Albanian Government adopts 10% flat rate tax. Being generous or just a cunning plan?

At the start of this year Albania followed a number of its post communist Eastern European neighbours and adopted a flat tax rate of 10%.

In a nutshell this basically means that companies and individuals will pay a flat 10% of their earnings to the tax authorities irrespective of how much they actually earn. Compare this to the vast majority of other countries in the world who have ‘Progressive tax’ regimes whereby the burden of tax increases as earnings increase.

But surely a lower tax rate means less tax revenue and therefore less to invest in the infrastructure of the country?

Well possibly not. There is evidence from other countries who have already adopted a flat tax rate that suggests the first year’s tax revenues either remain stable or increase as a result of the rate cuts.

Most of the countries that have adopted these flat tax rates are post communist countries where a grey and hidden economy was a significant part of their Gross Domestic Product (GDP). Flat taxes have the effect of bringing this grey economic activity back into the legitimate market place. This is achieved by simplifying the tax systems and legislation making it easier for taxes to be collected and harder for companies and individuals to evade tax. Simplifying the system also reduces the number of tax loopholes for legitimate ways of tax avoidance and thereby increasing tax revenue.

One criticism of the flat tax rate is that it unfairly penalises those on a low incomes as compared with progressive systems that tax on the basis of ability to pay.

Lower simpler taxes boost competitiveness and attract Foreign Direct Investment (FDI)

By offering low tax rates to business the Albanian government will be hoping to attract foreign companies to invest in Albania creating jobs and boosting the economy.
Obviously the lower the tax burden on businesses the more attractive Albania will be as large International corporations look to move their bases of operation to locations where labour and production costs are cheap and a lower proportion of the profit is taken as tax. Of course more foreign businesses means more tax revenue as well.

Estonia was the first country to adopt a flat tax rate back in the 1990’s and the simplified tax system boosted its competitiveness which lured foreign investment and helped make it Europe’s fastest growing economy. The Albanian government would certainly like to see more investment funds flowing into the country and the reduced tax rates will certainly help to encourage this. So perhaps a cunning plan after all.

Of course failure to reduce the tax rate may well have left Albania lagging behind the majority of its neighbours in Eastern Europe who are already attracting foreign investment with their low rates of tax.