How does fiscal policy affect government revenues?
Comparative approach between flat tax and progressive
tax systems from 2002 – 2015
Case Study: Albania
by
Alban Halili
Thesis submitted for the degree of Master of Science
Faculty of Economics and Administrative Sciences
Department of Banking and Finance
Epoka University
September 2015
Approval Page
Thesis Title
How
:
does
fiscal
policy
affect
government
revenues?
Comparative approach between flat tax and progressive tax
systems from 2002 – 2015 Case Study: Albania
Author
:
Alban Halili
Qualification
:
Master of Science
Program
:
Banking and Finance
Department
:
Banking and Finance
Faculty
:
Economics and Administrative Sciences
Thesis Date
:
September 2015
I certify that this thesis satisfies all the legal requirements as a thesis for the Master of Science (MSc)
degree.
(Assoc. Prof. Dr. Uğur Ergün)
Head of Department
I certify that I have read this study that is fully adequate, in scope and quality, as a thesis for the
Master of Science (MSc) degree.
(Assist. Prof. Dr. Abdulmenaf Sejdini)
Supervisor
ii
Exam Board of Thesis
Thesis Title
:
How does fiscal policy affect government revenues?
Comparative approach between flat tax and progressive tax
systems from 2002 – 2015 Case Study: Albania
Author
:
Alban Halili
Qualification
:
Master of Science
Date
:
September 2015
Members
(Title, Name and Signature)
……………………….
(Title, Name and Signature)
……………………….
(Title, Name and Signature)
……………………….
iii
Abstract
The aim of this thesis is to investigate two taxation systems: flat and progressive, and the role that
government has played in effective administration of tax collection. The analysis investigates the
effect that each of the taxation systems has on government revenues through time-period of fourteen
years. Data for this thesis were obtained from several official competent publishing institutions,
where worth mentioned: International Monetary Fund (IMF) and Ministry of Finance in Albania. In
the help of econometric program SPSS the data so obtained, were processed to answer the research
questions posed by this study.
In this context, this study answers several questions such as: Have the government used the right
policies to collect taxes? Which is the most appropriate taxation system to collect taxes? How
taxation system affects socio-economical life of individuals?
Furthermore, the study will have a break down the Albanian taxation system by having a deep
analysis to taxation system over years and how those policies have affected the economy. The
following material is intended to provide a more concise view of the concepts of the tax system and
fiscal reform in the social, economic, political and technological conditions of Albania, including the
flat and progressive tax treatments within the dynamic changes that have occurred in recent years.
Keywords: fiscal policy, flat tax, progressive tax, government revenue, taxation system
iv
Abstrakt
Qellimi i kesaj teze eshte investigimi i sistemeve te taksimit: i sheshte dhe progresiv dhe roli qe luan
qeveria ne administrimin efektiv te mbledhjes se taksave. Kjo u arrit duke bere nje analize te
imtesishme ne ndikimin qe secila prej tyre pati ne ardhurat e qeverise ne nje periudhe kohore prej
katermbedhjete vitesh (2002 – 2015). Te dhenat per kete studim jane marre nga disa institucione
pergjegjese per publikimin e te dhenave, ku vlejne per t’u permendur: Fondi Monetar Nderkombetar
(FMN) dhe Ministria e Financave. Ndersa per te analizuar te dhenat e marra eshte perdorur programi
ekonometrik SPSS nga te rezultatet e te cilit ky studim i pergjigjet pyetjeve kerkimore perkatese.
Ne kete kuader, studimi tenton t’i jape pergjigje pyetjeve si: A ka perdorur qeveria politikat e duhura
per te mbledhur taksat? Kush eshte sistemi i taksimit me i pershtatshem per te mbledhur keto taksa?
Si ndikon sistemi i taksimi ne jeten socio-ekonomike te individeve?
Me tej, ky studim do ta thelloje analizen e tij ne taksimin nder vite ne Shqiperi dhe si politikat fiskale
kane ndikuar ne ekonomi. Materiali ne vijim tenton te jape nje pamje me te qarte te reformave
fiskale dhe sistemit te taksave ne Shqiperi duke marre parasysh taksen e sheshte dhe progresive si
dhe ndryshimet dinamike gjate viteve te e fundit.
Fjale kyce: politika fiskale, taksa e sheshte, taksa progresive, te ardhurat e qeverise, sistemi i
taksimit.
v
ACKNOWLEDGMENTS
I gratefully acknowledge all of those who have contributed in preparation of this thesis. Especially,
my girlfriend, who has always been by my side during my accomplishments by work, sacrifice,
motivation and love. I owe to her many of my achievement, without her I would not be who I am
and where I am.
Special thanks goes to Professor Urmat Ryskulov who comprehensively helped me in preparation of
this thesis by his indefatigable work. He was a strong effort in preparation this dissertation and
overall academic achievement.
I would not forget to thank my family for their support in every aspect: financially, psychologically
and motivating me through any path of my life.
vi
DEDICATION
This thesis is gratefully dedicated to my mother for the sacrifice and love everything she gave me.
Her support has followed me in every step of my life; hope my achievements has make her proud
and peaceful.
vii
Table of Contents
Approval Page ....................................................................................................................................... ii
Exam Board of Thesis .......................................................................................................................... iii
Abstract ................................................................................................................................................ iv
Abstrakt ................................................................................................................................................. v
ACKNOWLEDGMENTS ................................................................................................................... vi
DEDICATION .................................................................................................................................... vii
List of Figures ....................................................................................................................................... x
List of Graphs ....................................................................................................................................... x
List of Tables ........................................................................................................................................ x
1
INTRODUCTION ........................................................................................................................ 1
1.1
Types of Taxation................................................................................................................... 3
1.2
Taxation and Revenue Collection .......................................................................................... 5
1.3
Changes in Tax System in line with European Integration .................................................... 6
1.4
Flat Tax .................................................................................................................................. 7
1.4.1
Taxes on personal income ............................................................................................... 8
1.4.2
Taxes on business profit.................................................................................................. 8
1.4.3
Flat Tax in Albania ......................................................................................................... 9
1.5
Progressive Tax .................................................................................................................... 11
1.5.1
Progressive Tax in Albania ........................................................................................... 12
1.6
Political and Historical Background of Albania .................................................................. 15
1.7
Overview of Budget Revenue .............................................................................................. 17
1.7.1
Direct vs Indirect Taxation ........................................................................................... 17
1.7.2
Revenue Performance from 1993 – 1998 ..................................................................... 20
viii
2
1.7.3
Revenue Performance for the period from 1999-2008 ................................................. 21
1.7.4
Revenue Performance in the period from 2009-2014 ................................................... 24
LITERATURE REVIEW ........................................................................................................... 26
2.1
World Scholars ..................................................................................................................... 26
2.2
Optimal Taxation.................................................................................................................. 30
2.2.1
Ramsey Theory ............................................................................................................. 30
2.2.2
Corlett-Hague Theory ................................................................................................... 32
2.2.3
Edgeworth Theory ........................................................................................................ 32
2.2.4
Mirrlees Theory ............................................................................................................ 33
2.3
3
4
Scholars in Albania .............................................................................................................. 34
DATA AND METHODOLOGY ................................................................................................ 37
3.1
Model 1 ................................................................................................................................ 38
3.2
Model 2 ................................................................................................................................ 38
3.3
Model 3 ................................................................................................................................ 39
3.4
Model 4 ................................................................................................................................ 39
EMPIRICAL FINDINGS ........................................................................................................... 40
4.1
Model 1 ................................................................................................................................ 40
4.2
Model 2 ................................................................................................................................ 41
4.3
Model 3 ................................................................................................................................ 42
4.4
Model 4 ................................................................................................................................ 43
CONCLUSION ................................................................................................................................... 44
Bibliography ....................................................................................................................................... 46
APPENDIX ......................................................................................................................................... 49
ix
List of Figures
Figure 1: Laffer Curve Source: (Laffer, 2004) ..................................................................................... 5
Figure 2: Excess Marginal Burden Source: (Rosen & Gayer) ........................................................... 31
List of Graphs
Graph 1: Value Added Tax Rate in the Region Source: (European Commision, 2015) .................... 13
Graph 2: Total Government Revenue and Tax Revenue (in billion ALL) ......................................... 17
Graph 3: Direct and Indirect Taxation (in billion ALL) ..................................................................... 18
Graph 4: Weight of Direct and Indirect Taxation to Government Revenue (in billion ALL) ............ 19
Graph 5: Government Revenue (in billion ALL) 1993-1998 ............................................................. 20
Graph 6: Tax Revenue as percentage of GDP 1999-2008 .................................................................. 22
Graph 7: Tax Revenue from Main Tax Sources (in billion ALL), 1999-2008 ................................... 23
Graph 8: Government Revenue 2009-2014 (in billion ALL) ............................................................. 25
List of Tables
Table 1-Income Tax Rates (Law No. 8438 "On the Income Tax in Republic of Albania", 1998) ....... 4
Table 2 - Model 1. Descriptive Statistics ............................................................................................ 49
Table 3 - Model 1. Correlations .......................................................................................................... 49
Table 4 - Model 1. Model Summary................................................................................................... 49
Table 5 - Model 1. ANOVA (b).......................................................................................................... 50
Table 6 - Model 1. Coefficients (a) ..................................................................................................... 50
Table 7 - Model 2. Descriptive Statistics ............................................................................................ 50
Table 8 - Model 2. Correlations .......................................................................................................... 51
Table 9 - Model 2. Model Summary................................................................................................... 51
Table 10 - Model 2. ANOVA (b)........................................................................................................ 52
Table 11 - Model 2. Coefficients (a) ................................................................................................... 52
Table 12 - Model 3. Descriptive Statistics .......................................................................................... 52
Table 13 - Model 3. Correlations ........................................................................................................ 53
Table 14 - Model 3. Model Summary................................................................................................. 53
x
Table 15 - Model 3. ANOVA (b)........................................................................................................ 54
Table 16 - Model 3. Coefficients (a) ................................................................................................... 54
Table 17 - Model 4. Descriptive Statistics .......................................................................................... 54
Table 18 - Model 4. Correlations ........................................................................................................ 55
Table 19 - Model 4. Model Summary................................................................................................. 56
Table 20 - Model 4. ANOVA (b)........................................................................................................ 56
Table 21 - Model 4. Coefficients (a) ................................................................................................... 57
Table 22- Data Inputed ....................................................................................................................... 58
xi
1
INTRODUCTION
This chapter gives a brief introduction on the topic covered by the paper, states the research
question, and presents the historical, economical and social background of Albania that is the
country under study. Main milestones and facts on fiscal policies are indicated.
Taxation can be defined in a several number of definitions that change depending on the context.
Taxes defined as a "mandatory refundable fee to the government". Payment is irreversible in the
sense that the benefits, which the government makes available to taxpayers, are not in proportion to
their tax payments (Gruber, 2009). According to the Directorate General of Taxation, taxes
distinguished from taxes or user fees in terms of the latter, although mandatory, are generally
reversible, in the sense that there is a link between the amount paid and benefits provided. Generally,
the nature of a special is tax summarized in the descriptive name, such as income tax; value added
tax, personal income tax, excise duties, capital gains tax, property tax, etc. (General Tax Directorate,
2015)
Many countries continue to work towards fiscal reforms. Dominant objective of these fiscal reforms
has been to minimize the fiscal burden disproportion, improving administrative efficiency and
stimulating economic growth. The effect is expected to have these tax reform is supposed to be
neutral (fiscal burden spread evenly) and less interference factors operating in the market. Tax
reform, as part of fiscal reform should also aim to eliminate the imbalance in tax collection and
improve income distribution. Albania is one of the countries that are under transformation of tax
system over the years.
Thus, considering Albania, tax administration is oriented to move in expanding the tax base;
adjustment of the VAT law and income tax starting from the effects in the structure of tax revenues;
perfection of tax administration fighting the negative elements of corruption and incompetence of its
management employees. (Ministry of Finance, 2012)
During the past 10 years, the Albanian tax system underwent three major reforms: the transition
from the progressive tax to flat tax 10% on income (2007) and on profit (2008); Bilateral free trade
agreements with Eastern European countries and the multilateral CEFTA agreement (2006); the
1
signing of the SAA (1 April 2009). Large reductions in customs duties (after joining the World
Trade Organization), which were associated with significant increases in taxes of excise goods;
reduction of social security contributions from 42.5% in 2005 to 26.5% in 2009 and continuously
decreasing to 23% in 2015. All these reforms made in the context of promoting sustainable growth
of revenue in the long-term level. Thus, the government revenue has constantly increased due to the
policies applicable from 1.56 billion USD in 2002 to 3.48 billion USD in 2014, where to be
mentioned is the fact that the tax revenue has constantly taken a greater share of revenues over time.
During the years under study from 2002 to 2014, an increase in government revenue from special
funds of social and health securities of 7 percent on average is observed. (Ministry of Finance,
2014)
Other changes affecting the government income and tax system efficiency has followed, thus in full
package form there are conducted four decisions that affect the level of VAT on health related
products, changing the threshold / turnover, the tobacco excise tax, obligation and tax on profit
calculation. However, another decision, the one of the local tax system has to do with business fees
for billboards and amount of compensation for fiscal devices. Additionally, important change took
place in mid-2010 when the decision that the Albanian companies have invested abroad and are
shareholders in the regional and European companies can bring to Albania their shares without
paying taxes.
Considering the last three years (2013, 2014, 2015), the main change is the transformation of tax
system from flat to progressive applicable to income on individual income (wages). Followed by the
increase from 10% to 15% of the corporate income tax or tax for income other than wage, the
increase of traffic tax from 17 ALL/liter to 27 ALL/liter; the decrease from 10% to 7.5% on the
profit of small business and reduces in specific items subject to excise tax and custom tax Ministry
of Finance (2015).
As per above, fiscal policies and tax system as an integral part of it, prove to be an issue under study
by most governments in the world, so as to find the road toward the optimal taxation system.
Albania is also one of the countries that in addition to major political and economical changes, has
faced also several shifts of taxation systems, the impact of which is questioned by this study. Thus,
given the facts presented above, the research questions stated by this study are:
2
1) How has the tax system affected government revenue in the county?
 To which components government revenue is most sensitive to?
 How has the government revenue components varied during different tax regimes?
2) How had the direct/indirect taxes impacted on government revenue over the years?
 Which taxes prove to have contributed the most?
To answer the research questions, data collected from several official publishing institutions are
used to construct Simple and Dummy Variable Regression Models that are after processed through
SPSS into four econometric models that aim to investigate the impact of tax regimes to government
revenue, the general impact of components to government revenue and last the impact of each tax, in
a period of thirteen years.
1.1
Types of Taxation
The two main tax types are the flat and progressive ones, thus, the flat tax is fixed rate tax and occurs
only on a single rate of application regardless of the amount of revenue. On the other hand, the
progressive tax is a variable rate of tax, which is applied in proportion and according to the fiscal
policies implemented by government, on amount of revenue.
Furthermore, taxes and fees are divided into central (national) and local. Some of taxes and national
grounds determined as the most important applicable in the country, are:
1) Value Added Tax is a tax on consumption. It applies to all supplies of goods and services made by
natural or legal persons in the territory of Republic of Albania and the imports of goods into the
territory. All legal persons that have an annual turnover exceeding 5,000,000 ALL are subject to pay
VAT, the particular rate is flat and is 20% (Law No. 7928, "On the Value added tax in the Republic
of Albania", 1995).
2) Income Tax applies to a tax on individuals where it can be defined as personal income tax or
individual income tax. Regarding corporate income taxes, liable to it are: companies, corporate
groups, consortiums and institutions; Albanians and foreigners who conduct business in Albania.
These entities are also subject to value added tax in the country. The criteria of territoriality establish
by the domestic legislation, defines as taxable all sources of income, even if are perceived abroad.
3
Subject to income tax are legal persons having their headquarters in Albania as well as legal persons
not residents in Albania but still having sources of income produced in the country. The tax rate on
income is 15%, except what is provided by the law on “Small Entrepreneurship Taxation” (Law No.
8438 "On the Income Tax in Republic of Albania", 1998). Small businesses or Small entrepreneurs
that have a gross annual turnover less than 8 million ALL are subject to a simplified profit tax
applicable. Under the new amendments, businesses that have a turnover less than 2 million ALL
shall be subject of a fixed tax of 25,000 ALL per year. While those whose profit varies from 2
million ALL to 8 million, are subject to a reduced rate of 7.5%. In addition, the regime applicable to
personal income was revolutionized and currently tax for residents and people treated as residents is
calculated separately for each category of income deriving from wages, salaries and other benefits as
per the (See Table 1) (Law No.177, 2013).
Table 1-Income Tax Rates (Law No. 8438 "On the Income Tax in Republic of Albania", 1998)
Monthly taxable income
Tax rate
From
Up to
0
30,000
0%
30,001
130,000
13%
130,001
Over
23%
3) Excise tax refers to an act or transaction as production, sales, import, or consumption. Excise
duties often placed through user fees for government services or a free "regulatory" on activities
such as gambling or air transport. The excise tax apply to a limited number of products for mass
consumption, in particular, tobacco and its derivatives, petroleum, alcoholic beverages, soft drinks
and coffee, perfumes and deodorants (Law No. 61/2012 "The Excises", 2012).
4) National Taxes are applicable in the form of: port taxes; annual movement fee of vehicles;
environmental tax; mining royalties tax; tax on transactions and stamp duties; fees for registration of
gambling, national lotteries, sport betting, casino; tax on fishing (Law No. 9975,"On National taxes",
2008)
4
5) Local taxes are considered the simplified business taxes, tax on real estate, hotel tax, tax
infrastructure for new construction, tax on ownership transfer, fee for public space use, advertising
sanitation, etc. The tax on business for commercial use is 400 ALL/ m2 and 15 to 30/ m2 for
residential property (Law No. 9632, "On the Local Tax", 2006)
1.2
Taxation and Revenue Collection
The income tax system in Albania summarized from following incomes: Value Added Tax, Income
Tax, Excise Tax, Personal Income Tax, tolls and other National.
The Laffer curve graphically shows the balance between the level of taxation and revenue collected
from taxes and provides the theoretical justification that flat tax effects to tax revenues. Specifically
shown the chart below:
Figure 1: Laffer Curve Source: (Laffer, 2004)
As we see, on the left side of the axis, the reduction of tax from the T* causes a decrease in income
from taxes in the amount. When the level of taxation is approaching t * for any shifts in the level of
taxation influenced less revenue collected. In optimal taxation point t * collects the maximum
amount of revenue. Beyond the optimal point, any increase in the level of taxation will bring about
other effects. Such growth stimulates reactions in humans; they tend to work less and try to avoid
taxes; consequently reduce the amount of revenue collected from taxes. Therefore, if we follow this
5
logic to a level assuming 100% tax would have no incentive to work since the government will
recoup everything gained.
The situation is reversed if the level of taxation before the application of the tax reform is to the left
of t *, the reduction of tax provides no increase in revenue collected.
Laffer analysis by researchers poses two ways you can choose to use the government tax collection.
The first concerns the establishment of a high level of taxation, but with a certain segment of the
population (high taxes, narrow base). The second is a low level of broad based. So in countries
where applicable flat tax and chosen the second way of fiscal reform and if the current level of
taxation (before the introduction of the flat tax) is higher than t*, then the application of the flat tax
(reduction of the current level taxation) would increase revenue by expanding the base. This is what
the applicant flat tax take for granted, namely the existence of a current level of taxes higher than
optimal level. In the short term, in countries where there is the increased income, but only
maintaining their current level, the reduction of tax base brings growth. This causes positive effects
in countries where the informal economy and expanding of basis seen as a formalization of the
economy. (Papp & Elod, 2008)
1.3
Changes in Tax System in line with European Integration
Albania nowadays faces major restructuring challenges in the context of European integration. At a
time when member states have legislation after those European countries, while our country, still in
development, where institutional adaptation present difficulties and the absence of long-term
sustainable fiscal policy. In Albania, fiscal reform is still developing. Albania is still looking for a
stable fiscal model. The reform focuses not only on the amount of tax, but also in the content of
supporting legal norm. On the other hand, keeping the economy in a competitive position through
effective use of macroeconomic instruments is not only a requirement of the EU but also need for
national development.
Medium Term Fiscal policies include the introduction of personal income statement at the end of
2011. The new draft law on VAT in compliance with the EC's statement (on the importance of
disciplined fiscal policies and macroeconomic reforms). The drafting of this law will ended in June
2013 and developed on technical assistance of the European Commission.
6
On the other hand, long-term aimed consolidation pattern for low and flat tax. Implementation of
small-scale VAT for goods and services related to education and health. Reduction of tax on
dividends, preferential tariff reductions from the free trade agreements. Reforming of real estate
taxation, reform of taxation on profit and capital, in the case of securities as well as real estate.
Modifications in the system of excise duty with a view to simplifying the list of goods according to
the European practice; fiscal education; reform of tax and customs administration; modification of
the repayment scheme of VAT within 30 days, etc.
What remains most important is education by undertaking massive initiatives to citizens and
businesses with fiscal culture in support of this process. Achievements up to now in fiscal system
still need further refinement and adaptation, not forgetting that not act in good economic conditions
internationally (European Commision, 2015).
1.4
Flat Tax
Application of a tax system with a single level of taxation is defined as flat tax. In such a system,
instead of calculating mechanisms taxes through various levels, whether increasing (progressive) or
discount (regressive) to income that exceeds a certain threshold, flat tax apply a single level of
taxation. The flat tax is applied based on the assumption that all income is taxed only once during
their movement, and this time it is at the time of possession. Consequently, the concept of a flat tax
includes tax computation on two levels of taxation in the case of individuals, it applies personal
income tax and in the case of companies profit tax.
(Hall & Rabushka, 1995) introduced a practical implementation of fiscal theories in the form of a
genuine taxation reform. Their fiscal reform attempts a fundamental change in how the government
decides to organize the collection of tax revenues. Based on a single level of taxation of all sources
of income. This proposal aims simplifying and increasing the economic efficiency and fairness in the
tax declaration, traditional an effective measures of taxation system and in turn ensuring
permanently satisfactory level of revenue to finance public spending.
The authors argue that by radically simplifying the tax system, thus eliminating the repetitive taxes
or taxation, flat tax would free the current system of these anomalies, making it even more efficient.
7
Another crucial aspect by (Hall & Rabushka, 1995) is that all income is taxed uniformly. The only
exception that makes the proposal, similar in concept to progressive taxation was generous tax
deductibility of individuals and families with incomes below a certain minimum living.
Consequently, under this proposal, individuals and families with incomes lower than a certain level
does not have to pay income tax, while those who exceed the limit will only tax the amount of
income above this limit.
1.4.1
Taxes on personal income
According to (Hall & Rabushka, 1995) proposal, payments in the form of remuneration, including
benefits received from insurance schemes are considered as personal income and are subject to
taxation on personal income. Income from dividends, capital gain and bank or loan interests are not
subject to personal income tax because they are already taxed at source through the tax on business
income. Individuals and families in the practical implementation of the flat tax system calculate the
amount of all types of their income as defined above and then deduct that amount as the limit value
set for the minimum level of tolerance. Taxes on personal income flat tax = x [Remuneration +
wages + pensions, etc.-the minimum threshold of tolerance]
1.4.2
Taxes on business profit
The second category of the (Hall & Rabushka, 1995) system described what being careful to avoid
repeated taxation. The taxable business income are calculated by taking the total income from the
sale of all products and services that produces this business and descending three types of expenses.
First, deducting wages or bonuses paid to employees, since they are taxed as personal income.
Secondly, reduced value of the products or services purchased from other companies, since those
taxes belong to additional companies. Thirdly, deducting all the costs of investments in machinery,
plant or equipment as an expense in the year of their purchase. This immediate deduction of
investment encourages capital formation and eliminates possible abuses in the calculation of
depreciation and administrative costs for their evaluation.
Taxes on business income = Flat Tax x [Total revenues from the sale of the product-the value of
bonuses and salaries of employees-value acquisitions of other companies-value purchases of
machinery, plant, equipment]
8
Based on the above interpretation of this multidimensional reform known as a flat tax, the authors
positively prove that the flat tax is a tax based on consumption. It provides a substantial discount to
the tax on new investments by companies and frees individuals from repeated taxation on interest
and dividends. Applied to all elements of the proposal of (Hall & Rabushka, 1995), the flat tax
reform aimed at increasing the efficiency of the national tax system without sacrificing the level of
budget revenues through a tax system based on consumption. According to this reasoning, it is
natural to expect a considerable increase in savings and investment and consequently the formation
of capital in the market, these factors essential for continued economic growth.
1.4.3
Flat Tax in Albania
Even though the flat tax by (Hall & Rabushka, 1995) is used on repeated occasions as a source of
inspiration for fiscal reforms undertaken in a number of countries, the implementation of this model
in practice has seen numerous modifications or deviations from the original proposal. Although the
argument of those economists manages to convince us for the success of such reform, at least in
theory, experience and empirical data to countries, which have implemented the reform of the flat
tax, suggest that the implementation of such a model is also a challenge and it remains to be proved
in practice for its success. The flat tax is provided in Albania by so many similar examples of the
region. More changes that are fundamental focused on personal income tax and profit tax.
To understand the dimension of fiscal changes within the flat tax, we must first investigate the state
budget. When first implemented in 2007 tax revenue and government spending were not in balance
thus increasing the possibility for the budget deficit. Whether how these inequalities does is through
the fall or growth of gross domestic product. In the first case (the decline of GDP) means less
revenue generated because of lower production of goods and services. Under a progressive tax
system, less income taxed at a lower percentage, giving consumers more money available for
domestic spending and fewer taxes. Therefore, we have a declining economy and consumers willing
to spend and that will restore the economy to its previous state. The opposite is also true. The second
case (increase of GDP) when the GDP grows exceedingly means generating more income tax which
would be a higher percentage. Given consumers already, pay a higher percentage of taxes from
income, results in less money to spend. Now consumers refuse to spend more than they can,
economy contracting occurs automatically, which reduces inflationary pressures. Flat tax system (or
9
proportional) cannot have this feature. Even in times of budget deficit, the flat tax becomes a
dangerous instrument. This happens because of the government plans to increase government
spending thus unable to increase tax revenue because of the flat tax leading to further deepening
budget deficit. This will leave the way open for the desired credit terms less profitable and declining
confidence of foreign investors and local entrepreneurs in our financial system.
1.4.3.1 Personal income tax
Taxation of personal income in the context of the flat tax simplifies the steps, but not eliminating
them. Given the examples of the region, but also in support of the theoretical model of the (Hall &
Rabushka, 1995) Albanian policymakers attempted mitigation of the effect of the flat tax on
individuals with lower incomes putting a new limit to 10 thousand ALL taxation zero, this limit in
real terms does not correspond to the minimum wage. In a simple analysis of the effect of changing
the taxation on personal income from employment on individuals, it shows that the application of
this fiscal change increases the level of taxation in absolute terms for wages by 140 thousand per
month. While salaries over 140 thousand personal income tax drops compared with the progressive
system. This means that individuals with low income and the average will grow tax on income and
therefore less net money to consume, while those with higher wages will benefit from the lowering
of income tax therefore their net money to save.
1.4.3.2 Income tax
Income tax was a flat tax of 20% reduced by half to 10%, considered as the most daring of the flat
tax reform. Reduction of income tax to reflect the effects of the (Laffer, 2004), which supports the
idea that reducing the level of taxation, raises revenue to the state budget. As stated above, the effect
of such is only possible if the current situation of taxation is located to the right of the optimal t*.
However, if we make an analysis based on the exception, it is clear that the country's economy
cannot be on the right t*, as long as our aggregate level of taxation expressed in the value of
revenues and reported with GDP is very low.
10
1.5
Progressive Tax
The role of the state as conceived after World War II is to provide citizens with a safety net to
protect them from unfair conditions of existence. One of the tools to achieve this goal is the
progressive tax. If the government will be able to provide people in need a comprehensive education
and health services, then this would significantly improve their chances to emerge from the circle of
poverty. However, apart from the moral validity of a progressive tax, there are economic reasons that
prove the usefulness of this tax.
"Investing" made to the poorest layers of society brings positive economic consequences. First, it is
by increasing their human capital and consequently the country's production capacity. Moreover,
such policies also alleviate major social problems such as unemployment, high levels of crime and
social disruption. These are the results of socially undesirable and constitute an economic cost for all
of us. Finally, there is the thesis that the poorest strata have a greater tendency to spend income on
domestic products, thus creating a positive impact in stimulating domestic demand in Albania.
Arguments against progressive tax belonging to the economic plane libertarian political ideal.
According to this point of view, the acquisition of the goods of the work of a government employee
is a violation of individual rights. Considering the economic reasons progressive tax reduction would
bring the overall level of savings because of transfers from the richest to the poorest to save less.
This will reduce the total funds available to invest. Lack of proper capital markets (stock exchanges)
in Albania means to carry out major investments; wealth must be concentrated in the hands of a few.
Finally, individuals will have less monetary incentives and consequently may choose to work less
than before. This is not necessarily true in all cases, but it is a theoretical possibility that must be
taken into account anyway.
To determine optimal levels of taxation must first be a detailed study of the economy. However, this
study may be almost impossible in conditions where a large part of economic activity remains
undeclared. Moreover, the alarming levels of corruption in the country of the arguments in defense
erode progressive tax. After all, if they end up in the pockets of officials or even misused by the
inability of the administration, the government has no right to ask afford these extra taxes citizens,
even if they belong to the country's rich layer. Also, have created a system that does not allow you to
hide certain individuals of their personal income, it is difficult to achieve in terms of Albania.
11
Concluding, progressive tax should be recognized that an election is not merely economic but also
and perhaps above all, a society's political choice.
1.5.1
Progressive Tax in Albania
Ministry of Finance has provided progressive taxation with three levels, the first level, that of wages
up to 30 thousand will bandage protective zero taxation, from 30 thousand to 130 thousand, the tax
will be 13 percent of value over 30 thousand. While salaries over 130 thousand and tax will be
higher, around 23 percent of the remaining value of salaries protective bandage.
1.5.1.1 Wages
(Ministry of Finance, 2014), the draft drawn up by it, left untouched by taxes pay up to 30 thousand
While Parliament at that time passed the law for Income taxes, finances stipulating that all
employees having salaries from 30 thousand to 130 thousand will actually benefit from the new
system of taxation. For these salaries will be tax cuts in monetary value when compared with the
current taxation, where lower wages would benefit the most, after tax will start from 300 thousand
and above. Differently, a salary of 400 thousand will be taxed at 13 percent, or in numbers only 1300
ALL. The value of the benefit ALL of the new tax system is declining to pay 130 thousand. While
any salary above 130 thousand will be charged with 23 percent being really affected by progressive
taxes. Wages above that amount will be taxed at three levels, but at progressive; up to 30 thousand
zero tax, 30 thousand to 130 thousand 13 percent, and over 130 thousand 10 percent. More
specifically, in the event that income is taxed currently 140 thousand 14 thousand, new tax will be
taxed 15,300 ALL, where the difference will be 1300 ALL.
According to data from the Ministry of Finance are currently over 8 thousand individuals who have
stated a salary higher than 130 thousand per month. The tax applies only to wages and bonuses, as
other types of income such as rents or other activities are not included in this scheme, but will be
taxed in the same way as now.
12
1.5.1.2 Corporate Income Tax
The corporate income tax rate for businesses that declared a turnover below 8 million ALL in the
last financial declaration term, is 7.5 percent; for those declaring a turnover over 8 million ALL, is
15 percent and for small businesses, zero taxation is provided. (Ministria e Financave, 2015).
1.5.1.3 Value Added Tax in Albania and Region
Value added tax shall be subject: a) all supplies of goods and services, carried out against payment,
within the territory of the Republic of Albania by a taxable person acting as such; b) all imports of
goods in the Republic of Albania.
Standard rate of value added tax in the Republic of Albania is 20%. However, the law provides as
exceptions, as well as zero rate of VAT for certain products and services. This law does not provide
for reduced rates of VAT rates.
If we compare our country with other countries of the region, in terms of the VAT rate, we see that is
Croatia, which has the highest degree of its 25%. Croatia comes after our country, Bulgaria and
Serbia to apply the same level of VAT of 20%. Kosovo is a country that offers a lower rate of value
added tax, with only 16%. (Data, 2015)
Value Added Tax (%)
Serbia
Macedonia
Montenegro
Croatia
Kosovo
Bulgaria
Bosnia & Herzegovina
Albania
0%
5%
10%
15%
20%
25%
30%
Value Added Tax (%)
Graph 1: Value Added Tax Rate in the Region Source: (European Commision, 2015)
13
According to (Data, 2015) our country applies a VAT rate equal to European Union countries such
as Austria, Great Britain, France, Slovakia and Bulgaria. Luxembourg is the EU countries applying
the lower rate of VAT of only 17%, the rate that by 2014 was 15%. After him comes Malta 18%,
Cyprus and Germany with 19%. All other countries apply a VAT scale over 20%, with the highest
rate of VAT of 27% applies Hungary.
Interestingly in the legislation of EU countries have reduced VAT rates for goods and services.
Reduced VAT rates found in the legislation of countries in the region with the exception of Bosnia
and Herzegovina and our country. We have examined several groups of goods and services, which
we consider reasonable identification of the VAT rate.
Food consumer products are a very important voice in the lives of individuals, where certain
products are fundamental to its existence. Thus, in countries like Malta and the UK rate of VAT on
food products is 0%, Luxembourg applies a value-added tax of 3% on all food products. Among the
30 countries under consideration, Albania, Denmark and Hungary have the highest rate of Value
Added Tax on food products, respectively 20, 25 and 22.5%. All other countries apply a low rate
VAT on bread and food products.
Countries like Slovenia, Bosnia and Herzegovina, Bulgaria, and our country to apply standard VAT
rates for food and basic food without considering tax for lower base consumption, consumption that
affects the poorest of the population. In the 30 countries under consideration for meals average VAT
is 13%.
All neighboring countries with Albania have VAT on food and food products lower than Value
Added Tax practiced in Albania. While Albania practicing VAT at 20%, neighboring countries such
as Italy; Greece; Kosovo; Macedonia; Montenegro or Serbia introduce VAT on food products at the
rate of 7 to 15%. Albania appears between the countries with the highest tax on food products and
consequently more negative behavior towards layers of minimum or low income.
14
1.6
Political and Historical Background of Albania
Albania is a country that faced the transition from centralized to free market economy in 1990. In
20-year history of tax policy of countries that underwent transformation of political and economic
systems shows a split of experience into two main groups:
Countries that at the same time reformed the tax system and institutional structure (primarily the
countries of Central and Eastern Europe) which for their administration took good results and stable
in terms of income level.
Today in Albania, tax policy is improved institutionally and better tax structure responds to the
needs of public revenue collection and creating a climate conducive to private sector development.
This is shown in performance figures of the income level in years, which continuously narrows with
the region countries. From the structure and revenue collected, VAT is the tax that shows best results
in the Albanian tax system.
Its structure is divided in three tax rates, 20, 10 and 0% (although reduced fee has very limited
application). Revenue collected in relation to GDP reached its top in 2008, with 9.8%, while in 2012
this ratio was 9.2%. Even though reimbursement was an increased in absolute value, it is still
problematic, with a still high level of VAT refund procedure and longtime reimbursement. (Ministria
Financave, 2012)
Excise structure is sufficiently harmonized with legislation of the European Union, especially with
the new excise law, which entered into force in 2012. Revenues have been generally upward annual
trend, with the exception of 2012, the year in which the proceeds from the excise tax on an annual
basis were 10 percent lower. (Ministria e Financave, 2014)
The structure of the income tax in Albania is similar to what most countries calls Corporate Income
Tax. The essential difference with international practice is that being or not subject to income taxes
in Albania depends on the turnover of the business and not the legal form of organization of business
activity. The rate of 10%, effective from 1 January 2008, is the lowest in the region and lower than
all Western European countries. The policy reflects the orientation in all CEE countries and the
15
region, reducing the tax burden for businesses and simplification of the taxation schemes from
exemption elements or tax incentives for specific sectors and businesses.
In the 20-years revenue collected, the profit tax has been variable. Personal income tax has been one
of the hardest hit by the tax evasion in Albania. Fiscal Reform of 2007 essentially changed the
structure of this tax by replacing the progressive tax rates with a unique degree of 10% for all types
of personal income. The last law increased the progressivity of the tax TAP, excluding from taxation
the salaries up to 30 000. Meanwhile, Albania had the lowest rate of taxation of personal income in
the region (as well as Bulgaria), of 10%. (Ministria Financave, 2012)All countries of the region and
a large part of CEE countries apply a flat tax. Even though there is not a consolidated opinion on the
effect of the flat tax on income and on the economies of countries that have adopted, Albania, in
about 5 years of experience with the flat tax has shown a positive impact on the revenue collected.
Despite continuing differences with other countries, the ratio to GDP of Income Tax in Albania has
changed dramatically, reaching the highest point in 2009 (2.3%).
The data in several years indicates that more than half of all income tax collected by Income Tax on
wages. Policies implemented in complementary by placement of the flat tax by setting reference
salaries and obligation of Payroll through the banking system this tax became more controllable and
the administration and collection improved significantly, indicated by the numbers income
immediately after the reform.
As personal income tax another weak link of the tax system have been social security contributions.
However, in recent years the social security system has been at the center of reforms, both in terms
of the tax burden and compliance of contributors and their management. Income from contributions
represents the highest difference with all other taxes other of region countries.
16
1.7
Overview of Budget Revenue
In very general terms, total revenue in the budget, has gone from 33.5 billion ALL in 1993 to 366.7
billion ALL in 2014, signifying a more than 10 times increase. If we split into three groups: aid,
income tax and non-tax, aids are relevant to 2014 which stays in the same level also in 1993, but
with significant reduction versus years 1998-2001; Tax revenues have increased to 13 times and
non-tax revenues 5 times since 1993. In relation to GDP, in 1996 Albania used to collect 15.1 ALL
for every 100 ALL domestic product, while in 2012 this indicator was at 24.5 ALL. The progress is
clearly shown in the graph below. (Ministria Financave, 2012).
400.0
350.0
300.0
250.0
200.0
Total Income
150.0
Tax Income
100.0
50.0
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2003
2004
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0.0
Graph 2: Total Government Revenue and Tax Revenue (in billion ALL)
Source: (Ministry of Finance, 2014)
1.7.1
Direct vs Indirect Taxation
In terms of the structure of taxation, over the years has been a shift of taxation from trade taxes to
VAT and Excise. Currently only a few of income from customs duties applied to imports. On the
other hand, indirect taxes (on consumption) are dominant in the collection of income against income
tax (individuals and companies) and wealth. The following chart reflects the performance of the
direct and the indirect taxation over years.
17
As noted by the graph, during overall period it is easily obvious the "dominance" of the revenue
collected from taxes that burden consumption, such as VAT, Excise and Customs duties, against
taxes that exacerbate the direct income derived by individuals and businesses and their wealth
(building or agricultural land). In the pace of growth, revenues from indirect taxes suffer more
significant increase than direct taxes, especially from 1998 to 2008, the year from which felt the
effects of declining consumption and because of domestic production and imports.
In this report, income from direct vs. indirect taxes influenced several factors: indirect taxes are
easier to collect, especially the part collected at the time of import. While direct taxes (especially on
personal income) for long time have been subject to high levels of tax avoidance and evasion; in
addition, the policy pursued has been on continuously reduction of direct tax rates, with special
focus on income tax; however, related to indirect taxation, the VAT rate has been kept unchanged
since 1996.
120.0
100.0
80.0
60.0
40.0
20.0
0.0
Direct Taxes
Indirect Taxes
Graph 3: Direct and Indirect Taxation (in billion ALL)
Source: (Ministry of Finance, 2014)
18
350.0
300.0
250.0
200.0
Tax Income
Indirect Taxes
150.0
Direct Taxes
100.0
50.0
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0.0
Graph 4: Weight of Direct and Indirect Taxation to Government Revenue (in billion ALL)
Source: (Ministry of Finance, 2014)
Continuously changing structure of GDP had had a significant effect on revenue collected over the
years. Meaning two structural factors: the gradual reduction of the share of public sector in the
economy (i.e the degree of privatization and liberalization of the economy) and within the private
sector, reduction on the contribution of agriculture (which is a division of untaxed) in favor of
sectors that became an important contributor to income, such as: construction, manufacturing,
services. Thus, in 1996 the agricultural sector accounted for 35.1% of total GDP, construction
accounted for only 4.9 per cent, 9.5 per cent production; the same sectors in 2012 were respectively
14.8%, 8% and 12%. (Ministry of Finance, 2014)
Another influencing factor was administration, in terms of efficiency in collection revenues,
measures against tax, taxpayer education, and increased taxable base. It marked important progress
in the field of administration, tax and customs, particularly from 1998 onwards. Among the most
important developments may include: restructuring of tax administration by computerizing the basic
functions; separation and specialization of functions Unit Large taxpayers; merging of small local
offices in regional structures in larger and fewer in number.
19
1.7.2
Revenue Performance from 1993 – 1998
Figure 6 shows that tax revenues in the initial transitional period, in Albania, as in all transition
countries have fallen significantly. In this period, the tax reform was incomplete and generally not
accompanied appropriate administrative reform, and therefore revenues, especially taxes, performed
poorly in revenue relative to GDP.
At the beginning of the transitional period, 1992-1995, the performance of tax revenues was in
satisfactory situation, 20,5%, 19%, and 24% of GDP, and the average change in transition countries
respectively for 1993 1994 and 1995 was down warding by -13% , -12,% and -6.1%. In 1996 and
1997, due to the confusion of economic and social that followed the rise and collapse of financial
pyramid schemes, tax revenues were falling relative to GDP, while GDP had a nominal increase
negative of 0.06%.
Graph 5: Government Revenue (in billion ALL) 1993-1998
Source: (Ministry of Finance, 2014)
In this period, there were several decisive factors that influenced the performance of the revenues,
not only in Albania, but also in countries in transition: First, the history and the starting point
significantly influenced the process of reform taxes. We note that Albania was the starting point of
zero. In addition, countries that since the beginning of the transition have performed better with
20
revenues maintained this trend in the following periods. In contrast, other countries, which have
performed worse than the first, continued to keep differences with these countries. Due to many
reasons, which are the main are differences in the levels of taxation, poor tax culture administration
and taxpayers, as well as significant tax evasion trends driven by institutional and legal environment.
Experience has shown that the effective tax reforms cannot be fulfilled Isolated from the skills of the
tax administration system and culture of taxpayers. Another wrong point of decision was that at that
period government was focusing on modernizing tax policy, passing reconciliation issues voluntary
administration taxpayers in the background.
To be effective and successful, tax reform needed to be accompanied by institutional and structural
reforms throughout the economy. Those countries in transition, which have moved quickly to
restructure their economies and institutions also have progressed better fiscally (Czech Republic,
Estonia, Hungary, Poland, and Slovenia).
1.7.3
Revenue Performance for the period from 1999-2008
By the end of the period of de-stabilization caused by the collapse of pyramid schemes, tax revenue
as a percentage of GDP had an upward trend in the coming years, growing more until 2008, when
tax revenues to GDP reached 24.3 percent and then the percentage of GDP stabilized. Average
annual growth of revenue by 2008 has been a significant level of 18 percent. This level considerably
exceeded nominal GDP growth, which means that the revenue collected has played an important
factor in fiscal management. Also noteworthy is the revenue to GDP indicator. This indicator shows
continuous growth during the period in question, especially for "income from taxes and customs".
Increased revenue / GDP reflect the developments in the economy, with a gradual transition from the
non-cash in the formal ones.
21
Graph 6: Tax Revenue as percentage of GDP 1999-2008
Source: (Ministry of Finance, 2014)
In total, tax revenue in this period have been significant developed in terms of specific taxes. With
the abolition of the turnover tax and its replacement with Value Added Tax, in 1996, it became the
main source and sustainable income in the Albanian tax system. VAT system in the Albanian tax
legislation designed so admirable: it is simple, broad-based, contains a large standard tariff of 20%
and has a reasonable exemption threshold, typical of developing countries. The average annual
growth of VAT revenue for the period was 14 percent.
22
250.0
200.0
150.0
100.0
50.0
0.0
1999
2000
2001
Value Added Tax
2002
2003
Excise Tax
2004
2005
Duty Taxes
2006
2007
2008
Direct Taxes
Graph 7: Tax Revenue from Main Tax Sources (in billion ALL), 1999-2008
Source: (Ministry of Finance, 2014)
In these period revenues from income tax and personal income rose in absolute terms and in % of
total revenue structure, reflecting the positive economic development, improving the investment
climate and policies to private sector development. The most important tax policy of direct taxation
this period was the establishment of a flat tax in 2007, for individual taxation and for profit
companies. As mentioned above, the structure and level change was accompanied by administrative
measures that led to a significant increase in revenues from this tax.
Specifically, the flat tax for taxation of individuals affected system by simplifying management and
increase the taxable base. Personal income tax has been one of the hardest hit by the tax evasion in
Albania. It changed substantially tax reform structure, replacing progressive taxation scales with a
unique scale, for all kinds of personal income, from 10%. Average annual growth of revenue by
income tax for the period was in the level of 42 percent. In the context of taxation of income from
business, halving income taxes made it possible for entrepreneurs by having a liquidity level of the
72.5 billion (calculated over the course 2008-2011). For 2008, revenues from corporate income tax
were at the level of 2.2% of GDP from 1.1% in 1998. Gradual repeal of exemptions and incentives
from the profit tax has simplified the system becoming more transparent and has reduced the room
23
for evasion. The policy of allocation of facilities and exemptions has been replaced with that of the
continuous reduction of the business tax. Statutory rate of income tax has been reduced over the
years, from 30% in 1999 (after the entry into force of Law no. 8438, 28.12.1998), 20% in 2007 and
10% since January 2008.
Regarding collection level, the average annual growth for the period 1999-2008 was 16.5 percent.
On the other hand, reduction of revenue from customs duties suffered considerably because of trade
liberalization policies applied by Albania. Increasing revenues from excise from the low level of
1997, improved because of improvements in the legal framework and administration. Excise
legislation in our country has been subject to frequent changes. Albania excise levels have been
steadily increasing, as well as the range of products and goods subject to this tax. For this period,
Albania has had steady growth of revenues from excises in % of GDP. The average increase for this
period is 21.5 percent.
As personal income tax, the other weakness of the tax system has been social security contributions.
However, over the years, the social security system has been at the center of reforms, such as with
regard to the tax burden of contributors as well as compliance and management. In December 2002,
the Government decided the transfer and unification of collection of contributions to tax
administration. This process lasted several years. The administration and collection of closely related
contributions and raise awareness of the population on the importance of participation is part of the
scheme of compulsory insurance.
1.7.4
Revenue Performance in the period from 2009-2014
In 2009, the impact of the global economic and financial crisis on the Albanian economy touched
toughly with less effect in the region. The slowdown in the pace of economic growth was reflected
in the ability contributors in taxes and duties of individuals and businesses, both in terms of direct
taxation (income) and in that of indirect taxation by lowering the consumption of goods and services.
During the period from 2009-2012 the average annual growth in revenues from taxes and customs
was 3.2 percent on an annual basis.
In relation to GDP, total revenues amounted to 24.5 percent, the lowest level since 1998. The
following graph shows the trend of revenues by key items, from 2008 to 2015.
24
400.0
350.0
300.0
250.0
200.0
150.0
100.0
50.0
0.0
2009
2010
2011
2012
2013
2014
Graph 8: Government Revenue 2009-2014 (in billion ALL)
Source: (Ministry of Finance, 2014)
The same trend of slightly decreasing government revenue followed until 2013. However, after
2013, the government revenue was significantly increased. In 2013, the tax system shift from flat to
progressive took place and most of public institution analysis attribute the increase in government
revenue to the effective shift of taxation system in the country.
25
2
LITERATURE REVIEW
This chapter is a review of the main world and domestic literature on the topic of this study. Studies
and theories from different Public Finance books, well-known journals and competent institutions
reports are taken into appraisal. The review starts with studies from different countries in the world
(mainly developed) on the impact of tax reforms to economic growth, to be followed by main
theories on optimal taxation and last, studies specific in the country of Albania.
2.1
World Scholars
The impact of taxation and fiscal policies to economic growth is a topic of great debate for the
scholars around the globe. The first studies, date back in 1978 when, (Genetski, 1978) used a modest
regression model to demonstrate that economic growth was adversely associated with moving rates
of state and local taxation, a finding replicated and extended later by many authors.
Decades after (Helms, 1985) researched annual data for the period 1965 -1979 for 48 states. In total
672 observation. The dependent variable in Helms Study state personal income followed by
explanatory variables in three categories: taxes and other revenue, public expenditures and
demographic and labor force characteristics. Regarding revenue variables by the way the states and
local governments shares the responsibility. By stating that any attempt to use statutory tax rates
schedules in construction a measure of effective rates across states over time is unlikely to succeed
because of the substantial non-uniformity of state tax base definitions, rate structure and
enforcement. As an alternative Helms has used tax rate proxy revenues, from property taxes, other
state local taxes, each of them expressed as of state personal income.
At first, it seemed that personal income in the denominator of proxy would lead to a spurring
correlation with the dependent variable under certain circumstances. Nevertheless, revenue and
income are highly correlated; simultaneity between the tax proxy itself and the dependent variable
significantly attenuated.
Conferring to his study, the capability of state to attract business activity strongly related by its form
of taxation. Tax revenues are devoted to the provision of public services, which appreciated by
business and their employees. While in the other hand, the countervailing effect of taxes and
26
expenditures, recognizing the government budget limitation by estimating a model of state economic
growth using a time series of cross sectional data, the results indicate that the effects of taxation on a
state’s economy depend crucially on the use to which the revenues are put. States that seek to devote
substantial tax revenues to transfer payments later or soon will experience significantly lower growth
effects, which limits the scope for redistribution at the state and local levels of those revenues.
Moreover, (Scully, 1991) analyzing tax revenues and growth rates, comes up with conclusion that
most countries would maximize their growth rate if tax rates were not more than 19 percent of GDP
where countries in which governments takes more than 43 percent of national income in form of
taxes could collect more revenue by lowering their tax rates. It is difficult to imagine worthwhile that
countries that limit the size of public sector to this level have chances to experience high rates of
economic growth. Moreover, in long run, promoting economic growth results in more revenue for
government than trying to collect the most possible taxes each year.
Two years after, (Stokey & Rebelo, 1993) concentrated his study on the impact of flat tax. Thus, to
study growth effects on flat-rate taxes used an endogenous model by supposing income taxed is net
of depreciation and tax rates vary only by factor. By considering, that all incomes are taxed at a
common rate than comparing to the rates of the economy then the change on growth rate would be
equal to the change in interest rate. These effects according to author are independent by of the
properties of production functions.
Furthermore, (Engen & Skinner, 1996), examines the relationship of economic growth and taxation
by disagreeing proposition that high taxes are bad for economic growth. Taking into consideration
that per capita input strongly depends on capital stock and so on human capital, while thinking of
countries like U.S.A and Mozambique. In their study, dependent variable is GDP growth rate,
independent variable change over time in capital stock, percentage growth rate in effective labor
force and overall economy’s productivity growth. This study resulted in conclusion that higher taxes
could discourage investments rate (independent variable or net growth in the capital stock. Tax
policy has the potential to discourage productivity growth (R&D) development of venture capital
whose spillover effects can potentially enhance the productivity of existing labors and capital.
27
In the same line, (Vedder, 2001) studies the effect of taxes on economic growth by analyzing 52
states of U.S.A grading them from A to C to the extent of revenue collected towards government
spending. He concluded that this impact strongly depends on how those expenditures are used on
welfare, (Molfidi, 1990) reached on similar conclusion studying this impact.
Six years after, the study of (Johnson, 2007) for the same country, showed that taxes had lagged
negative effects, with the adverse impact being realized often after about three year of fiscal reform.
According to (Johansson & Christopher Heady, 2008) reviewing tax structure and trends particular
growth from the bottom to the top by exploring the impact that certain taxes (consumption, property,
personal, and corporation tax). Their study focuses on where moving to an overall new tax structure
effects aggregate economic performance. Thus, studying the changes on tax structure and its effect
on GDP per capita, founded that beyond the policy of tax analysis, tax levels reflects societal choices
as to the appropriate level of public spending. While the response of the economy to the tax structure
varies across countries depending on taxation level. The effects that a changing structure have on
GDP is more long lasting that the effect the same change may have on humans pocket. When in the
open economies the tax design may strongly depend on the other countries taxation in order to
compete in global market this may not happen in countries in transition.
In addition, (OECD, 2010) a periodical journal studying tax policy and economic growth tax system
seeks to create as few obstacles as possible to investment, innovations and other factors affecting
economy growth. This report ranked the most harmful taxes for economy growth as: corporate
income tax, personal income tax, consumption taxes and lastly immovable property taxes the least
harmful one. While when reforming tax systems, policymakers have to weigh up the different goals,
that system tries to achieve. Balancing the efficiency of growth-oriented objectives of tax reform
with their distributional impact. Taking into account the impact of tax reforms on revenues, tax
avoidance, tax compliance and enforcement costs, report advices policymakers to communicate the
issues involved in improving efficiency and equity of tax regimes. This point is crucial for advancing
reforms.
In 2014, (Gale & Samwick, 2014) concludes that individual income affects long-term economic
growth in states where tax cut may encourage individuals to work, save and invest but on the other
28
hand if tax cuts are not accompanied by immediate spending cuts it may result at an increased
budget deficit. The effect on growth in such case may be low or many times negative. Taken
individually not all taxes may have the same impact on economy growth. Reforms that improve
incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing. Resulting
that both changes in the level of revenue and structure of tax system can influence economic activity.
Continuously used argument that income tax cuts raise growth remains a gospel, it may incentives to
work and save but in the other hand it may reduce the need to engage in economic activities thus
having major effect on long-term economy growth.
Regarding the great debate of countercyclical or pro-cyclical fiscal policies, there seems to be a great
discussion on the effects of both, the results of each are dependable on the variables used under the
study. Thus, the Brookings Institution and Tax Policy Center and the Dartmouth College and
National Bureau of Economic Research come with the conclusion that the countercyclical fiscal
policies contribute in the increase of economic growth by boosting the incentives to save, work and
invest; but it also creates income effects that decrease the need to employ in productive economic
activity. They may also subsidize old capital that grants extra gains to asset holders, by weakening
their motivation for new activity (Gale & Samwick, 2014).
In his study (Mirdala, 2009) explored the effects of discretionary changes in fiscal policy (associated
with an increase in government expenditures) as well as the role of automatic stabilizers (associated
with an increase in tax revenues) in the transition economies of Europe. He concluded that, with the
tax revenue shock , the real output should decrease and that a increase in tax revenue is not directly
related to a increase in tax rates; in the case of tax revenue increase due to non increase in tax rates
the economic slowdown of country is not inevitable. As a consequence, higher real national income
can increase tax revenues without harming the economic growth.
However, regarding International Monetary Fund’s working paper, “the policy reaction to the
business cycle is different depending on the state of the economy: fiscal policy is “a-cyclical” during
bad times, while it is pro-cyclical during good times.” Since, policy’s response is generally measured
with regard the output changes and the state of economy it would not be appropriate to define
whether the efficient a fiscal policy is the pro-cyclical or countercyclical one (Manasse, 2009).
29
All in all, what most scholars conclude is that the most impacting factor to economic growth is the
way the revenues are spent rather than the ammount collected in tax revenues. Also, higher tax rates
are seen by most studies as negatively effecting the economic performance of countries. However,
important discussions to be considered are impact and efficiency of pro-cyclical or counter-cyclical
fiscal policies and optimal taxation.
2.2
Optimal Taxation
One important point to be discussed is the optimal taxation system as the starting point of efficiency
in macroeconomic level. Globally have been developed and updated several theories considering the
optimal taxation that in turn assure efficiency in economic performance of the countries applied.
Therefore, standard theory of optimal taxation consists of a system that ought to maximize social
welfare according to some specified limitations. Typical literature of optimal taxation treats the
social projector (decision maker of fiscal policies) as utilitarian, meaning that social welfare is a
function of individual’s utilities in society. There are several hypotheses on utility functions. A
number of studies, consider it as average utility that turns the social welfare function to a linear one,
while other studies consider it as non linear or strictly depended on individuals consumption (Varian,
2006).
Regarding the limitations imposed, (Ramsey, 1927) suggested that the projector should increase
government through consumption tax, tax that should be applied in reverse report to the goods and
services demand elasticity of consumer, meaning that the products which demand is more inelastic
should be taxed more. However, as the tax was based in hypothetical theory further studies
suggested that the optimal tax is one that is not affected by different forms of taxes applicable, but is
rather a lump sum one (Samuelson & Marks, 2006) . Although in reality this kind of taxation is rare
as it burdens the same for rich and poor, creating possible dissatisfaction to wide public as UK case
in 1990, when Margaret Thatcher imposed a lump-sum local tax in favor of efficiency concept,
without taking into consideration the heterogeneous purchase power of population.
2.2.1
Ramsey Theory
In Ramsey theory, the main concern is on how the tax norm on two products should be, in order for
the excess burden of tax to be minimized. To minimize the total burden of tax, the marginal burden
30
derived from income from each product should be the same. To simplify, Ramsey considered that
the individuals consume only two goods in society, particularly X and Y, which are neither
complementary nor substitutes of each other. In the following graph, the individual can buy only X
units with the price of P0 , making thus the offer curve horizontal and demand curve the Dx.
Figure 2: Excess Marginal Burden Source: (Rosen & Gayer)
If a tax ux was to be applied on product X, it would lead to the lower of demand from X 0 to X1,
shown as ΔX in the graph. Thus, the excess burden of tax would be the surface of triangle abc.
Furthermore, if the tax raise would be of 1, the tax would be (ux+1). Now, the price of product would
be P0 + (ux+1) and the quantity demanded would fall from ΔX to X2 meaning that the excess burden
created would be triangle fec. The marginal excess burden created would be the difference between
the two aforementioned triangles, creating the trapezoid fbae. The surface of which is ½ of the
height of (∆x) times the sum of the base [ux + (ux + 1)]. Thus, the excess marginal burden is ½ ∆x [ux
+ (ux + 1)].
As the marginal excess burden increases by the increase of taxes, the income generated from the tax
increase is to be measured. Therefore, dividing the excess marginal burden with income change
would otherwise mean the excess marginal burden created by each additional unit of income. When
tax is ux and income from taxes are uxx1, in the graph is expressed through the rectangle hbaj.
Similarly, when the tax is (ux+1), is expressed through the rectangle gfej. Comparing the two
triangles, as the tax is increased the government earning is gfih and loss ibae. Thus, the change in
income is gfih-ibae. Mathematically the change in income from taxes can be expressed as:
X1 - ∆X = Marginal income from taxes
31
As the condition of total excess burden minimization was achieved through the same marginal
excess burden in each product, then:
∆X/X1-∆X = ∆Y/Y1-∆Y
From where:
∆X/X1=∆Y/Y1
All in all, according to (Ramsey, 1927) the total excess burden from taxation is minimized when the
taxation is such that realizes the same decrease in quantity demanded for each product.
2.2.2
Corlett - Hague Theory
After twenty-six years, (Corlett & Hague, 1953) proved a important implication of Ramsey theory.
Hence, if we have only two products, the efficient taxation would demand the taxation of the product
that is relatively complementary to the leisure time. This means that, if leisure time would be taxed
the income from taxation would be increased without producing an excess burden of tax. However,
as the policymaker cannot tax leisure time, he taxes the products that are accompanied with it,
decreasing thus indirectly the demand for leisure time. According to the authors, if the taxation of
goods consumed accompanying leisure time would be realized, and then it would be reached the
perfectly efficient system.
2.2.3
Edgeworth Theory
(Edgeworth, 1897) on the income tax optimization, aimed to model a systematic way of thinking for
the optimal amount of progressive tax. His model by the end of 19th century, studies the question on
optimal taxation of income based on some simple hypothesis. First, welfare maximization depending
on demanded income. Second, all individuals have the same utility function and last, the sum of total
income is fixed. As the utility functions are identical it means that the marginal utilities are also the
same if income is same. According to this model taxes should be such that after the tax distribution
on income, the latter to be as equal as possible. The income tax should be first collected by rich
people as the loss of marginal utility is less than the one of poor. Lastly, to this theory, the tax
32
burden should be distributed equally only if government would need more income and after the full
equality is reached.
Edgeworth theory is a progressive system in which individuals with higher income should have a
marginal norm of 100%. However, in the last decades economists have investigated how the
Edgeworth theory changes in different conditions and hypothesis in the model.
2.2.4
Mirrlees Theory
(Mirrlees & Dimond, 1971) suggested a new formulation of the policymaker/ projector problem. The
formulation was based on the heterogeneous purchasing power of taxpayers. In his first version,
individuals own different born abilities to generate earnings. The tax collector, can define the
income, which in turn depends on the abilities and efforts put by individuals, which in turn cannot be
controlled by the policymaker. Thus, id the policymaker would levy more taxes to the ones with
more efforts and earning, he will discourage them to earn more.
In the particular model, taxation becomes as a game of imperfect information between taxpayers and
projector. The projector is willing to tax those with higher abilities and pass the funds to the ones
with fewer efforts. However, this system should assure that the individuals with higher abilities do
not pretend as individuals with lower abilities.
Modern analysis of Mirrlees are based on “Preference Revelation Approach”, according to this
approach, optimal allocation of sources can be achieved through a policy where every individual
willingly reveals its preferences. In other words, the policymaker should make sure that the system
gives the right incentives for the high income earners to be motivated to continue earning in higher
amounts even though he wills to levy them in higher rates.
The strong point of the approach is that allows the policymaker to consider all types of realizable tax
systems. While, the weak point is the high level of complexity, the relation of agreement-incentive
that makes individuals not to work in lower levels than the abilities they have. In Mirreels model the
optimization is achieved when marginal tax rates are zero. The supposition holds that in a marginal
tax rate of y for the high income earners, the incentives of earning higher income would decrease,
generating this way a kind of efficiency cost. However, if the marginal tax rate on these taxpayers
33
will be zero above the level y, then the same amount of income would be collected and the
efficiency cost would be eliminated. However, this phenomenon known as “striking antagonist” is
neglected in reality as it is evaluated as not practical. Behind the rationale of redistribution of income
higher marginal taxes on high income earners are justified, though there is no clear criterion on
individuals with high income and low income. Thus, is still unclear who the high income earner is.
In the same wave, (Saez, 2001) argues that unconditional redistribution is more interesting than the
conditional one to solve the optimal taxation problem on high income earners. In addition, he states
that the problem of high income earners and optimal taxation is to some extend simplified in Islamic
tax systems. To such systems, the income tax is not levied, and it is substituted by the tax on
property, which wealth is considered what is left after covering the basic needs or basic standard of
living, meaning that nothing is collected from individuals that do not face such kind of “excess”
income. In addition, to wealthy people a flat tax is levied, omitting the discourage effect a marginal
tax is thought to create.
2.3
Scholars in Albania
When emerging countries are concerned in the debate of taxation impact on economic growth on the
most experienced economists of the country (Malaj, 2012) states that nowadays emerging economies
challenges are not focused on the percentage of economic growth, rather than in the new working
places and opportunities, as through lower unemployment poverty is alleviated and debt crisis is
expected to be surpassed. In addition, the scholar emphasizes that even though the taxation impact is
obvious it cannot be absolute as its direction (either positive or negative) is highly sensitive to
economic and political environment.
Following the same reasoning as (Malaj, 2012), most of the studies available in the country on fiscal
policies are focused either in the relation of fiscal policies to wellbeing or in other times the
efficiency of fiscal policies is seen in terms of the efficiency of public sector and its impact in
economic growth.
Thus, (Syka, 2015) in his paper analyses and reviews the main economic and political events in the
last twenty years in Albania, highlighting fiscal evasion as the main enemy in public finances of the
country and the leaking point of real macroeconomic figures of Albania. Due to the corrupted
34
officers and highly dependent central institutions that are aimed to serve independently (as INSTAT
and Central Bank) the real information on macroeconomic indicators cannot reach the hands of
researches leading to instable empirical finding, leading in no clear conclusion or suggestion on the
impact of fiscal policies to social and economic development. Moreover, the author emphasizes the
importance of fiscal policies adaption to economic and social circumstances of the country, as to his
views and conclusions fiscal policies that finance sectors of economy which give incentives of
economic growth or those that guide to fiscal stability, would reduce social problems and increase
well being in the country.
(Milova & Kule, 2010) draw the relation with economic growth, through the econometric model
built on government spending. Thus, as the most government revenue (that in turn is the mean for
government spending) is generated from tax collection, the government spending impact to
economic growth is investigates, concluded that if the funds are invested in prosperous sectors, the
impact on economic growth is positive.
(Shijaku & Gjokuta, 2013) analyze through their econometric model the impact of fiscal policies to
economic growth for the case of Albania. Hence, the study’s results, suggest that government
revenue is negatively impacting the country’s growth, while government spending is positively
impacting. However, the scale of revenue impact is stronger than the one of spending and after 2007
the negative impact has been intensified, while the positive weakened. The reasoning of authors lies
to the deforming policies. Furthermore, productive spending was positively effecting, while the non
productive ones were negatively impacting.
Regarding the optimal taxation, (Kadiu, 2014) through her investigation concludes that comparing to
other regional countries under study; the optimal fiscal policy should be based on two main factors,
first the efficiency work or the product it generates, that is seen by the study with a mutual benefit
for the individual as for society and as such it should be subject of a progressive taxation. Secondly,
the other main impacting factor is the incentives the taxation creates; in this context for the high
income earners not to be discouraged on generating higher income, a proportional system would be
more appropriate. The conjunction of the two factors would generate the optimal to author view
fiscal system that is a combination of proportional and progressive tax.
35
Reviewing all the literature available on fiscal policies studies for the country of Albania, it is
obvious that previous scholars are based mostly on its well being impact, public administration
efficiency or other comparative approaches to tax system in the region. However, no single study
gives a clear mirroring of the impact of different fiscal policies to the economic growth of the
country. This gap is aimed to be filled by the investigation in this research.
36
3
DATA AND METHODOLOGY
In this chapter the methods use to derive empirical results of this study are presented. The data
specifications, periods and sources used are listed, together with the econometric models
constructed and rationales used.
The empirical part of the study is composed of several models that aim to give an in depth analysis
of taxation system impact on government revenue. The analysis is divided into two spheres, one
analyzing the impact of government revenue components to its performance, considering the two tax
regimes applied in the country; followed by the impact of taxes applicable, divided to direct and
indirect tax, to state revenue.
The data used for this study are obtained from official sources of competent publishing institutions,
such as: International Monetary Fund (IMF) and Ministry of Finance in order to have outcomes of
the results as close to reality as possible. The data comprise of indicators values from 2002 to 2014,
that is to say, a period of thirteen-years (13).
Several econometric models are constructed, most of them Normal and Dummy Variable Regression
Techniques, all processed through the statistical software of SPSS. Normal regression analysis treats
all independent (X) variables in the analysis as numerical, i.e interval or ratio scale variables whose
values are directly comparable. However, the variable of taxation system of either progressive or flat
is a nominal variable, the imputation of which in the regression method would require a technique
that would consider nominal variables impact on the numerical variable of government revenue. Due
to this reason, dummy variable that takes on a finite number of values so that progressive and flat
categories of the nominal variable of taxation system can be identified, is inputted in the models,
where 0 was the definition of progressive tax and 1 the definition of flat. (Bluman, 2009)
In all of its models this study uses as dependent variable the GR (Government Revenue). Variables:
Financial Aid; Tax Income in turn comprised of Value Added Tax (VAT), Personal Income Tax,
Corporate Income Tax, Excise Tax and Duty Tax (Custom); Taxes from Local Government
comprised of local government taxes, Small and Medium Enterprise Tax and Property Tax; Income
from Special Funds comprised of Social Securities and Health Insurance; and Non Tax Income are
37
derived through government’s income statement from Ministry of Finance archives, ( Ministria e
Financave, 2015) and are used as independent variables to some of the models, as supporting
explanatory variables.
The data are presented in billions of the domestic official currency, ALL (Albanian Lek) and the
logarithm of each value is used to process the penal data. The period of progressive taxation
comprises of data correspondent to years 2002-2007 and 2014, while flat tax periods is comprised of
years 2008-2013. The dummy variables of zero (0) indicate progressive taxation and one (1) flat
taxation.
The rational of using dummy variables of taxation system to define government revenue
performance lies behind the fact that 89 percent of government revenue comes from tax revenue, the
rates of which are defined by fiscal policies; a point hence that assures the significance of fiscal
policies as explanatory for government revenue.
3.1
Model 1
The first econometric model, mentioned as Model 1, aims to give the general view on the effect of
particular tax systems to government revenue. The methodology used is a Dummy Variable
Regression Technique, as:
𝐺𝑅 = 𝛽0 + 𝛽1 𝑇𝑎𝑥 𝑆𝑦𝑠𝑡𝑒𝑚 + 𝑢1
3.2
Model 2
The second model, continues further by analyzing the components impact on government revenue,
to investigate on the accounts to which the government revenue is most sensitive to in the general
picture. Thus, processed through a simple regression the econometric model considers government
revenue (GR) as depended variable and Financial Aid (FA), Tax Income (TI), Tax from Local
Government (TLG), Tax and Special Securities (TSF) and Non-Tax Income as independent
variables
𝐺𝑅 = 𝛽0 + 𝛽1 𝐹𝐴 + 𝛽2 𝑇𝐼 + 𝛽3 𝑇𝐿𝐺 + 𝛽4 𝑇𝑆𝐹 + 𝛽5 𝑁𝑇𝐼
38
3.3
Model 3
Moreover, the third model aims to examine the impact of direct and indirect taxes, considering the
taxation system as dummy variable to the dependent variable of government revenue. Government
revenue is one of those indicators which is the most discussable and strongly affects government
position towards individuals and opposition party. The relation of tax revenue and taxes is calculated
through the formula:
Direct Tax Revenue= Profit Tax + Personal Income Tax + National Taxes and Others +
Revenues from Local Government + Social Insurance and Contributions
While,
Indirect Government Revenues = Custom Duties + VAT + Excise Tax
The summation of direct and indirect tax revenue makes the total of tax revenue, the article that
holds the highest share of 89% on average to Government Revenue indicator.
Hence, a Dummy Variable Regression model is processed through SPSS, using Direct Taxes and
Indirect Taxes quantitave variables and taxation system as qualitative/dummy variable as
independent and government revenue as dependent, under the equation:
𝐺𝑅 = 𝛽0 + 𝛽1 𝐷𝑖𝑟𝑒𝑐𝑡 + 𝛽2 𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 + 𝛽3 𝑇𝑎𝑥 𝑆𝑦𝑠𝑡𝑒𝑚.
3.4
Model 4
The last model, Model 4, is a simple regression that explores the impact of each tax to government
revenue. Thus, the model considers the Value Added Tax (VAT), Corporate Income Tax, Excise
Tax, Personal Income Tax, National and Other Taxes, Duty (custom) Taxes, Local Taxes, Property
Taxes and Small and Medium Enterprise Taxes (SME) as independent, to find out the most affecting
tax to government revenue.
𝐺𝑅 = 𝛽0 + 𝛽1 𝑉𝐴𝑇 + 𝛽2 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 + 𝛽3 𝐸𝑥𝑐𝑖𝑠𝑒 + 𝛽4 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 + 𝛽5 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 + 𝛽6 𝐷𝑢𝑡𝑦 +
𝛽7 𝐿𝑜𝑐𝑎𝑙 + 𝛽8 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 + 𝛽9 𝑆𝑀𝐸
39
4
EMPIRICAL FINDINGS
This chapter presents the results of the econometric models, together with main findings and their
interpretation. The analysis of each model is divided in a separate subsection.
4.1
Model 1
Starting with the model where government revenue is used as dependent variable and the dummy
variable of taxation system as explanatory independent variable, specifying progressive (0) and flat
(1) taxes the model was proved to be significant with an R-square of 0.858. According to the model
summary, the fiscal policy of a government can explain the changes in government revenues for 85
percent. Indicating the great share of revenues that are generated from tax income, in turn defined by
the fiscal policies. (See: Table 4 in Appendix)
Furthermore, the ANOVA results shows the significance of the whole model, taking into
consideration both quantitative and qualitative variables in the regression. Thus if we consider as
null hypothesis and alternative hypothesis of:
H0: Taxation System is not significant in defining government revenue
H1: Taxation System is significant in defining government revenue
Also, given the critical value for the given degrees of freedom of F (1,11) of 4.844; the higher F
value of 30.807 (See: Table 5 in Appendix) resulted by the model, rejects the null hypothesis and
reflects enough evidence to prove that the model of defining the government revenue by tax system
is significant. A result, expected by this study as tax revenue is a component of government revenue
making it thus a highly affecting factor.
Albanian taxation system used as an dummy variable as indicated in the coefficients table (See Table
6 in Appendix) shows that the decision made by the government on the fiscal policy may negatively
or positively affect the government revenues; respectively the progressive tax rate may effect
positively while the flat tax rate negatively.
GR = 0.506 – 0.201(tax system) + µi
Moreover, the effect of this change will be equal to the 0.201 units. Which means that if the
government will apply flat taxes and these taxes income will change for one percent, the government
40
revenue will decrease for 0.201 million ALL. While the progressive tax would have an opposite
effect, according to results.
4.2
Model 2
The Model 1 gives a general indication of the impact of tax regimes to government revenue. Hence,
starting from the high impact such policies have on government revenue, the Model 2 investigates
the effect of each of government revenue components to it, so as to fucus the study on the most
affecting element.
Starting from the link between the variables, the correlation (See Table 8 in Appendix) between
Government Revenues (GR) and its components is observed a 29 percent correlation between
Financial Aids (FA), 99 percent with Taxes Income (TI), 73 percent with Taxes from Local
Government (TLG), 98 percent with Taxes from Special Funds (TSF) and 53 percent with Non Tax
Income (NTI). Proving that the Government Revenue is mostly related and affected by the income
generated from taxes; specifically: the value added tax (VAT), corporate tax, personal income tax,
duty fee tax (custom taxes) and national and other taxes. This indicates the high volatility of the
Government Revenue to fiscal policies. Similar results are observed for taxes collected from local
government. Another finding to this study is the high correlation by 98.6 percent between the taxes
from special funds (TSF) particularly: social contributions and health securities, and tax income (TI).
Possible explanation to this finding is the domestic payroll computation law on social and health
securities estimation in line with personal income tax.
Regarding the effect of each government revenue component to its yearly value, a normal regression
processed through SPSS proves 100 percent explanation of government revenue by non-tax income
(NTI), tax from local government (TLG), financial aids (FA), tax from special funds (TSF) and tax
income (TI). This absolute significance is due to the fact that the above items are full components of
government revenue calculation. However, the aim of this model is to investigate the impact of each
component to government revenue so as to highlight the find out the most affecting factor.
Therefore, in addition to the full explanation indicated by R-square (See Table 9 in Appendix), the
F–test of the model which is several times higher than the critical value of 3.971 proves the
significance of whole model (See Table 10 in Appendix).
41
Furthermore, the Beta coefficients (See Table 11 In Appendix) of each variable define the impact of
each variable in the model to the dependent variable (government revenue). Thus one percent
increase in financial aid would increase the government revenue by 19 percent; this low impact may
be due to the continuously descending financial aids the state has been provided in last 20 years. Tax
Income impact resulted as the higher impacting positively government revenue by 69.5 percent.
Meanwhile, taxes from local government (TLG), taxes from special funds (TSF) and non-tax income
(NTI) show the lowest thresholds. Overall, the tax income proves to be main source of government
revenue generation and the most impacting factor to revenues performance.
4.3
Model 3
Considering the fact that tax revenue is the most affecting factor to government revenue, the
sensitivity and impact factor of taxes divided into direct and indirect is investigated in this model for
the specific taxation system (Dummy Variable), where total income from taxes used as an
independent variable while direct, indirect taxes and tax system (dummy variables) as dependent
ones.
Consequently, from the correlation (See Table 13 in Appendix) a strong correlation between indirect
taxes and total income from taxes followed by the nearly weak positive correlation between direct
tax and total income is observed. Meaning that the indirect taxes applicable in the country, are
affecting in greater scale the government revenue than the direct ones.
In line with the previous experiment of investigating the impact of each compnent to the government
revenue, mediating the effect of these taxes into direct and indirect, the significant model explains
the government revenue by 99 percent (See Table 14 in Appendix). The same significance of model
is testified by significant F-test derived by ANOVA analysis (See Table 15 in Appendix).
From the Beta coefficient (See Table 16 in Appendix), we can understand that for 1 percent increase
in direct taxation it can increase total income from taxes by 63 percent while indirect taxes, which
increases total income from taxes by 147 percent. This due to the high importance and effect of
indirect taxes on total income and informality through fiscal evasion and non-declaration of
employees making the direct taxes less affecting in the revenues. Another reason for the lower rate
of direct taxes is the high rate applicable to indirect taxes such as VAT, excise and custom taxes that
in turn means higher income for the government. From the dummy variables used to see the effect of
42
taxation system on income from taxes where 0 was for progressive and 1 for flat, progressive
taxation positively affects income from taxes by 9.3 percent while flat negatively affects by the same
percentage.
4.4
Model 4
Splitting the direct and indirect taxes to spate applicable in reality taxes, this model, examines the
effect of each tax to government revenue.
Regarding the correlation (See Table 18 in Appendix) between specific taxes and government
revenue, VAT proves to have the highest correlation with government revenue by 99.5 percent
followed by excises 95 percent and personal income tax of 94 percent. National taxes and property
taxes stay almost in the same correlation rate, particularly 69.8 percent and 68 percent. Local taxes
and small medium enterprise taxes (SME) are shown as the less correlated. This result may be due to
the lower tax rates applied for the subject of these taxes. In addition, interesting to notice is a
negative correlation with corporate tax and duty tax.
According to the results of the regression, the variables of small and medium enterprises tax (SME),
duty tax (custom), excise tax, corporate tax, national and other tax, local tax, property tax, personal
income tax and value added tax (VAT) explained the variation of government revenue by 99 percent.
The same significance of the whole model is proved by the ANOVA results (See Table 19 in
Appendix).
Lastly, the impact of value added tax (VAT) seems to triple the government revenue and this may be
due to high number of subjects and applicable rate (See Table 21 in Appendix). Excise taxes seems
to affect the government revenue by 84 percent. Meanwhile, the personal income tax, duty tax and
local tax are shown negatively affecting government revenues, a strange result that may be due to the
fiscal evasion and non – declaration of employed employees by the companies and physical persons
in the country. In addition, the lower rates of tax are applied to property taxes and small and medium
enterprise entities, this fact has made possible most of the subjects to repay the liabilities to the state
leading to high coefficient that almost doubles and triples the state revenue. However, the results are
comprehended by fiscal evasion.
43
CONCLUSION
Fiscal policies efficiency, optimal taxation system and particular rates, are one of the world’s hot
research topics. World scholars have been investigating and generating theories on fiscal policies for
centuries now. However, emerging countries, as the one of Albania has been left behind, with just a
few domestic studies mainly from Ministry of Finance. The taxation system and its functioning as
per most scholars, is unique as it is adapted to the social, economic and political circumstances of the
country. Thus, taking into consideration the Albania’s instable transition economy in the past twenty
five years, sensitive and fluctuative government revenue was observed to have nearly stabilized
during the past ten years. However, if the comparison from the year of communism collapse score of
state revenue to todays one is to be compared, a more than tripled amount is monitored. Important to
mention, is that significant years of 1997 (Albania’s civil war), have scored minimal amounts in
states cash register.
Moreover, linking to fiscal policies, the two tax regimes applied in the country, the one of
progressive and flat taxation, have functioned with continuously changing and decreasing rates,
mostly affected by membership in international organization, alliances or treaties.
The aim of the study is to make a step by step comparative analysis of both taxation systems and
government revenues, starting from the general impact, to end up with specific analysis of each tax
applicable effect on government income. Thus, to this study’s results, the progressive tax system has
been more effective in the country, affecting positively the revenue performance. In addition, the
most affecting component of government revenues resulted to be tax income that highlights the
importance of fiscal policies optimization for positive results in state’s income statement. Moreover,
analyzing the impact of taxes the two analyses completed showed that in terms of direct and indirect
taxation, the latter has had more impact. Regarding the impact of each tax, the VAT tax was proved
to be the most impacting followed by excise tax, national taxes and corporate income tax; a possible
explanation of the high impact, is because of the high share they hold in tax income due to the large
number of subjects they are levied on. Property tax and Small and Medium Enterprise Tax resulted
also in high impact, however the results are doubted to the views of this study as prior to 2008 no
record are held for property tax. Lastly, the Personal Income tax, Duty (Custom) tax and Local
Taxes resulted in negative impact, an outcome that can only be interpreted under the assumption of
44
informality present in the country, in declaration of revenues, employees and commodities
merchandised. The social securities and health insurances were found to have a tight correlation to
the Personal Income Tax, due to the law of their collective calculation.
To sum up, progressive taxation proved to have positively affected government income, in contrast
to flat tax; a view that is in contrast to most scholars’ views. Nevertheless, as the study was getting
deeper in analysis, contradictory results were observed and this is due to the most prevailing problem
of informality, mostly shown through fiscal evasion, non-declaration of income, merchandise and
non-payment of liabilities due to state.
45
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48
APPENDIX
Table 2 - Model 1. Descriptive Statistics
Mean
Std. Deviation
N
GR
.4134
.12179
13
Tax_system
.4615
.51887
13
Table 3 - Model 1. Correlations
GR
Pearson Correlation
Sig. (1-tailed)
Tax_system
GR
1.000
-.858
Tax_system
-.858
1.000
.
.000
.000
.
GR
13
13
Tax_system
13
13
GR
Tax_system
N
Table 4 - Model 1. Model Summary
Model
R
R
Adjusted R
Std. Error of
Square
Square
the Estimate
Change Statistics
R
1
Square
F
Change
Change
.858(a)
.737
df1
df2
.713
.06525
a Predictors: (Constant), Tax_system
49
Sig. F
R Square
Change
Change
.737
30.807
F Change
1
df1
11
df2
.000
Table 5 - Model 1. ANOVA (b)
Model
1
Sum of Squares
Df
Mean Square
Regression
.131
1
.131
Residual
.047
11
.004
Total
.178
12
F
Sig.
30.807
.000(a)
a Predictors: (Constant), Tax_system
b Dependent Variable: GR
Table 6 - Model 1. Coefficients (a)
Model
Unstandardized
Standardized
Coefficients
Coefficients
t
Sig.
Beta
B
Std. Error
Std.
B
1
(Constant)
Tax_system
Error
.506
.025
-.201
.036
-.858
20.532
.000
-5.550
.000
a Dependent Variable: GR
Table 7 - Model 2. Descriptive Statistics
Mean
Std. Deviation
N
GR
.4134
.12179
13
FA
-1.3620
.22046
13
TI
.2483
.13626
13
TLG
-.9844
.10410
13
TSF
-.3491
.12471
13
NTIncome
-.6779
.09194
13
50
Table 8 - Model 2. Correlations
GR
Pearson Correlation
Sig. (1-tailed)
N
FA
TI
TLG
TSF
NTIncome
GR
1.000
.290
.999
.738
.987
.532
FA
.290
1.000
.265
.282
.343
-.243
TI
.999
.265
1.000
.744
.986
.526
TLG
.738
.282
.744
1.000
.740
.075
TSF
.987
.343
.986
.740
1.000
.424
NTIncome
.532
-.243
.526
.075
.424
1.000
GR
.
.168
.000
.002
.000
.031
FA
.168
.
.191
.175
.126
.212
TI
.000
.191
.
.002
.000
.032
TLG
.002
.175
.002
.
.002
.404
TSF
.000
.126
.000
.002
.
.074
NTIncome
.031
.212
.032
.404
.074
.
GR
13
13
13
13
13
13
FA
13
13
13
13
13
13
TI
13
13
13
13
13
13
TLG
13
13
13
13
13
13
TSF
13
13
13
13
13
13
NTIncome
13
13
13
13
13
13
Table 9 - Model 2. Model Summary
Std.
Error of
Adjusted
Model
R
the
R Square R Square Estimate
R Square
Change
1
1.000(a)
F Change
1.000
df1
df2
1.000
.00185
Change Statistics
Sig. F
R Square
Change
Change
1.000
a Predictors: (Constant), NTIncome, TLG, FA, TSF, TI
51
10369.833
F Change
df1
5
df2
7
.000
Table 10 - Model 2. ANOVA (b)
Model
1
Sum of Squares
df
Mean Square
Regression
.178
5
.036
Residual
.000
7
.000
Total
.178
12
F
Sig.
10369.833
.000(a)
a Predictors: (Constant), NTIncome, TLG, FA, TSF, TDF
b Dependent Variable: GR
Table 11 - Model 2. Coefficients (a)
Model
Unstandardized
Standardized
Coefficients
Coefficients
t
Sig.
Beta
B
Std. Error
Std.
B
1
Error
(Constant)
.399
.040
10.023
.000
FA
.019
.003
.034
6.280
.000
TI
.695
.044
.778
15.655
.000
TLG
.024
.011
.020
2.197
.064
TSF
.166
.042
.170
3.980
.005
NTIncome
.076
.013
.058
5.852
.001
a Dependent Variable: GR
Table 12 - Model 3. Descriptive Statistics
Mean
Std. Deviation
N
Total_Income
2.6303
.67995
13
Direct
.6814
.20339
13
Indirect
1.2597
.38023
13
Tax_System
.5000
.51887
13
52
Table 13 - Model 3. Correlations
Total_Income
Pearson Correlation
Total_Income
Sig. (1-tailed)
Indirect
Tax_System
1.000
.635
.982
.890
Direct
.635
1.000
.493
.540
Indirect
.982
.493
1.000
.866
Tax_System
.890
.540
.866
1.000
.
.007
.000
.000
Direct
.007
.
.037
.023
Indirect
.000
.037
.
.000
Tax_System
.000
.023
.000
.
Total_Income
13
13
13
13
Direct
13
13
13
13
Indirect
13
13
13
13
Tax_System
13
13
13
13
Total_Income
N
Direct
Table 14 - Model 3. Model Summary
Std. Error
Adjusted
Model
R
R Square R Square
of the
Estimate
Change Statistics
R
1
R Square
F
Change
Change
.998(a)
.995
df1
.994
df2
.05302
a Predictors: (Constant), Tax_System, Direct, Indirect
53
Sig. F
Square
F
Change
Change
Change
.995 709.229
3
df1
df2
10
.000
Table 15 - Model 3. ANOVA (b)
Sum of
Model
Squares
1
Regression
Residual
Total
df
Mean Square
5.982
3
1.994
.028
10
.003
6.010
12
F
Sig.
709.229
.000(a)
a Predictors: (Constant), Tax_System, Direct, Indirect
b Dependent Variable: Total_Income
Table 16 - Model 3. Coefficients (a)
Unstandardized
Standardized
Coefficients
Coefficients
T
Sig.
Beta
B
Std. Error
Model
B
1
Std. Error
(Constant)
.290
.088
Direct
.632
.086
1.479
.093
Indirect
Tax_System
3.288
.008
.189
7.341
.000
.078
.827
19.060
.000
.059
.071
1.586
.144
a Dependent Variable: Total_Income
Table 17 - Model 4. Descriptive Statistics
Mean
Total_Income
Std. Deviation
N
2.6303
.67995
13
VAT
.8979
.28030
13
Corporate
.2151
.13723
13
Excise
.2671
.12427
13
Personal_Income
.1852
.09643
13
National_Other
.1777
.06242
13
Duty
.0947
.04002
13
Loal
.0604
.02327
13
Property
.0109
.00995
13
SME
.0321
.01507
13
54
Table 18 - Model 4. Correlations
Pearson Correlation
Sig. (1-tailed)
N
Total_Income
VAT
Corporate
Excise
Personal_Income
National_Other
Duty
Local
Property
SME
Total_Income
1.000
.995
-.161
.952
.943
.698
-.594
.257
.681
.261
VAT
.995
1.000
-.153
.946
.950
.643
-.583
.303
.690
.188
Corporate
-.161
-.153
1.000
-.425
-.039
-.008
-.447
-.161
.319
-.374
Excise
.952
.946
-.425
1.000
.846
.600
-.388
.347
.488
.311
Personal_Income
.943
.950
-.039
.846
1.000
.716
-.764
.066
.854
.173
National_and Other
.698
.643
-.008
.600
.716
1.000
-.754
-.392
.684
.507
Duty
-.594
-.583
-.447
-.388
-.764
-.754
1.000
.343
-.919
-.040
Local
.257
.303
-.161
.347
.066
-.392
.343
1.000
-.171
-.378
Property
.681
.690
.319
.488
.854
.684
-.919
-.171
1.000
-.043
SME
.261
.188
-.374
.311
.173
.507
-.040
-.378
-.043
1.000
Total_Income
.
.000
.292
.000
.000
.003
.013
.188
.004
.184
VAT
.000
.
.301
.000
.000
.007
.014
.146
.003
.260
Corporate
.292
.301
.
.065
.447
.489
.054
.291
.133
.094
Excise
.000
.000
.065
.
.000
.012
.085
.112
.038
.139
Personal_Income
.000
.000
.447
.000
.
.002
.001
.411
.000
.278
National_Other
.003
.007
.489
.012
.002
.
.001
.083
.004
.032
Duty
.013
.014
.054
.085
.001
.001
.
.115
.000
.446
Local
.188
.146
.291
.112
.411
.083
.115
.
.280
.092
Property
SME
Total_Income
.004
.184
13
.003
.260
13
.133
.094
13
.038
.139
13
.000
.278
13
.004
.032
13
.000
.446
13
.280
.092
13
.
.442
13
.442
.
13
VAT
13
13
13
13
13
13
13
13
13
13
Corporate
13
13
13
13
13
13
13
13
13
13
Excise
13
13
13
13
13
13
13
13
13
13
Personal_Income
13
13
13
13
13
13
13
13
13
13
National_Other
13
13
13
13
13
13
13
13
13
13
Duty
13
13
13
13
13
13
13
13
13
13
Local
13
13
13
13
13
13
13
13
13
13
Property
13
13
13
13
13
13
13
13
13
13
SME
13
13
13
13
13
13
13
13
13
13
55
Table 19 - Model 4. Model Summary
Std. Error
Model
R
R
Adjusted
of the
Square
R Square
Estimate
Change Statistics
R
1
R
Square
F
Change
Change
.999(a)
.999
df1
df2
.996
.04550
Sig. F
Square
F
Change
Change
Change
.999 322.061
df1
9
df2
4
.000
a Predictors: (Constant), SME, Duty, Excise, Corporate, National_Other, Local, Property, Personal_Income, VAT
Table 20 - Model 4. ANOVA (b)
Sum of
Model
1
Squares
Regression
Residual
Total
df
Mean Square
6.002
9
.667
.008
4
.002
6.010
13
F
322.061
a Predictors: (Constant), SME, Duty, Excise, Corporate, National_Other, Loal, Property, Personal_Income, VAT
b Dependent Variable: Total_Income
56
Sig.
.000(a)
Table 21 - Model 4. Coefficients (a)
Unstandardized
Standardized
Coefficients
Coefficients
t
Sig.
Beta
B
Std. Error
Model
B
1
(Constant)
Std. Error
.368
.299
1.228
.287
2.270
1.044
.936
2.174
.095
Corporate
.207
.472
.042
.439
.684
Excise
.846
1.164
.155
.727
.507
-1.139
2.758
-.162
-.413
.701
.659
1.058
.060
.623
.567
Duty
-.203
2.455
-.012
-.083
.938
Local
-.385
2.072
-.013
-.186
.862
Property
2.185
7.279
.032
.300
.779
SME
2.062
1.696
.046
1.216
.291
VAT
Personal_Income
National_Other
a Dependent Variable: Total_Income
57
Table 22- Data Inputed
Nr.
Article
TOTAL OF INCOME
I.
Financial Aid
II.
Tax Income
II.1
From taxes and Duty fees
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
154.6
167.22
184.4
204.2
229.4
251.6
291.2
299.0
324.7
330.5
330.4
327.2
366.7
4.1
2.6
2.4
6.2
8.0
1.3
4.2
4.4
4.6
3.8
5.6
5.7
10.1
128.9
145.4
166.0
183.8
205.5
228.2
264.4
270.8
288.6
303.9
300.9
299.9
335.9
98.1
108.8
123.1
135.6
155.1
176.8
205.3
208.9
223.0
235.5
232.6
229.0
253.5
1
Value Added Tax
46.1
50.6
58.2
64.5
74.3
87.8
107.1
110.1
114.0
119.2
116.5
111.9
123.8
2
Corporate Tax
12.2
13.1
16.3
19.2
22.3
21.1
18.1
17.1
17.6
19.7
16.9
15.1
21.5
3
Excise Tax
9.3
12.3
15.8
18.5
23.0
28.7
32.5
33.5
38.8
40.4
36.4
38.2
40.9
4
Personal Income Tax
6.1
6.4
6.9
7.4
8.6
14.8
24.5
26.8
27.1
28.0
28.0
29.6
28.9
5
National and Other taxes
10.9
12.5
12.1
12.3
13.0
14.5
14.4
13.4
18.3
21.4
28.7
28.5
32.6
6
Duty Taxes
13.4
13.9
13.9
13.6
14.0
9.8
8.7
7.9
7.3
6.9
6.1
5.8
5.9
5.2
7.9
9.6
12.0
11.1
9.4
11.3
12.1
11.9
11.8
10.9
10.8
12.4
Taxes from Local
II.2
Government
1
Local Taxes
2.7
5.0
5.6
8.2
8.5
7.1
7.1
8.2
7.7
7.3
6.2
2.5
3.7
2
Property Tax (Land)
0.0
0.0
0.0
0.0
0.0
0.0
1.6
1.5
1.9
1.9
2.5
2.0
1.7
3
Small Enterprise Tax
2.5
2.9
4.1
3.8
2.6
2.2
2.6
2.5
2.3
2.6
2.1
6.4
7.1
25.6
28.7
33.3
36.2
39.3
42.0
47.8
49.8
53.6
56.6
57.4
60.0
69.9
II.3
Income from Special Funds
1
Social Security
23.5
26.1
30.4
33.1
35.7
37.6
42.5
44.3
45.0
48.8
49.5
51.1
61.4
2
Health Security
2.1
2.6
2.9
3.1
3.6
4.4
5.3
5.5
6.4
6.2
6.6
7.4
8.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2.2
1.6
1.3
1.6
0.3
Non-tax Income
21.5
19.2
16.0
14.2
15.9
22.1
22.6
23.7
31.6
22.7
24.0
21.6
20.7
1
Profit tranfer from BoA
10.3
8.9
5.1
5.0
5.2
5.0
5.7
6.2
4.9
5.7
4.7
4.6
2.0
2
Income from Budgeting Ins
6.3
6.1
7.9
7.2
8.2
9.5
8.9
9.3
14.0
10.3
10.3
10.0
11.2
Income for owner's
3
III.
compensation
3
Dividend
0.0
0.0
0.0
0.0
0.0
0.0
6.4
0.4
0.7
1.1
0.4
0.9
1.4
4
Service Fees
0.0
0.0
0.0
0.0
0.0
0.0
0.0
4.2
3.0
3.5
3.8
3.1
3.2
58