TIRANA TIMES EDITORIAL
Albania’s taxation system is about to undergo the largest overhaul in five years with great implications for both businesses and individual earners. Such change will no doubt generate much debate about who wins and who loses – and whether the change is what’s best for country. But beyond the numbers, the most important thing to point out is that how the changes are implemented is more important than the actual new tax percentages.
For five years now, Albania has been a flat tax place, a puritan free market approach implemented by the former center-right government. In theory, it’s great for a small, developing country like Albania. Businesses in particular love it. And the tax was set low – at 10 percent – so it worked to entice more investment.
The new government, standing true to its leftist leaning, now wants to overhaul the system under the slogan: Those who make more, pay more נthose who make less, pay less. The language has been copy-pasted from speeches of left-leaning politicians elsewhere, but, in essence, it means the flat tax is out to be replaced with a progressive tax that relies more on high-income earners and large corporations and less on lower wages and small businesses, which will see their taxes go down.
The only verifiable good news out of this story so far is that for the first time in years, Albania’s two main groupings have allowed themselves the luxury of debating something that is a global right-and-left political issue: How to levy taxes and how much. Before these past elections, voters had a hard time distinguishing the self-proclaimed leftists from the center-right.
One thing is certain though: In Albania, how tax laws are implemented and certainty that they are not changed every six months are far more important to businesses than the actual amount they are taxed, within reason, of course. Implementation means that the laws are actually enforced equally for all and everyone pays what is owed. As it stands right now, informality is high and those who follow the rules pay for everyone who doesn’t.
The previous government changed the tax laws so frequently, it defeated the entire purpose of enticing investors with low taxes. It also made a mess not paying its bills to businesses that had worked on public projects and not reimbursing the VAT owed to companies.
The current government says it is working to remedy these problems, but whatever good will it is gaining with the business community, will be tested with the higher corporate earnings rate is wants to implement – 15 percent, up from 10 percent.
The Socialist-led government should not forget that it is at the helm of a small country in a neighborhood filled with flat tax countries. So there will be a cost to pay in terms of competitiveness, but one that the government can recover through creating a more secure place to do business and finding other ways to outperform the neighbors.
Opponents of the change – in effect a 50 percent increase in income taxes for corporations – argue that it will increase informality in a country where it is already high. The same applies for high-income earners, which in Albania means people who make more than 11,000 euros annually.
Only time will tell if this will actually materialize. Lowering taxes on most people could also help lower informality as there would be more of an incentive to declare all earnings, but the government should make sure the law is fully implemented for all equally – and recent history shows that in Albania that is easier said than done.
Despite statements by some in the former administration, claiming progressive taxation is “Marxist” – virtually every developed country in the world including most of the EU members use this type of progressive tax. Flat tax countries are a minority. But a flat tax was not necessarily a bad thing for a country like Albania.
Theory aside, it will take a couple of years before the verdict is out on the effectiveness of a return to progressive taxation.
