Albanian Tax Reforms - Essay Example

Albanian Tax Reforms of 2008 Table of Contents 2 Introduction 4 Effects of the tax reform on growth 4 Consumption 5 Investment 6 Government Expenditure 7 Exports-Imports 9 Effect on AS 10 Effects of the tax reform on development 11 Unemployment 11 Income Distribution 12 Impact of Tax Reforms on Gross Domestic Product (GDP) 13 Tax Evasion 15 Conclusion 15 List of References 16 Abstract This paper examines the case of a developing country, Albania, and the fiscal policy taken by the government to maintain and manage the fiscal crises faced by the country following the global financial challenges and the 1998 Civil War. The paper would discuss and analyze the effect of growth based on the components of Aggregate Demand. Furthermore an analysis of the effect of development based on looking at the figures of unemployment, income distribution, and tax evasion is also done in the paper. Since Albania was previously a closed and centrally planned economy, therefore it had to undergo numerous obstacles to become an open market economy. Since, the public debts increased to 60% of the total GDP in 2008 and the budget deficit also increased to 7% from that 5.7, new tax reforms and taxation policies were introduced in Albania in order to maintain the macroeconomic stability. It was very hard for a country like Albania who was in its transition period after the collapse of its economy during the 1997 Civil War. Such reforms have an impact on every aspect either positively or negatively Albanian Tax Reforms of 2008 Introduction During the late nineties and the early twenties, many countries in the world, particularly Albania, was also facing challenges with respect to its economy and economic stabilization. Since Albania was previously a closed and centrally planned economy, therefore it had to undergo numerous obstacles to become an open market economy. Initially the country managed to override the global fiscal crisis, however, it could not resist it permanently and the Albanian economy had to come under pressure. Since, the public debts increased to 60% of the total GDP in 2008 and the budget deficit also increased to 7% from that 5.7, new tax reforms and taxation policies were introduced in Albania in order to maintain the macroeconomic stability (Kadiu, 2012). Numerous tax reforms whose sole purpose was to effectively execute strategies that are aimed to reduce poverty and public debts while decreasing inflation at the same time, although it was very hard for a country like Albania who was in its transition period after the collapse of its economy during the 1997 Civil War (Thomsen & Brown, 2008, bankofalbania, 2014). The 2008 Albanian tax reforms were aimed to help the Albanian economy collectively, in which numerous tax policies from small-scale business to corporate level and agriculture and wages, were imposed. It should be noted that such reforms have an impact on every aspect either positively or negatively. The purpose of this essay is to study the effect of the tax reforms of 2008 on consumption, investment, unemployment, etc. Effects of the tax reform on growth As it has been already aforementioned, the taxation policies have a certain impact on every aspect of the economy of the country, and therefore, the 2008 taxation reforms of Albania made some notable impacts on the growth of the country in a variety of ways. The taxation reforms had an impact on the consumption, investment, government expenditure, exports-imports, etc. The effect on growth of the taxation policy would be calculated by measuring the(C+I+G+(X-M)) (Diamond & Zodrow, 2008). The effects of such reforms are either positive or negative; these effects are studied below in the paper. Figure 1: Graph showing the impact of AD on Price and Real GDP (Aaron & Gale, 1996) Consumption It should be noted that the Albanian tax reforms of 2008 put an increase on certain factors. The tax policy that was adopted by the Albanian government was flat taxation policy and implemented an increase in tax on various aspects. However, consumption being the largest proportion of Aggregate demands is of vital importance and therefore needs proper analysis. The reason why the taxes were increased was to ensure that the consumption is controlled and that it may help and contribute towards the overall growth. However, even after the 2008 Albanian tax reforms, the scenario was opposite to what was expected and the economy had to face numerous challenges regarding consumption. In simple words, it could be said that this is one of the main factors that contributed towards an increase in public debts in 2008-09 period (Diamond & Zodrow, 2008). Figure 2: Graph showing the relation between consumption and taxation (Kadiu, 2012). Investment Out of the many economic factors, investment is also one such factor that is indirectly proportional to the increase or decrease in taxes. During the fiscal changes that were made by the taxation reforms of 2008 the investment (both local and foreign direct investment FDI) faced a decline. Since investment again is an important element of growth and contributes towards the economy in a sound manner, therefore, it played its part in the then economy of Albania. Due to an increase of taxes on foreign direct investments and large-scale local investments majority of investors avoided investing in the Albanian market. However, only a few local and international investments were made following the reforms. Therefore, in general, the 2008 Albanian tax reforms had a negative impact on the economic growth of the country (Diamond & Zodrow, 2008). Table 1: Foreign direct investments (inflows, stock, as a share of GDP and per capita) FDI in Albania 2005 2006 2007 2008 2009 2010 inflows In million Euros 212.6 258.6 481.1 665.1 696.4 831.5 As a share of GDP 3.2 3.6 6.1 7.5 8.0 9.3 Per capita, in euro 66.8 81.3 151.2 209.0 218.9 261.3 Stock (cumulative) In million euro 860.7 1048.5 1815.1 2169.7 2312.3 n.a. Per capita, in euro 270.5 329.5 570.4 681.9 726.7 n.a. Source: FDI – Bank of Albania Government Expenditure It should be noted that the economic factor of government expenditure has always been a troubling one for the government of Albania and its economy. Since the Civil War in the later 90’s the government has taken various loans for the process of development. Thus, the increase in government debts has been noticed since then. While the country currently resides at the maximum percentage of government debts i.e. 76%, Government expenditure is one of the few elements that are directly proportional to the increase in taxes (Instituti I Statistikavi, 2014). Although the 2008 taxation reforms should have played its part in overcoming the challenges faced by this element, however it did not happen and the overall government expenditures increased enormously following the reforms. In order to calculate growth then government expenditure is an important factor and should be rightly and accurately calculated. It is strange how the huge taxes collected by the government did not contribute towards the progress and growth of the economy (Kadiu, 2012). The table below effectively shows the collection of revenue from 2003 to 2010. According to this table, it can be seen that there is a certain increase in the revenues collected by the government every year. However, on the contrary, the deficit also increased each year, reducing the gap between the revenues earned and the expenditures. The increased government expenditures have however contributed towards the economy in such a manner that the government also invested in various mega projects in Albania, specifically in the energy sector, therefore, this measure can be found helpful towards the economy of the country in the coming years (Aaron & Gale, 1996). Year 2003 2004 2005 2006 2007 2008 2009 2010 Total Revenue 167,224 184,355 204,163 229,444 251,555 291,238 299,597 324,719 Figure 3: table showing the increase in revenue of Albania. One factor that has bound the growth of Albanian economy is because of the increased corruption in the country. Despite the revenues earned by the government, the increased corruption tactics have largely barred the economy of the country to grow. There are numerous corruption examples that can be cited here in order to explain how devastated the system are and how badly it depends upon corruption. It is studied that for a single signature the government officials charge a bribe regardless of how basic the transaction is. It can certainly limit the country’s ability to grow and prosper economically (Kadiu, 2012). This is not the only case; corruption is also witnessed in the corporate sector. Corporate firms are also observed doing corruption. Because of the increase in taxes for these organizations, there is an increase in the total cost of that organization. To avoid such situation, these organizations hide their income audits and use the technique of double booking. In order to get low taxes these organizations show a falsified report of their earnings to the government. The original report is kept hidden with them. The overall technique is known as double booking as is very common in Albania. However, the 2008 tax reforms of Albania presented a solution to this problem by imposing comparatively low taxes as of other countries in Europe (Thomsen & Brown, 2008). Exports-Imports Import exports are the two economic factors that are not directly affected by the tax reforms. However, the 2008 Albanian tax reforms did have an impact on the GDP of the country, which had an impact on the exports of the country. It is a complete cycle, which involves various steps. The 2008 Albanian reforms had a positive impact on the export of the country as the production increased. Because of the increase in the production the organizations had to utilize more resources and manpower in order to maximize the outcome. It ultimately contributed towards the growth of the economy. Similarly, due to the increase in the net income of the Albanians after the 2008 Albanian reforms the imports gradually increased. It has been noticed that the Albanians spend a lot of their income on lavish imported products and cars. The increase in the overall import has been noticed following the 2008 taxation reforms (Kadiu, 2012). Figure 4: Graph showing the growth in Imports and Exports of Albania after the 2008 taxation reforms (Kadiu, 2012). Effect on AS Herein, it is significant to understand the concept of aggregate supply before understanding the impact of flat tax reform of 2008 in Albania. As a matter of fact, aggregate supply is basically a relationship between the pricing as well as the output that the country is accounting. It makes it evident that the productivity factor is more likely to allow the supply to increase by large. The tax reform of 2008 in Albania resulted in the decrease of tax payments on the personal income. It allowed the individuals to get motivated to work harder. Consequently, the productivity factor showed a positive increase in the relationship measure of aggregate supply. Figure 6: Aggregate Supply The above figure illustrates the relationship that aggregate supply maintains with that of other macroeconomic factors. Lowered tax measures on personal income have relatively increased the demand of job locators. In simpler words, it can be well stated that the reform in the aggregate supply (AS) has been noted positive (White, et al., 2003). Effects of the tax reform on development In the year 2008, Albania progressed in establishing its ability to carry out tax policy development and its implementations. The tax revenue model is maintained every year and the model is revised every year for improvement in the development of the country. With the help of taxation reforms a country is able to maintain its GNP. Tax reforms have helped Albania in overcoming its issues of unemployment and income distribution. Unemployment in the country is a big issue but by the tax reform in Albania in 2008 has increased the rate of employment, such a situation is not the same in other countries as usually increase in taxation decreases rate of employment. The GNP and GDP help in estimating Income Distribution and finding out per capita income. A country’s status and its standard of living can be determined with income distribution. Tax evasion was also reduced by the reform in taxes in Albania, the Albanian government implemented such models and reforms with the help of which it was not easy to skip taxes. Unemployment Unemployment is a big issue that every country faces and keeps on introducing such plans to overcome with the issue of unemployment. In every country when there is an increase in taxes its unemployment increases but in the case of Albania the reforms in taxation in 2008 its unemployment decreased. The tax reforms in Albania actually brought beneficial changes for them as it helped in boosting the economy of Albania. The rate of employment increased in Albania, which means the people were more employed in 2008 after the changes in taxation. The unemployment rate in Albania decreased from 13.5% to 13%, which was because of the changes made in tax structure. The impact of tax reforms changes its employment structure, 18.3% were employed in Public sector, 55.8% were employed in Agricultural private sector and 38.3 were employed in non-Agricultural private sector. There was also a gender difference in the employment as women were less employed in 2008 as compared to the previous years and males were more employed. The employment rate in females was 45.6 % and the employment rate in males was 63 % (Grown & Valodia, 2010). Figure 7: Albania taxation timeline The reform in taxation in Albania has been very helpful for its government as it is responsible for creating jobs and reducing unemployment. The decrease in the rate of unemployment helps the people as well as the government and increases the growth of the country. The more employment there will be in the country the more there will be tax collection. Tax reforms have helped the government of Albania to collect tax in a much better manner as compared to the previous years and flourished the economy to some extent (Abed, 1998). Income Distribution Tax reforms affect the income distribution in a country but it is very difficult to implement such changes in income distribution. It is a difficult task for the policy maker to make such tax reform which can help in increasing the income distribution in a country. The 2008 tax reforms in Albania were a big change for them. The tax reforms helped Albania in countering many of its issues without having a negative impact on it. The inequality within the country creates many problems and gives rise to the criminal activities. The tax reforms of 2008 in Albania were not only beneficial for a specific high class but it also increased job opportunities for the lower class and there was not a big difference in the standard of living of the people. The tax reform not only brought equality amongst its citizens as the income was distributed properly amongst the working class and it even increased the per capita income of Albania. The increase in the rate of income distribution and in per capita income of a country represents its status in the whole world and reflects its progress. The tax reforms in Albania were supportive for its economy and very effective in terms of the changes brought by it, which was the main motive of Albanian government. Impact of Tax Reforms on Gross Domestic Product (GDP) There was financial crunch around the whole world starting from the year 2007 and continued till 2009. The economies of many countries were adversely affected by the recession in that era, the Gross Domestic Product (GDP) and National Income (NI) declined resulting in poor economy. The figure of Gross Domestic Product tells a different story in the case of Albania. The tax reform of Albania in 2008 had a great impact on the economy as it progressed itself facing many obstacles. The GDP of Albania in 2007 was 967,670m and it increased to 1,080,676m in 2008. The figure explains us that even at the time of financial crisis, the tax reforms in Albania were so powerful that it increased the GDP. Impact of Tax Reforms on National Income National Income is the total amount of money that it earned within the geographical boundaries of a country. Tax and recession are more likely to decrease the National Income of a country but the tax reform of Albania in 2008 worked differently. In 2008, there was worldwide recession and along with that there were tax reforms in Albania which worked in a different manner. The National Income in 2008 increased as compared to that of 2007, in Albania. In 2007, Albania recorded its National Income at 994,534m and its value increased to 1,086,131m in 2008. The increase was not expected in the National Income but the approach towards tax reform was brilliantly executed. National Debt The national debt of Albania in 2006 was 5,048m and increased to 5,716m in 2007 and further increased to 7,113m in 2008. A big difference can be seen in the year 2008 if we compare it with other years representing the impact of Tax Reforms on the National Debt. The percentage GDP also increased from 53.43% to 54.70% in the year 2007 and 2008. The tax reforms of 2008 in Albania had its impact on the whole country and on every aspect of that country. Albania: Debt evolution Millions € Millions $ % GDP € Per Capita $ Per Capita 2012 5,955 € 7,656 $ 62.44% 1,894 € 2,436 $ 2011 5,504 € 7,659 $ 60.26% 1,699 € 2,363 $ 2010 5,188 € 6,884 $ 58.53% 1,831 € 2,429 $ 2009 5,181 € 7,216 $ 59.45% 1,623 € 2,260 $ 2008 4,833 € 7,113 $ 54.70% 1,518 € 2,234 $ 2007 4,170 € 5,716 $ 53.43% 1,315 € 1,803 $ 2006 4,020 € 5,048 $ 56.08% 1,275 € 1,601 $ 2005 3,813 € 4,751 $ 57.84% 1,211 € 1,509 $ 2004 3,395 € 4,221 $ 57.41% 1,083 € 1,346 $ 2003 3,085 € 3,489 $ 60.71% 989 € 1,118 $ Tax Evasion Tax evasion is illegal and many individuals and corporations practice it. Corporations mostly practice the tax evasion by declaring less income, gains or profits and even overstating deductions. Tax evasion is a big issue that every government faces; it reduces the taxes injections of an economy. In 2008, tax reforms in Albania reduce the tax evasion, which helped the economy to progress as the injections of the economy were increased. The tax reform model was such that it was difficult for the people to hide from paying taxes. The people had to update their real income, gains and profits without understating it. They were not even given an opportunity to overstate their deductions and escape from tax. The tax reforms in Albania in 2008 reduced the tax evasion in the country, which helped them in progressing in the economy (Cockfield, 2010). Conclusion Albania was a closed and centrally planned economy and it underwent many obstacles to establishing an open market economy. The Albanian economy was not very effective in its fiscal policies and had a poor setup of taxation. The tax system, which was being used in the country, was not properly implemented having an adverse effect on its economy. In the year 2008, tax reforms took place in Albania, which brought many changes in the country. The economy of the country progressed as there was very less tax evasion and it also increased the rate of employment of Albania. The 2008 Albanian tax reforms were aimed to help the Albanian economy collectively, in which numerous tax policies from small-scale business to corporate level and agriculture and wages, were imposed. Overall, the tax reforms of 2008 were very helpful for the Albanian government and the economy of Albania progressed. List of References Aaron, H. J. & Gale, W. G., 1996. Economic effects of fundamental tax reform. First ed. Washington, D.C: Brookings Institution Press. Abed, G. T., 1998. Fiscal Reforms in Low-income Countries: Experience Under IMF-supported Programs. 1st ed. Washington, D.C.: International Monetary Fund. bankofalbania, 2014. Monetary Policy Report. [Online] Available at: http://www.bankofalbania.org/web/Monetary_Policy_Report_5794_2.php [Accessed 20 August 2014]. Cockfield, A. J., 2010. Globalization and Its Tax Discontents: Tax Policy and International Investments : Essays in Honour of Alex Easson. 1st ed. Toronto: University of Toronto Press. Diamond, J. W. & Zodrow, G. R., 2008. Fundamental tax reform : issues, choices, and implications. First ed. Cambridge: MIT Press. Grown, C. & Valodia, I., 2010. Taxation and Gender Equity: A Comparative Analysis of Direct and Indirect Taxes in Developing and Developed Countries. 1st ed. New York: IDRC. Instituti I Statistikavi, 2014. Gross Domestic Product according Statistical Regions in Albania, 2012. [Online] Available at: http://www.instat.gov.al/en/publications/press-releases/press-release-gdp-by-regions-2012.aspx [Accessed 20 August 2014]. Kadiu, F., 2012. Albania Fiscal Policy: Designing Tax Policy by Given Circumstances. Mediterranean, 3(1), pp. 371-377. Thomsen, P. M. & Brown, S., 2008. Albania: 2008 Article IV Consultation, Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Review Under Extended Arrangement, Financing Assurances Review, and Request for Modification of Performance Criteria - St. First ed. New York: International Monetary Fund. White, S., Bingham, R. & Hill, E., 2003. Financing Economic Development in the 21st Century. New York: M.E. Sharpe. Read More