Roosevelt Institute | Cornell University

Albania's Taxing ProblemHow Can Albania Solve the Problem of Declining Government Revenue?

By Benjamin WangPublished February 17, 2019

The Albanian Parliament
The answer to this question may lie in marginal income tax rate reform.

In the wake of the anti-communist revolutions of 1989, socialist planned economies in Eastern Europe were successfully recast into free-market economies one after the other. In 1991, Albania's authoritarian regime collapsed, and the nation began its transition to a free-market economy along with its Eastern European brethren. With this transition, the implementation of a new system of taxation and tax administration was necessary in order to generate government revenue. As such, in 1991, preliminary fiscal legislation was adopted, followed by more comprehensive tax legislation a year later.1

Taxes in Albania are paid to both the local and national governments—taking the form of direct taxes (income tax, social security tax, corporate tax, etc.) as well as indirect taxes (fuel tax, excise tax, etc.).2 For the 2015 fiscal year, the Albanian state budget stood at around 3.8 billion USD.3 However, since the 2008 global financial crisis, government revenues have been falling steadily due to a combination of high unemployment rates, high rates of tax evasion, high rates of inflation, weakened trade outlooks, as well as other incidental factors.4 Thus, beginning in 2009, the government elected to maintain taxation levels and raise revenue through deficit spending in order to promote growth.5 This was not sustainable, and as a result, in 2014, the government was forced to raise most taxes across the board by 50% in order to try and alleviate the shortfall.6 Unfortunately, this policy did not produce the intended effect, due to “lower oil prices and production and weakness in tax compliance and administration.”7 As such, in July of 2015, the government was forced to cut the budget by 131.5 million USD as a result of revenue shortfalls.8

So, how can the Albanian government solve this problem of revenue? While scholars and economists have offered several solutions, such as developing measures to prevent tax evasion,9 raising corporate taxes,10 or austerity,11 I believe that reforming the income tax scheme will provide a solution to this problem that will both solve the problem of revenue decline, as well as address problems of income inequality within Albania.

In 1994, the Albanian government introduced a progressive personal income tax for the first time.12 However, since the minimum taxable income threshold was set at 10,000 leks per month (around 90 USD), most Albanian citizens did not need to pay this tax; rather, this system was largely targeted at foreign workers.13 Between 1994 and 2007, this progressive taxation system had existed with minimal changes, with the top marginal tax rate set at 20% and a fixed sum.14 However, between 2008 and 2013, the Albanian government adopted a flat taxation system—every citizen would have to pay 10% of their income in taxes regardless of income level.15 In 2014, the government decided to revert the tax scheme as part of the government’s initiative to increase tax revenue.16 The top marginal tax rate was set at 23%, while the bottom rate was set at 13%.17 This top marginal rate is one of the lowest in the world. In 2018, out of 135 countries surveyed by KPMG, Albania ranked 90th.18

By either increasing the top marginal tax rate to align with that of other countries or adding a new tax bracket for wealthier individuals, Albania can achieve a fair redistribution of wealth while raising enough revenue to meet its fiscal needs. This is especially important because both unemployment and income inequality are currently on the rise in Albania.19 As many prominent economists have argued in the context of the United States, raising the top marginal tax rate would allow the government to raise more revenue while maintaining economic growth due to increased government spending.20 Furthermore, the increased economic growth would lead to a modest increase in revenue in and of itself, as Velaj and Prendi have shown in their research on factors influencing tax revenue collection in Albania.21 While detractors may argue that raising the top marginal tax rate may stifle growth in the private sector, this is simply not the case—in fact, research shows that raising marginal rates on the top earners would have little to no effect on private sector growth, and may instead lead to increased growth.22 Thus, raising the top marginal tax rate would alleviate—if not solve—the Albanian government’s problems at a single stroke. As the Albanian government looks toward tax reform as a means to raise revenue, it would do well to consider readjusting the personal income tax scheme.

Works Cited

1. Binaj, Agim, Ilir Binaj, and Irini Limaj. “Personal Income Tax Policy Analysis: Albania vs. United States.” International Journal of Economics and Financial Issues 3, no.1 (2013): 42-49.

2. Gashi, Joinda. “Promoting Economic Growth: The Right Tax Policy for Albania.” European Scientific Journal 11, no. 25 (September 2015): 109-110.

3. Ibid., 108.

4. Ibid.; Muharremi, Oltiana, Filloreta Madani, and Eraid Pelari. “Tax Evasion and Setbacks of the Shadow Economy in Albania.” Mediterranean Journal of Social Sciences 5, no. 13 (June 2014): 398-408; Gerxhani, Klarita. “Explaining Gender Differences in Tax Evasion: the Case of Tirana, Albania.” Feminist Economics No. 2 (2007): 119-155; Velaj, Entela and Llambi Prendi. “Tax Revenue—The Determinant Factors—The Case of Albania.” European Scientific Journal 1, special ed. (2014): 526-531.

5. Ibid., 110.

6. Ibid., 108.

7. Ibid.

8. Ibid.

9. See Muharremi, “Tax Evasion.”

10. Grashi, “Promoting Economic Growth,” 113.

11. Ibid., 112.

12. Binaj, “Personal Income Tax Policy Analysis,” 43.

13. Ibid.

14. Ibid.

15. Ibid., 44. An exception was made for those earning less than 30,000 leks—their wages were exempt from taxation up to 10,000 leks. The remaining sum would be taxed at the 10% rate.

16. Ibid.

17. Grashi, “Promoting Economic Growth,” 109-10.

18. “Personal Income Tax Rate - Country Rankings.” The Global Economy. Accessed February 9, 2019. https://www.theglobaleconomy.com/rankings/personal_income_tax_rate/

19. See Dijena Drenova, “Albanian Trade and Wage Inequality: Skilled Versus Unskilled Workers’ Case.”; Gianni Betti et.al, “Local Poverty and Inequality in Albania.”

20. See Pomerleau, Kyle, and Li Huaqun. “How Much Revenue Would a 70% Top Tax Rate Raise? An Initial Analysis.” Tax Foundation. Published January 14, 2019. https://taxfoundation.org/70-percent-tax-analysis; Krugman, Paul. “The Economics of Soaking the Rich.” The New York Times. Published January 5, 2019. https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html

21. Velaj and Prendi, “Tax Revenue,” 530.

22. See Diamond, Peter and Emmanuel Saez. “The Case for a Progressive Tax: From Basic Research to Policy Recommendations.” Journal of Economic Perspectives 25, no.4 (2011): 165-90; Piketty, Thomas, Emmanuel Saez, and Stefani Stancheva. “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities.” National Bureau of Economic Research Working Paper Series, no. 17616 (2011, rev. 2013): 1-61.