Change of tax rates and GINI index (inequality in national income distribution)

The redistribution of budget revenues reflects the level of taxes for the expenditure on money transfers to the working age population and not just. It also aims at achieving personal income tax revenue progressively through revenue levels and the orientation in which money transfers go where the population have the most necessities in relation to improving living.

The high level of inequality in income in the Western Balkans continues to receive increased attention from governments, regardless of the political wing. It is understood by governments that inequality is a challenge that each country must address, but it is now necessary that redistribution of revenues be clearly addressed through fiscal policy and good will of administration.

Before being treated as a major expansionist capitalist defect, it is first necessary to update the data and to raise awareness of all segments regarding the means of correcting social polarization.

Measuring individual inequality by GINI Index should be seen with respect to the fact that inequality is also affected by taxes and fees.

One of the recent studies conducted by OECD, income inequality mainly reflects the impacts arising from inequality of the labor market, but not only. Incompensation of incomes is the main contributor to the distribution of income to households. If we look at the case of Albania, the bulk of the incomes go to high salaries for a minority of less than 1% of employees.

Also, the decline of the redistribution effect under current fiscal policy is accompanied by an increase in inequality in the labor market, as well as in the taxation of incomes circulating in the informal market. In some cases, the latter circulates more income than the formal labor market itself.

In 2009-2017, up to 96% of individuals owned 40% to 48% of total money in banks. While, 4% of households owned 52% to 60% of deposits.

In 2018[1], deposits of Albanian individuals in banks amount to ALL 979.3 billion (79% of currency in circulation), where money outside the banking system amounts to ALL 267 billion (21% of currency in circulation), making up 78.5% of total money in circulation.

Insurable deposits below ALL 2.5 million were as much as 38% of the total amount of insurable deposits, while deposits above the level reached 62% of the total amount of insurable deposits. According to the amount available from individuals in deposits it is seen that 96.4% of individuals own 42.5% of the deposited amounts, or an average of 185 thousand lek deposits per individual.

In fact, 40% of these households have accounts which reach a deposit up to ALL 100. So, the rest of this group (56.4%) has individual savings in amounts reaching up to ALL 2.5 million.

Meanwhile, 5.6% of depositors own 57.5% of total deposits, with each individual in this group averaging 5.7 million leks.

Money transfers from the budget to various population groups, such as retirees, unemployed, and inadequate labor, account for 12.6% of budget expenditures in 2018 in the Western Balkan countries.

These money transfers mainly aim to be redistributed throughout for all individuals’ lives, following the principle of their distribution according to the historical level of the contribution of individuals to the budget. Although the values ​​of these individual transfers represent modest or very small amounts in relation to individual consumption, they remain a permanent means of redistributing the income for long-term or permanent periods.

According to graph above, the GINI Index in the Western Balkans shows the highest level of income inequality in North Macedonia (0.36), followed by Serbia (0.34). In third place is Bosnia and Herzegovina (0.33). The fourth place is taken by Montenegro (0.32). Croatia holds the fifth place (0.31), and Albania holds the second lowest level (0.29), while Kosovo (0.27) holds the lowest level of inequality, although it should be noted that the data for the two last states are respectively 2012 and 2013.

It is necessary to clarify the true level of the GINI Index based on how much revenue remains to individuals after paying taxes. But clarification at the same time needs to be recognized with the level of informality and this information is not possible officially, but only based in some studies that are not data confirmed by the government statistics and reports.

For example, when looking at the situation of income distribution in Albania and inequality, GINI index positioning is seen as a relative level of inequality, but better positioned than other Western Balkan countries.

But this data can not argue the entire inequality indicator, as the GINI index is also influenced by other elements such as: informality, tax burden, average age of the population. However, if we look at Albania’s case, following the application of the progressive tax on wages, it is noted that since 2014 the progressivity of the wage tax seems to have diminished the inequality observed in the reported gross and net incomes.

This is explained by the fact that countries that exercise fair fiscal pressure have an impact on reducing inequality.

This is what we find in IMF, OECD, World Bank reports.

If we focus on the redistribution of budget revenues by fiscal burden tool and the type of tax applied it can be said that the tax burden shows little impact in the redistribution of income by geographic areas and segments of employees by economic sectors, as the development of economic sectors and areas geographical, historical, economic, cultural, educational and environmental differences. But demographic movements along with the change of average age are factors that change the equity of income. Meanwhile, government transfers in the last 5 years, eg. in Albania have maintained the same level of 11.8% of GDP.

In particular, the higher the fiscal burden, the lower the Gini Index. This can be argued by explaining why countries like Sweden, Germany and France, which have high tax rates for the rich, suffer less from the inequality compared to the US, which has relatively low fiscal burden.

Changing the progressivity in the upper wage tax rates is more effective in reducing inequality than the similar changes in the bottom of the income tax rate.

Although it is not possible to find official data for each Balkan country, this conclusion is explicitly considered to be also sustainable for the Western Balkans, starting with the case of Croatia. Because fiscal evasion is so widespread in Western Balkan countries, burden and fiscal productivity from the findings of the study can clarify that countries face lower efficiency costs in terms of narrowing tax inequality.

[1] Raporti tremujor i politikës monetare, 2018/IV