Fiscal Policy X Capacity = Fiscal Productivity + Outcomes

When the fiscal capacity is weak, we taxpayers understand this from the fact that the government is unable to register and tax the entire population that has the legal obligation to pay the tax due to pay for the services it benefits from.

A logic that could be justified to some extent would be if taxes and duties were high compared to profits and income. In this model, the logic of Albanian taxpayers would act in the direction of not paying the increased taxes. For countries that have a developed system of tax collection, this abnormal response of taxpayers would have been restrained by the harmonization of preventive policy measures with the use of the fiscal capacity of governments in order to close the logical path created from the high tax system.

But in Albania, where even after 30 years taxpayers continue to pay less than 1/3 of the domestic production, they continue to be culturally unaccustomed to the idea of ​​the weight of taxes, which is the result of a low tax morale. With their perception of the tax system, they manage to bypass the government’s policies, as it is still the social and political environment of the state and the opposition that keeps them in fiscal poverty. Meanwhile, the fiscal administration is still an extension of the political model of the government that invests politically and is not interested in enabling the administration to implement a fair tax policy.

This way of reaction is considered normal in Albania, since the low capacity of policy-making (its productivity) and fiscal administration accepts the unfair competition of the large informal economy. Any policy to limit this economy is worthless as long as the fiscal policy and fiscal capacity of the government will continue to remain at low levels and with insensitive changes.

As a solution to tax evasion, the government has actually found the easiest ways to address the problems being aware of low administrative skills and the inefficient use of technology has encouraged this tax system with less efficient taxes and levies, but more easily assembled.

Based on this policy, it was and is much easier for the Albanian governments to build a system of taxes and tariffs on imported goods. A taxation model based on fiscal fees was also implemented, which are easier to collect because they require fewer administrative resources and are not heavily influenced by a strong culture of tax compliance.

Furthermore, Emran and Stiglitz (2005) argue that adding “tariffs can provide a less distortive source of tax revenue” because it can encourage less tax evasion than, for example, raising income taxes.

But even though a similar tax model should have been eliminated for the following years, in fact governments and political parties continued to stimulate the consumption (import) tax model and focusing very little on taxes and direct taxes with a vision and weak will for the future to move to a formal economy within the perimeter of government control.

This fiscal policy implemented by right and left governments in the last two decades did not have the intention of working for the best interest of fair tax governance, where the correct approach would be to define the tax model and the types of taxes and duties that would discourage fiscal evasion.

The low fiscal capacity and short-sighted policy to take advantage of the moment and not with the vision of the future built the tax system based on quotas (tax exemptions) and fiscal penalties (used according to the political will of the moment). As a result, today we have inherited an inefficient (non-productive) taxation model, which is unable to collect the necessary obligations (tax debt as much as 2/3 of the taxes collected today) and reduce the large informal economy. This situation comes not only because there are no administrative capacities to support efficient tax collection, but there is also no stable and fair policy to model a fair, honest, equal and simple tax system for Albanian taxpayers.

The balance of the fiscal equation is greatly influenced by addressing the tax equity dilemma by increasing efficiency based on fiscal productivity. Striking the right balance between progressive taxation (equity) and economic incentives (efficiency) is a perennial challenge. The current rates of taxes and duties are not high and this element of tax policy does not affect the discouraging of production and investments. Meanwhile, the low rates yesterday and today seem to have worsened income inequality and only politicians have gained from it by being re-elected to their positions.

It is true that politics cannot be separated from the modeling of the fiscal system, since fiscal decisions are essentially political However, the exclusion of public opinion in decision-making, the representation of the interests of small interest groups and election cycles have been the influencers and deformers in tax policies and the distribution of resources.

Starting from the left side of the fiscal equation, where fiscal policy must produce the components of Fiscal Capacity to reach a balance with the right side of the equation (fiscal productivity and the appropriate results of fiscal revenues, below we have obtained in a analysis of exactly the elements that should enable the solution of the fiscal equation.

First, the register of taxpayers should serve as the Tax Base to calculate and distribute the tax burden fairly and honestly.

The foundation of fiscal capacity needs (a) a broad tax base (large number of taxpayers), (b) stable over time (a base that grows and reflects the trend of the economy and welfare), and (c) strong in structure (taxpayers who are able to voluntarily accept and pay their obligations).

This tax base, which should include all economic activities that are subject to taxation, has actually been damaged and reduced over the years precisely by the tax policy adopted by governments.

The tax base of the income tax has often been reduced by excluding from taxation categories and layers of taxpayers with deeply political and electoral reasons, but ignoring the public and economic interest of the country.

The most recent government decision on the exemption from income tax for many years of businesses with a turnover of up to 14 million lek has violated the tax base.

In the same way, the governments’ fiscal policy of increasing the VAT threshold, excluding thousands of businesses and individuals from their obligation, has undermined the VAT base. These two tax bases are the most important and largest parts of the taxpayers’ register and their exclusion has created an incentive to avoid paying real wages and insurance contributions. In conditions where businesses were not forced to keep documents to pay profit tax or VAT, this political position has had a very bad effect on education and tax morale, but for the budget it has also affected the concealment of real wages and expenses. They have corrected this missing tax burden over the years by increasing the tax burden on middle-income levels, a political sin after an electoral rush.

Governments have tried to design tax policies to balance the needs for tax revenue, to influence economic growth and a free economic environment based on equality. In this regard, progressive income taxes, flat tax or regressive consumption taxes and targeted exemptions have all played a role. This role has been to keep an economy that for some can be called resistant, but in fact we have an economy that generates less tax revenue than all regional economies comparable to Albania.

Consequently, income from activity, consumption, property and business profits, which contribute to the tax base only from short-sighted political interest, have reduced the base and helped to increase informality.

Secondly, the Tax administration is valid only if it serves as an elastic and efficient mechanism for the calculation and collection of taxes, as an essential action in strengthening the fiscal capacity of the state budget. A well-functioning tax administration minimizes evasion, ensures compliance and maximizes revenue. But, in fact, the tax administration has not functioned according to these directions, as influenced by the vulnerable fiscal policy, it has always been fragile, not strong and poorly organized to face the main challenge of strengthening the administrative capacities to perform its function. , but also to correct policy defects in the battle with fiscal evasion. In fact, the tax administration has found itself in a comfortable position by political decisions to tolerate evasion in exchange for rewarding corruption.

All this way of its operation in the last two decades has made the capacity of the administration weak and unable to function and perform the tasks for which it is paid and which affects the fiscal instability.

For us, this means that in the long term the Albanian budget will be able to cover its cost obligations and provide a high quality of service to its residents without large increases in tax rates and taxes, with levels of debt reduction. In order to maintain fiscal sustainability, it is important for the government and policy to assess the new development challenges related to the fiscal productivity of the European Albania project.