The Craggy Flat-Tax Reform

AGENDA Institute in the framework of a series of analysis on key public policies and strategies organized on June 25th a round table to present its Policy Brief No.4, "THE CRAGGY FLAT-TAX REFORM".

The opening speech was held by Mrs. Milva Ekonomi, Executive Director of AGENDA Institute.

Mr. Gjergji Filipi, Research Director, introduced the research team, methodology and briefed the participants on the findings of this policy analysis.

The paper asserts that based on the regional flat-tax practices, either successful or unsuccessful, and taking account of western skepticism on the flat-tax, this kind of policy reform does not guarantee sure positive results. If utterly and accurately implemented, the flat-tax reform is believed to result in multifaceted effects, which depending on the specific economic environment where it is applied, can turn out to either promote or undermine the overall effects of social and economic policies. The simultaneous application of the contentious scheme of minimal wages of reference and the flat-tax reform as proposed by the Albanian Government will necessarily result in revenue deficits. The flat tax modifies the level of taxation, while the categorization of the wages directly impacts the base in which they are applied.

The changes in personal income tax levels will result in lowering the net income on all individuals obtaining a monthly salary of less than 140.000 lek, while wages above that amount will benefit an increase in their net income compared to the progressive system in place prior to the flat-tax proposal. The middle-income workforce with monthly salaries from 40.000 to 90.000 lek will suffer the most from this proposed fiscal reform, with an immediate lowering of their net income with over 2.500 lek each month.

On a macro perspective, this kind of fiscal policy poses a craggy challenge with many uncertainties. How will this fiscal reform affect the incentives of doing business? Or, how will it associate with the formalization of hidden economic activity, tax administration efficiency or even how will the whole Albanian economic system translate this change in terms of employment, exports, foreign direct investments etc.

Taking reference of the latest policy attempts and taking into consideration the particularities of the Albanian economy, more effective than decreasing the corporate tax level would have been focusing on structural interventions necessary to create a more favorable and sustainable business environment. It appears that policymakers have decided to take the risk of decreasing the net income of individuals to favor capital creation through cutting corporate taxes in half. The estimations in this study indicate that the state budget will benefit an additional 5,8 billion leks in 2008 due to the application of the flat tax on personal income, while it will suffer a shortfall of more than 10 billion leks due to the lowering of the corporate tax. But how sure are we that this additional capital will be transformed into investments for as long as there seems to be a rather hostile business climate as well as a lack of consideration and willingness for improving it?

"The Craggy Flat-Tax Reform" attempts to touch upon the issues mentioned above and in its final chapter takes a closer look into the shoes and garments industry in the form of a case study. The paper concludes that however craggy might appear to be the interventions with economic policies, the prospects are in the favor of their success only and only if their ultimate outcome leans toward the creation of more job opportunities.

The activity was followed with interest by economists and analysts in the field of taxation and fiscal reforms, representatives from civil society, business community as well as the printed and visual media which broadcasted and commented on this activity in the following days. Mr. Arben Malaj, former Minister of Finance and current member of the Parliamentary Committee on Economy and Finance, offered exceptionally valuable concrete insights on the debate.

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