Why should labor taxation be based on equality and efficiency against informality?

The treatment of employment tax between equity and efficiency is at the core of modern ways of taxing employment income.

On the one hand, the government wants to improve social welfare through a fairer distribution of disposable income (tax equity). On the other hand, culture and society’s preferences for redistribution are specific to each. that is influenced by history, social choice and the institutional attitude of governments.

If we start from the treatment of tax policy based on equality, then the mechanism of progressiveness of tax rates is the right one.

However, in the implementation practice, if the progressive tax scales are not positioned correctly with the income, and if their progressivity is not applied on a broad basis and without exemptions and reliefs (such as capital income tax), then the mechanism gets stuck from inequality and loses the power to influence the labor market value chain.

In other words, the understanding of the efficiency of the tax policy is the right one, if it adapts the labor costs for employees and their formalization to the tax function.

The incentives and costs faced by low-skilled individuals (benefits and welfare, job search costs, childcare, transport, accommodation, etc.) to join formal employment should receive a full policy response fiscal and social with the aim of accommodating all their needs and obligations.

For example, at one point the government aims to reduce informality. In this case, a political initiative is taken to strengthen the fines for informal employees, but without taking any other complementary or helpful legal or administrative measures. Experience has shown us that solitary measures have a negative effect on personal income, as the market creates distortion from ill-advised policy, since it has dealt with the consequences and not the reasons of informality.

In fact, determining the level of the tax burden and influencing the choices of taxpayers through increasing the integrity of work are that part of the monopoly that the government holds to influence the expansion of efficiency while not forgetting equality in taxation.

Precisely, starting from the harmonization of the policy with the market conditions, the fate of the salary (labor) tax also depends, which, in addition to the labor supply that does not have an increase in the variety and quality of the salary, is also affected by the decisions on the unequal and exclusionary tax policy, both in terms of maintaining progressivity, but also in the unnatural expansion of the tax base by not effectively fighting informality.

According to an in-depth analysis of tax impacts and effects on the labor market by IMF experts[1], they mention that “The role of informal employment is another important dimension in an environment of a large presence of self-employment. Although the reasons may be many, including different social preferences and economic and political transitions, this is often understood as more rigidities in the labor market and incentive issues related to the establishment of formal employment relationships. Informality is more widespread in Albania than in North Macedonia or Serbia, where nearly 50 percent of work relationships are informal, compared to about 20 percent on average reported for the two neighboring countries.”

In the comparative analysis between the three countries, seen from the perspective of the above study, we see that the high level of informal employment in Albania is influenced by:

• lack of personal income tax parity, with a higher burden on middle-income employment and less on capital income,
• from the still objectionable culture to pay taxes, based both on the lack of a solid administration to enforce the implementation of labor standards, the problem of growing corruption, but also the loss of trust in politics that changes continuously,
• from the problems of inefficiency with quantity and equality in redistribution,
• a high (27.9%) and non-progressive rate of social and health insurance contributions on the salary of low- and middle-income employees, who make up over 80% of the personal income tax base.

The limited progressivity of taxes is influenced by the uneven distribution levels of the tax scales according to income (there is no in-depth study by the government), being content with an exclusionary threshold of ALL 50,000/month established on political-electoral arguments, as well as a narrow segment of taxpayers above the taxable threshold, bearing the main burden of payroll tax, being taxed even for double employment.

But considering that a large part of self-paying taxpayers are the self-employed, then this large category sees every government decision as an increase in costs for them and very little involved in redistributive social policies.

Meanwhile, even though the rate of social and health contributions is lower than in other Balkan countries, the main problem with high informality is exactly the low profit values, removing the incentive effect that the mechanism of individual profit makes through the redistribution policy the budget.

It is precisely the unique policy of the Albanian government, which implements an unequal redistributive approach, where the budget is addressed in those government decisions that are considered to be worth the future development, forgetting the increased social pressures in recent years.

If we look at the effect of redistribution through the GINI coefficient[2] for Albania, it shows a level above the average of income inequality countries, where the impact of income tax on salary income is small, as in terms of the low level of payments (PIT is as much as 0.027% of GDP) not being able to achieve the effect of redistribution through progressive taxation.

In the entire system of taxes and their redistribution policies, there must be a compromise between equality in treatment and efficiency. Although the administration of the payroll tax policy may not always be at the level to implement it as required, it is necessary to keep alive an honest, professional and transparent dialogue with expertise and all prominent levels of business analysts to correct deviations and in function of reducing the barriers raised by goals contrary to those determined by the tax policy.

This dialogue on the performance of labor taxes should include in the comprehensive platform also other actors representing the social and economic side of the market, to build a more productive program.

This logic of inclusion and non-separation between the actors who are part of the influence and factor the performance of the labor market are forced to decide together on labor taxes and the implementation of standards for decent employment, since tax revenues are completely dependent on the value of work that it is based on standards, as well as how employees ultimately live and move forward with the income and benefits associated with their employment status.

Meanwhile, the tax policies of recent years (from 2018 onwards) are much more aggressive towards work and have disrupted equality, as they are not in themselves oriented towards the goal of addressing the problems of inequality, but as a political approach that has overlooked achievements of the tax system until these years.

An example of a negative consequence is the decision to increase the minimum wage in a very short time and immediately, without consultation, without comprehensiveness and without studies on trends and economic life and the reality of problematic administration.

Unlike the countries of the region, where tax policies are not implemented by their governments, and taxes are imposed unilaterally, we find that:

• while raising the threshold above the minimum wage was used as an anti-informality mechanism to ensure that employees and employers have less incentive to under-declare wages, this is being felt as a regressive effect, especially for low-income wage segments, the self-employed as well as the part-timers as the burden fell on them with the subsequent rulings of the new income tax law.

This regressive effect, which has the main reason for the hasty political decisions of the government, can be seen in the non-expansion of the narrow salary tax base.

Although there is an increase in income from insurance contributions, it is based on the effects resulting from the increase in the minimum wage and part of the administration’s wages.

But, the disposable income of the employees is of low real growth, due to the non-benefit of the salary according to the government’s decisions. The influence of politics on the decisions of businesses by affecting their incomes encouraged them to declare the minimum wage to avoid controls, but it affected human capital by not necessarily increasing the wage according to the government’s decision.

The even more long-term negative effect is beyond the current real salary, since in the conditions of burdening the costs for businesses, it can lead to layoffs of employees, or even under-declaration of their salary with an impact on insurance contributions as a long-term guarantor of income for pensions . The government’s policy, not being properly based on the principles of adequacy or coverage of pensions, as well as their level, which depends on funding, has damaged the present, but more so their future.

It is this harmful model that has been imposed in the policy implemented as of today that is not contributing to the increase of the rights of social benefits (pensions, health care and funds for unemployment and PWD).

If we were to give opinions related to addressing the reduction of informality, it is the proposal to open a wide debate between experts and researchers inside and outside the country, to once again examine the progressiveness of income from work.

The different approach compared to today is the inclusion of contribution rates as part of the fiscal burden for the self-employed and employees, as well as a model of their progressiveness in the group by better distributing the burden according to the principle of affordability of the increased costs of living, but also a normal standard of living.

Meanwhile, it is necessary that the drafting of the tax burden to cover some of the social expenses that are already being implemented in the country (universal medical service, social pension, etc.) should be based on a tax base not only from work, but also from other taxes that can serve as a balance of these expenses that are actually still covered by other taxes.

The most acceptable proposal to also influence the narrowing of informality is a new policy of alleviating the tax burden for low and middle wages and shifting it towards higher wages and high wages harmonizing with new measures to combat of informality and responsiveness to the demands of business and various professional and work organizations.

[1] https://www.elibrary.imf.org/downloadpdf/view/journals/001/2022/239/001.2022.issue-239-en.pdf

[2] mat shpërndarjen e të ardhurave në një popullsi, ku në vitin 2022 për Shqipërinë është vlerësuar 31%