Flat Tax: The Case of Albania

Country without taxes and dues

In developing and implementing the tax policy towards the people, the Party of Labour of Albania was always aware that taxes are a temporary historical category. Therefore it prepared, step by step and with the utmost care, all the necessary conditions to abolish it. On November 8, 1969 very important measures were taken to eliminate the system of taxes and other direct charges for the population completely. This is because the area of the socialist relations of production had expanded and the productive forces of the country developed rapidly. The share of taxes and fees of the population in the income of the state budget was 92 percent in the fiscal year 1945-1946 (the first year of liberation), in 1950 it had fallen to 12.6 percent and to 2.7 percent in 1960; 1969 it was only 0.1 percent. 

The process in which the taxes and fees have been abolished for the people did not take place at once and not in an administrative process. The taxes were abolished gradually, while simultaneously the socialist sector of the economy developed and the class structure of the country changed. 

Article 31 of the Constitution states: “The citizens pay no taxes and fees.”

from Albanian Socialist Pamphlet

Albanian tax system after 2007

The Albanian tax system does not meet the equity, transparency and predictability criteria of a well functioning tax system yet. It contains significant opportunities for corruption, which further damages the accountability and credibility of the system. Nevertheless, there might be slight change after January 1, 2008. In a move aimed at creating a friendlier investment climate and making the economy more competitive, the Albanian government approved a fiscal package that included implementing a 10% flat tax — the lowest level in Southeast Europe. Flat tax was put into effect on personal and corporate income, replacing a system with rates from 10-30% on personal income and 20% on corporate income. The result? Tax revenues went up 18.4%, even though 2008 was a crisis year worldwide.

Flat tax and Labour Informality

However, there are voices saying that the flat tax implemented since January 2008 has not contributed in the reduction of labour informality but rather the increases in regular wages have played an important role in convincing the individuals to move to regular market. The rationale behind this results is related to the higher marginal tax rates the flat tax implies for the whole sample. The flat tax of 10% is certainly the lowest applied in the world but leads to higher average taxes than the previous one save the labour income remain unchanged. Furthermore, we simulate different tax penalty rates and probability detection scenarios and find that controls and audits are more efficient than fines in inducing people to switch from the informal to formal labour market. Finally, these results suggest that a kind of progressivity should be reinserted to the taxation system without affecting the attractiveness of the simplicity exercised by the flat tax.

here

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s