quotient (quotient familial); Germany applies the spousal splitting mechanism (Ehegattensplitting).
The Nordic Model
A dual taxation system featuring progressive personal income tax on employment income (up to 55.9% in Denmark) and proportional taxation of capital income (27%–42%). The model is characterized by a broad tax base and limited reliefs.
The Central and Eastern European Model
Dominated by flat-rate systems introduced during the transition period: Estonia (20%), Hungary (15%), Bulgaria (10%). These systems are distinguished by administrative simplicity but limited redistributive capacity.
Administration and Collection
Collection Mechanisms
Withholding tax at source — the predominant mechanism for employment income, under which the employer acts as the collecting agent. This system ensures regularity of receipts and minimizes tax evasion.
Self-assessment — applied to income from business activity and other sources. This mechanism requires active engagement by the taxpayer in the settlement process. In Poland, the system is supported by the availability of individual tax rulings providing legal certainty on contested questions.
Mixed systems — a combination of the foregoing, typical of the majority of contemporary systems, in which different categories of income are subject to different collection mechanisms.
Outlook
The future of personal income taxation will be shaped by demographic megatrends (aging populations), technological developments (artificial intelligence, blockchain), and social transformations (the precarization of labor). Further automation of processes, personalization of tax burdens, and integration with social transfer systems — within the framework of the negative income tax concept or universal basic income — are to be anticipated.
International harmonization, though politically fraught, is becoming a necessity in the face of increasing mobility and digitalization. OECD initiatives concerning minimum taxation and the exchange of tax information may prove to be precursors of broader coordination of personal income tax systems. Compliance with cross-border reporting obligations — including the CARF/DAC8 framework — further shapes the evolving landscape of international income tax administration.
The specialists at Skarbiec Law Firm provide expert assistance in determining the legal and tax consequences of personal income tax obligations arising from both completed and contemplated commercial transactions and business operations. We represent clients in dealings and disputes with the tax authorities — including tax audits, tax proceedings, and pending administrative court proceedings relating to personal income tax. We also represent clients in proceedings to obtain binding tax rulings from the tax authorities and provide advisory services on the use of available reliefs and exemptions.
Personal Income Tax PIT – Further Reading
Partial Return of Capital Contributions from Polish Partnerships
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
