Capital taxation or super tax of wealth of rich Albanians in the time of economic polarization

“We are living through an unprecedented moment of multiple crises. Tens of millions more people are facing hunger. Hundreds of millions more face impossible rises in the cost of basic goods or heating their homes. Poverty has increased for the first time in 25 years. At the same time, these multiple crises all have winners. The very richest have become dramatically richer and corporate profits have hit record highs, driving an explosion of inequality.” [1]

Oxfam [2] on the opening day of the Davos forum (2023) calls for progressive taxation on the income and wealth of the rich, including:

1. Personal income.
2. Capital gains.
3. Unrealized capital gains.
4. Property tax.
5. Inheritance tax, and
6. Tax on net worth [3].

We find regarding the tax policy and the taxes that most need to change in Albania is a reality that does not coincide with the tax logic in developed countries, which base the main tax burden on income tax.

Always if we must be convinced that the time has come for the tax policy to slightly ease market relations and the living costs of individuals in Albania, we first emphasize that the tax burden depends on consumption taxes and not on income tax.

However, during the year 2022, the need to reduce VAT was often discussed and analyzed, based on the logic of its direct impact on the price reduction. However, the objections to its non-application have been more numerous, starting from the excessive presence of informality in the market and the violation of fiscal integrity.

Although the government has not yet addressed the objective of minimizing evasion by not defining either time limits or a complete methodology for the fight against it, there is still room to discuss the impact on the poor of VAT reduction.

By the government and supporters, it is argued of not reducing the VAT, that the support of the state budget in consumption taxes, which are seen as regressive, suggests a limited or negative impact on the redistribution of income through the tax system.

In fact, according to supporters of reducing VAT, it is emphasized that consumption taxes affect poor families differently than rich ones. Consumption taxes on some everyday goods, e.g. fuels, daily food prevents poor families from getting the amount of product they need due to limited financial resources.

Then, the exemption/reduction of consumption taxes for these products can be progressive. For example, exempting food from VAT would allow the government to redistribute wealth to the poor, given the reality that the poor spend a larger portion of their budget on food (46% of the family budget) [4] than the rich.

Similarly, the presence of a large informal (untaxed) sector would make consumption taxes progressive, since by reducing consumption taxes, then the share of the household budget spent on the informal sector falls as it becomes consumer of the formal market.

However, purchases in the informal market deserve an in-depth study as by their nature, purchases are difficult to observe and relate to consumer income.

In general, fiscal administration policies should consider not only their impact on efficiency, but also on inequality.

The successful implementation of a tax policy in reducing inequality depends not only on its progressivity, but also on the level of tax rates and the size of the tax base that determine the share of a household’s budget that should be devoted to paying taxes.

Meanwhile, fiscal policies in the last 3 decades have been adopted primarily for the interests of the state budget. If we put this one-sided approach of governance in the complicated context that we know, where the government must face extraordinary expenses with its ordinary resources, we think it makes it uninterested in reducing taxes or implementing policies that can affect the stability of income.

If we refer further to our analysis, a new political approach to income tax, taxing the rich in principle has been accepted by the government and the Ministry of Finance and Economy together with the Central Tax Administration have begun to draft according to the references of foreign assistants (only they are still accepted as a reference even after 30 years) as a new fiscal move in government policy.

However, under the current income tax law and the legal framework for keeping accounting accounts, both together do not distinguish between “large” and “small” profit.

So, according to the current legislation profit either exists or it does not exist.

In this situation, a wealthy individual in Albania who is a shareholder in both a small business and a large business is faced with the tax policy, not in a clear position regarding the fate of his taxation as a albanian rich capitalist.

Familiarizing yourself with the register of Albanian businesses, it is easy to see that over 80 percent of them have the tax status of Small or Medium Business with a turnover of up to 14 million ALL. Most of these businesses include shareholders in large companies or individuals with high incomes that belong to only 5% of the population.

This policy of exemption from income tax does not seem possible to be cancelled, as it directly affects the loss of trust in government policies.

However, now the increasing availability of digital technology (e-albania) can reduce these costs and make it possible to bring smaller and smaller businesses into the tax net, removing the administrative rationale for exempting small firms from taxes for the government.

But only the not very logical argument remains, that the exemption of small businesses from taxation until 2029 can still be justified on the basis of the size of the capital.

Then, policy attention is directed by the super taxation format, for large companies and their individual shareholders, but not excluding wealthy individuals who own capital (shares and bank accounts and securities) and movable and immovable assets.

The segment of large businesses includes up to 800 companies, or only 0.7% of businesses in the country. Likewise, individuals who can be categorized as rich do not exceed more than 0.1% of the population.

In reality, a part of individuals with high incomes cannot be identified by the system because the capital and assets in their possession are distributed in informal destinations.

To get out of this evil, it is possible to start with the tax on dividends, which should be taken into focus by politics, like never before. The analysis should also include profits that have remained undistributed over the years.

If it is decided to tax undistributed profits in the form of a retrospective tax, then this method of taxation must also be analyzed for the consequences that fall on investments and the stability of large businesses, as well as others, since a discriminatory tax cannot be applied to only the category of large businesses. In the meantime, the discovery of assets and capital is also very urgent, even though it is a perplexing task to accomplish in a brief time.

For the fulfillment of this reform mission, preparatory work is needed, a feasibility analysis and the seal of the will not to be corrupted along the way. The value of this political movement is the significant help for the vetting process in justice, but also to do exactly first the certification of the fiscal purity of rich individuals and secondly probably their super taxation.

This movement needs to have the format of a policy with achievable objectives and maximum transparency.

But is it a feasible and timely policy to tax the rich with the super tax format?

This is one of the few times where the rich can be taxed to prop up the crumbling economy instead of taxing the same taxpayers who are the victims of the additional burden every time new tax rates are applied. They now share the tax burden with ordinary consumers through double-digit inflation for food products.

If we were to side with the opponents of this political move, the main argument would be that it could discourage investment in the economy as an already taxed formal sector would be taxed at a much higher effective tax rate.

The other argument would be based on free market logic, that such taxes will be passed on to consumers, resulting in even higher inflation.

This is true since these large businesses do not operate in a free market, but rather as conglomerates and oligopolies. They will cooperate to raise prices for the entire market and thus pass the burden on to the public.

An objection to this theorizing is that such an increase in prices will increase the income of these industries and thus pay more taxes, but they ignore the simple arithmetic that these companies will earn more than they will pay in taxes.

Proponents of this tax measure, however, believe that taxing the rich is a step in the right direction and should be accompanied by an efficient and effective price control mechanism to save the final consumer from the weight of higher inflation.

In conclusion, a temporary super tax is the right economic decision in the given circumstances, since:

– supports the economy through the collection of much needed taxes.
– does not hinder the investment as it is for a brief period of one year.
– helps the government spend on social upliftment of people facing severe inflation.
– shifts the tax burden from the poor to the rich; AND
– promotes a culture of taxing those who are the big beneficiaries of subsidies and tax breaks.

However, this is not a long-term solution, and the government needs to expand the tax base and increase the tax-to-GDP ratio, which remains at low levels. On the other hand, there is now an economic premise to impose heavy taxes on the real estate of the rich and to cut the unproductive budgets of various institutions.

But, carefully, because the long-term imposition of the supertax can drive away from the country even the rich who have settled in Albania, losing that capital that has already been absorbed with much difficulty and tiresome lobbying.

This should be a resumption of progressive and meaningful taxation and the way the economy works, and not a one-time measure by any means!

[1] https://oxfamilibrary.openrepository.com/bitstream/handle/10546/621477/bp-survival-of-the-richest-160123-en.pdf
[2] Oxfam is a global movement of people who are fighting inequality to end poverty and injustice.
[3] Around the world, capital gains are taxed only when realized. A capital gain is considered “realized” when there is a transaction, and the asset is sold for a higher price than it was purchased for. If the price of an asset increases but the asset is not sold, this is an unrealized capital gain. The absence of a tax on unrealized gains allows wealthy people to accumulate value from their assets without having to pay tax on it.
[4] From policy analysis in various countries, our experts have found that interest has grown among researchers and health policy advocates in taxing “unhealthy” foods, such as sugar-sweetened beverages and fast food, by more easily “healthy” foods. In this case, if we were to return to the proposal for supertaxes on food it could have unintended consequences for public health, which work against efforts to promote a healthy and well-nourished population by encouraging families to eat less quality food. and healthy.