Growing concern about the health of tax policy and equality, but also the imbalance of economic freedom

There are a number of important issues related to wage tax policies that deserve careful attention. Any decision affecting payroll tax should have in-depth transparency and inclusiveness from the initial policy-making processes, based on in-depth studies of consequences and effects. The importance is related to the broad base of influences, both in the lives of families, but also in the labor market and more broadly in the economy.

A political decision on wages should be based on multidimensional analysis considering important elements of their taxation related to the elasticity of taxable income, the relationship between inequality (especially as it is affected by the tax system) and the increase of the burden, the model of fair taxation , the effects of the new income tax law and detailed calculations on the effects on labor supply, savings and investment.

In the statement at the end of the first quarter of 2024 by Prime Minister Rama, on this topic we quote: “We have a project that we will materialize from June to reduce income tax for those who have the highest salaries as employees. One of the reasons is that we can’t tax people more if we don’t give them better services. For this level of services today, we cannot claim to impose more taxes” it is in the interest of the vast majority of citizens to get to know the real reasons and the analysis that is being done for this political movement.

If we have to react according to the logic that “For this level of services today we cannot claim to put more taxes”, then governments should either cut these services, or make up for the shortfall by collecting higher taxes from everyone [1]. This dangerous proposal to avoid the payroll tax by reducing the burden on high earners to 5% will absorb the redistributive share of welfare for the middle class and those close to the living wage.

Meanwhile, this logic as above actually does not take into account that most of the budget funds (for goods and services), where today they and their companies benefit in the form of investments, goods and services that they pay budget in their accounts along with the whole corruption part which is now a new tax paid by ordinary people.

This tax experiment, which will be dictated a priori, based on past precedents, as well as when we still have a declaration and no data on the effects of tax with progressive rates after coming into force in 2024, etc., would make sense answer the questions:

• Does unconsulted payroll tax cut policy have a greater impact on tax compliance?
• Does this political bias also affect the trust of all employees towards politics?

Answers are needed, when the whole approach of the government results in a deliberate choice against the current tax mechanism, in favor of a category that is less than 1.5% of wage earners, with very little impact on the budgetary income of the wage tax, but with a lot of influence on tax morale and equity.

We see political morality, which includes tax morality, closely related to the left-wing government, which has declared since 2013 that it will be based on the principle of fair taxation, according to the motto “who earns more will pay more” . This approach, which was welcomed by the entire category of low- and medium-wage workers, is an ideological approach expected from the “leftists”.

However, at the moment, when the tax burden according to detailed analyzes for income from work, capital and business falls on citizens, such as:

• consumption taxes (VAT and Excise), which are paid more by ordinary people than by the rich
• tax on wages, where up to 330 million Euros were paid, mainly from low and medium wages
• insurance contributions, where 1.4 billion Euros were paid, mainly from low and medium salaries
• dividend tax, where 57 million Euros were paid mainly by the rich, but at a rate 40% lower than the tax on low and medium wages
• local taxes and fees, where 305 million Euros were paid, mainly by medium and small businesses

In conditions where the main burden is not on big businesses (VIPs) or wealthy individuals, but on small (even self-employed) and medium-sized businesses, as well as on low- and medium-wage employees, we note that tax compliance and trust is eroded.

The controversial reasons for the distribution of the tax burden have been dictated over the years directly by political corruption and political selfishness, which is coming as a demoralizing policy for them, as it is not due to chance.

Consequently, it is not inequality itself that lowers the level of tax compliance[2] and corrupts the confidence of businesses and individuals, but rather it is the consequence that inequality creates due to a human choice. In a continuation of the logic, it appears that unfairness in the form of intentional wage tax inequality negatively affects tax compliance, which is harmful to society.

According to equity theory, in distributive welfare situations, such as the wage distribution scheme and their taxation, people expect wages to be proportional to work effort. When this rule of proportionality is violated, people feel that they have received an unequal outcome, which is followed by behavior aimed at restoring equality or simply compensating for the loss.

Simply put, a hasty and perhaps even deliberate decision based on narrow interests will affect a form of tax evasion, or even concealment of income from work, contradicting all of this with the country’s social and economic programs.

Cases are present from various studies in more democratic countries than Albania, where an increase in fiscal evasion is reported when taxpayers have perceived that the tax system treats them unfairly in relation to monetary results.

In addition, taxpayers who are treated unfairly selfishly distort their tax behavior, arguing that tax evasion is justified under these circumstances.

In fact, tax compliance can be directly shaped by the wage distribution rates imposed on taxpayers. Furthermore, they may be indirectly influenced by beliefs about the compliance levels of other categories of workers, who are also sensitive to wage distribution rates.

“These arguments should prompt those in power to decide that their wage and taxation policy choices matter not only for individual wealth or disposable income outcomes, but that they also have important welfare implications and ultimately shape the institutions that create a society[3].”

The serious deficiencies in the income tax law, which in Albania throughout 2023 was much debated by experts, professionals and business groups, seem to be proven very quickly. In just three months from its implementation, it is being requested to change the tax rate for individuals with high salaries without any financial or fiscal argument.

All this pointless approach and far from the interest of the majority of taxpayers takes only one meaning, that the law is being changed by the big beneficiaries (they are at the top, wealthy individuals, political and government leadership, as well as the heads of big companies together and foreign experts). Those in the group are using their position and influence to capture/allow economic benefits for themselves and the group, as well as to use economic structures to their advantage.

Notice! Managers of large companies and all experts of large projects with internal and foreign funds, benefit from a certain amount of benefits and assets (health expenses, education, travel and accommodation expenses, vacations, etc.), where they lead and operate in the form that are known as expenses and are deducted from the profit tax.

The tax morality, which keeps the honest tax system afloat and develops, loses its meaning with this change, in fact, it is the continuation of the great deformations (facilitation, exemptions, etc.) of the tax policy of recent years.

The new moral being served up to us without even asking is that when it comes to paying taxes and duties, there is one rule for the rich and another for the common man. While the most powerful evade taxes by paying little or nothing, ordinary citizens are left to foot the bill for government spending.

Governments must lead, but above all they must do their duty with social equality and equality before the law as the primary goal.

Meanwhile, the proposal to reduce the tax rate for high salaries is changing the equality of the tax system, from a progressive to a regressive trend. Lower-income taxpayers will pay larger percentages of their income in taxes than higher-income taxpayers.

Thus, a taxpayer with a salary above the taxable threshold (60 thousand to 200 thousand) pays up to 11.3% of his salary today. A taxpayer with high salaries (over ALL 200,000/month) pays tax up to 19% of his salary today.

According to the stated change, if we calculate based on the reduced rate:

• at the 20% level, the salary tax payment would reach up to 17% of the monthly salary.
• at the 18% level, the salary tax payment would reach up to 14.5% of the monthly salary.

This regressiveness in taxing salary income is unfair, unethical and has an impact on the decisions of other businesses and on economic freedom. This type of model is a lower burden for high-income individuals, for whom others will have to pay to balance the budgetary income that comes from their relief.

In closing, reforms that improve incentives, reduce existing distorting inequalities, avoid windfalls, and avoid deficit financing will have more favorable effects on long-term economic growth, but may also create more efficient links between capital and productivity.

[1] In normal democratic society, there should be no lack of information (transparency) from financial experts, as well as the creation of a working group with interest groups

[2] There is no public monitoring report on the level of compliance

[3] https://www.sciencedirect.com/science/article/pii/S2214804321001518