Time to call the harmonization of taxes with economy

Time to call the harmonization of taxes with economy

The value added tax help to deal with the major economic issues plaguing the economy. The money raised from a value added tax could be used to help lower the massive around 9-billion-dollar national debt of Albania. The value added tax also encourages people to save more money to avoid paying taxes on consumption. As a result, a nation with a higher percentage of people saving money is a prosperous nation.

But, here begins the reverse effect of VAT and all this should be noticed from the tax policy to harmonize the consumption tax with capital and labor taxes.

The big problem of VAT it is that could disproportionally affect the poor. Since the tax it is the same for the rich and the poor, then the tax it’s a higher percentage of an impoverished person’s income. Standard rate (which is 1/5 of the final price) on food and clothing will keep poor people from obtaining necessary items needed for survival.

Why are the poor people disproportionately hurt?

The VAT disproportionately hurts the poor because the tax would eat into their already limited income.

For example, let’s say we have 2 different people (Edi and Alban) living in Vlora both having to pay a value added tax. The VAT is 20% on all purchases. Edi makes $10,000 per year and spends $1,800 annually on purchases such as food and clothing. Edi pays $300 per year in value added taxes. Alban makes $3,000 per year. He spends $1,800 on purchases as well. He will pay the same $300 VAT as Edi. But are they really paying the same thing? The VAT is only 3% of Edi’s income whereas it is 10% of Alban’s income. Even though they are both paying the same amount of money, the VAT is a larger percentage of Alban’s money. So, VAT’s represent a much larger chunk of lower income individual’s money than other individuals.

Senior citizens and people that live on fixed incomes would also be adversely affected. This effect of value added tax is negative because discourages consumption. Our economy tends on consumption increase and any decline in spending will hurt businesses and its employees.

If businesses aren’t able to cover the cost of the extra taxes by passing it off to the consumer, it may continue to cause higher unemployment, because businesses will lay off more workers to cut costs because of the higher taxes.

Anyhow, regarding to the tax policy and harmonization of taxes in order to have no distort between taxes there’s plenty of room for the other types of taxes. For example, in recent years a number of tax experts have argued that increases in property taxation are less damaging to economic recovery than labor tax increases. All this reformation of tax system is needed to rebalance the burden of taxation away from labor taxes and taxes on consumption toward to property taxes and in particular to individual taxes (royalty, copyright, gambling, art, culture, sport and varies individual incomes), especially for the upper part of incomes.

But to make this shift of burden of taxes from one tax to another, or to make right the competition of taxes between them, some questions need to have answers?

The first question it is who pays the personal income tax, the payroll tax, the estate and gift taxes?

The second question it is who bears the burden of the gasoline, coffee and tobacco taxes?

Are any group of people who lose or who gain from the shift of burden of some taxes, i.e. from the raise and decrease of tax rates?

The hint of the political dispute over changes in the tax system often hinge on the answers to such questions.

To demonstrate who pays current taxes or who would be the winners and losers from a tax change, we should verify how much money everyone pays, or should pay, to the Budget. Winners and losers are grouped based in this philosophy.

If we can remember the example above and to add to this case also the personal taxes on property, and on ordinary consumption it is very clear that the most of the burden in Albania still bears the poor.

One cannot tell the true burden of a tax just by looking at where or on whom it is initially imposed, or at what it is called.

The economic burden of a tax, however, frequently does not rest with the person or business who has the statutory liability for paying the tax to the government. This burden, or incidence, of a tax refers to the change in real incomes that results from the imposition of a change in a tax. A better understanding of the economic consequences and real burdens of taxation is indispensable to achieving an optimal tax system.

Let’s take the case of Balkan countries, which compete each other in the tax field.

Putting a tax on the income from corporate capital would simply lead to adjustments whereby less capital would be at work in the country, especially in a small one. The capital would go abroad, because it’s easier to invest and earn in cross borders of the country where the venture capitalist intended to invest. The tax is a wedge that it’s inserted into the pre-existing cost structure. The prices of corporate tradable products cannot go up because they are set in the world marketplace; the net-of-tax return to capital cannot go down, because capital will not be content to earn less here than abroad.

The value added tax is not so important for the investors, because of his nature. The Balkan countries have not the same VAT rate, and that’s doesn’t harm the investor’s earnings, since the VAT is a tax that is based on consumption and there’s no burden for the investors and capital. But, if the refund of the credit of VAT doesn’t function well, then there’s a lot of problems with the cash flow of corporates, because the VAT is based on the cash flow.

It is in the interest of politicians that the VAT should see very close to the workers and linked with the labor taxes (personal income taxes and social and health contributions), since all these combination of tax tactics help to bring the investors in home.

The capital need a competitive market of labor, natural resources and infrastructure and naturally a stable policy and democracy rules with less possible corruption. When all this investment environment is ready, then is very helpful for the investment climate that the VAT to be in well function and the tax burden for the labor to be not so high in comparison with the neighbor countries.

If the whole puzzle of tax policy is in unison with the investment climate infrastructure, then the most important decision is in raising the capacities of human resources and as a consequence will be raised the economic standard of peoples, i.e. income per capita. When all this process is concluded with more income in the hands of people that is the best result that any government ask for the future.

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