Tax reform and income distribution for individuals

Tax reforms can effectively strengthen the incentives for some groups of the population and the economy that can affect a long-term perspective in the Balkan economies, which are under an increased pressure for market expansion and the right incentives to keep the power connected to the market workers and their incomes to encourage consumption.

Reforms in this approach should be studied and kept according to the context and not based on short-term programs that have created problems for the sustainability of the schemes for long-term periods.

The goal of tax reform should be to aim for a broad base, as well as to carefully analyze the facilities and exemptions, starting to shift the tax burden from consumption to capital and less to work.

Meanwhile, economies that rely on tourism and industrial income should start designing pollution tax schemes and new activities based on digital technology.

Certain models announced as tax reforms, such as the income tax in Albania, seem to lack this visionary approach and are based on the interests of the moment to have some more budget revenues, influenced in many cases by political ambitions and from populist approaches that use the tax policy of tax cuts and tax breaks in the name of development, but that the facts of economic rhythms and the well-being of individuals do not approve of this policy.

The major consequences, as side effects of hasty tax policies are related to the deformation of tax morale, the creation of tax injustices and the distortion of the market structure in those segments of the economy where these policies are used, but with extension beyond them depending on circulation chain.

This lack of accountability for taxpayers will translate into further loss of confidence in the system and the government’s sensitivity to the equal treatment of taxpayers, the implementation of neutral taxes and a system based on tax justice. All this new policy will directly affect the reduction of fiscal compliance being considered as a devaluation of the business facilitation policy.

The new reform initiatives are very closely related to the effect they have on trust in the government’s tax relief reforms. In the period when the initiatives do not consider the level of informality, corruption, the trend of diversification and economic developments, they are perceived by taxpayers as reforms with a lack of seriousness and responsibility in the design of fiscal policies, directly influencing mainly the strengthening of problems not addressed by GOVERNANCE.

From 2021 in BP6 countries, a growing phenomenon that still continues in 2023 is the increasing pressure for social spending, just like in EU countries.

This pressure for greater redistribution of the tax burden with social programs mainly affects the forced reforms of tax policies, or those problems mentioned a little above.

Responsibility for providing services and redistributing income is shared between

different levels of government, but still the central government budget is the main responsibility in BP6 countries, due to the very nature of a partial decentralization of tax and loan revenue collection.

The distribution of budget revenues has as its main direction the addressing of social needs that include pensions, benefits for different categories of citizens as well as social protection programs.

In this direction, labor taxes take on a greater meaning, since it is assumed that the value collected from citizens and businesses for these taxes will be in favor of redistribution from the budget, and in the case when these funds are not enough, then other elements of revenues will cover the requirements for more funds.

However, in order to achieve a greater amount of income in the budget, it is necessary to systematize through addressing with the appropriate policies the wounds carried by the past governing models, as well as the new symptoms presented by the new reforms.

One of the acute problems of the tax system is the equality of taxpayers before the law or tax justice.

Tax justice refers to ideas, policies and advocacy that aim to achieve equity and social justice through fair taxation of the wealthiest members of society and multinational businesses.

To this end, tax justice often focuses on dealing with tax havens (those who do not pay according to the law, domestically and abroad) and curbing corruption and tax abuse by wealthy and super-wealthy businesses and individuals.

Tax justice includes dealing with tax incentives, but it also goes beyond that, as it is also linked to the poor administration and corruption that keep tax evasion strong.

But, the biggest problem of a tax system, regardless of its composition, is the informality of the economy and the opportunity that the tax system allows to carry out tax evasion.

If tax benefits and exemptions (political targets) are added to the lost income from tax evasion, then the tax system becomes insensitive to any tax reform, no matter how well it is designed.

The tax system in Albania, but from our research it also results in other BP6 countries, is exactly with these symptoms which convey to the public the feeling that the government has:

– pronounced lacks of maintaining balances of justice and equal tax treatment,
– strong problems with the implementation of the social and economic contract with the public,
– indicators of weak effectiveness in the implementation of laws in force, as well as
– it does not assure young people and other taxpayers that it is in their economic interest to contribute to taxes and taxes to be spent in their interest.

It is precisely these effects that are present more than before in BP6, which also create premises for serious defects in the redistribution of income and the increase of well-being through the tax burden. A good redistribution would reduce somewhat the inequality and polarity in the income that individuals earn and save.

The Table shows that inequality has increased and this is evident from the GINI index (last column) in the comparison between it in the last 9 years.

Income polarization is lower in Albania, where the index shows that inequality has increased by 1.8 points. Meanwhile, other countries have a higher increase in inequality, ranging from 2.4 points in Montenegro, to 2.9 points in Bosnia and Herzegovina and 5.9 points in Serbia[1].

The measurement of inequality for the income of individuals, according to the index (coefficient) GINI[2] should be seen in connection with the fact that inequality is significantly affected not only by the distribution of the tax burden. One of the studies conducted and published by FES[3], income inequality is mainly reflected by the impacts that come from inequality in the labor market, but not only.

According to the analysis, “Income inequality in Southeast Europe is high … Labor markets are the main cause of inequality in the region. Income inequality is driven by unemployment and inactivity, precarious and informal work. Tax systems are generally not sufficiently progressive and redistributive, while social transfers tend to be small and cover only a small segment of the population. Lack of access to quality education increases inequality of opportunities and outcomes. Governments have neglected economic inequality in their socio-economic reforms…”

[1] For North Macedonia there is no data available for 2022 and for Kosovo there is no data

[2] The Gini Index or Gini Coefficient measures the distribution of income, or the distribution of wealth in the population of a country and beyond. The coefficient goes from 0 (or 0%) to 1 (or 100%), where 0 means perfect equality and 1 means inequality at the highest levels.

[3] https://library.fes.de/pdf-files/bueros/sarajevo/14451.pdf