Who really pays VAT in Albania?

Any attempt to evaluate the "fairness" of a tax (or a change in the tax system) requires
knowing whose disposable income is changed and by how much in response to the tax.
Economists often refer to taxes as "regressive" or "progressive," but the confusion over
the terms' meanings requires careful definitions. The definitions that most economists
use rely on the average tax rate, that is, the ratio of tax liabilities to income.
A tax is regressive if the average tax rate falls with an increase in income,
proportional if the average tax rate is constant and progressive if the average tax
rate rises with income.
Simply put, low-income people pay a higher fraction of their income in taxes than
wealthier people if the tax is regressive and a lower fraction of their income if the tax is
progressive.
In most developing countries, taxes are the primary sources of revenue for
government. In Albania, tax revenue accounts for about ninety percent of the total
revenue of the Government. However, like in many other developing countries, very
limited research has been undertaken to measure the incidence of indirect taxes in
Albania.
Sound fiscal policy is fundamental to maintain macroeconomic stability and foster
economic growth of any country. Excess expenditure over revenue collection (fiscal
deficit) may have an adverse effect on macroeconomic stability. This means resource
mobilization, whether sourced internally or externally, is immensely important to the
overall economic management of a government.
This is true in Albania, where tax revenue accounts for about 91.5 percent of total
government revenue, and the VAT alone accounts for more than 36.8 percent of total
tax revenue.
In this article, we express that the incidence of VAT on the poorest of the urban income
groups is higher than that on the middle-income groups, but the incidence rises as
income increases for the people of rural areas.

The comparison and analyse of data from INSTAT and Ministry of Finance about Monthly
Household Per-Capita Income, Relative Tax Burden, Per Capita Consumption, and
relative VAT Paid the result show that the VAT burden in the lowest income group is 7.9
percent, which is extremely high given the fact that the VAT burden of the highest
income group is only 5.5 percent.
The higher income groups are enjoying fewer burdens than the lower income groups.
Taking considerations to all of the analysis done in previous chapters, the study
suggests the following policy recommendations that could help design a better VAT
system in Albania.
First, VAT can be made less regressive by making a distinction between luxurious goods
and necessity goods. So the better policy would be not to maintain a single rate of VAT.
The government could impose a higher rate of tax on goods that account for a greater
share of expenditure of the better-off members of the society;
Second, exemption causes distortion and induces elements of tax evasion in the tax
system. But some exemptions are unavoidable. So exemptions should be limited only to
basic health service, public transport, agriculture and agro-based industries and
government education;
Third, a reasonably threshold can reduce the regressivity of a VAT system.
It can help the lower income group of people and ensure the equity of VAT.
Even though applying high threshold, more revenue can be collected by close
monitoring of the large taxpayers through adopting risk based audit programmes.

Eduart Gjokutaj, 2015