To tax or not to tax - this question could have never been asked twenty years ago. Historically, income tax is a novel invention. Still, it became so widespread and so socially accepted that no one dared challenge it seriously. In the lunatic fringes there were those who refused to pay taxes and served prison sentences as a result. Some of them tried to translate their platforms into political power and established parties, which failed dismally in the polls. But some of what they said made sense.
The success of VAT in the EU showed that VAT worked. The consistent support and advocacy of this form of taxation by the IMF and others in a variety of countries, encouraged and facilitated the adoption of VAT by countries with much less developed economic and administrative structures than those in the original EU member states, like Albania. The VAT, it's invariably among the most important sources of government revenue. Not all is so good for VAT, however. Some of problems have always been inherent in the structure and operation of VATs but are exacerbated by the increased fiscal weight being placed under pressure for new fiscal revenues for example to offset revenue losses from tariff reductions needed to accord with WTO requirements. It is thus perhaps time for a new look at the role of VAT in Albania. I want to make some question that can be a referent point for this discussion. Can VATs be adapted to cope with the rising demands for more access to revenues by local and regional governments? Can tax administration deal with such new problems as those arising from changes in business practices with financial innovations and e- commerce? Does VAT provide a way to tap the informal sector or does it instead tend to expand that sector? The answers to such questions are not only critical to the fiscal stability of Albania, but also to her economic growth and development. Not only do we as yet have surprisingly little solid empirical knowledge of some critical factors but the relevant economic theory also remains rather sketchy and we know even less about the relevant political economy context.
As we said, VAT works. Despite some doubts by various analysts, for the most part it remains true that, if a country needs or wants a simpler tax, it is well to have a VAT. Nonetheless VAT does not always work well, principally because we yet are so tax educated society ready for "self-assessment". VAT is by no means necessarily the 'money machine' for every government.. Indeed, the equally conventional conclusion that a VAT is the most economically desirable and administratively effective way in which to collect a given share of national income through a general consumption tax also holds -- provided, again, that the capacity exists to administer VAT adequately. Similarly, as with any tax, although increasing the rate of an existing VAT rates will neither necessarily increase revenues proportionately nor be costless, it may nonetheless be the economically most sensible way to expand revenue shares in economy, if that is the policy goal.
Recently, however, some have begun to explore in more detail the theoretical framework linking VAT, tariff reform, trade and welfare, turning up some interesting and to some extent disquieting results. Analysts have also recently begun to discuss the implications for VAT of the considerably larger underground or shadow economies found in Albania as compared to developed countries. Some analysis suggests that in the presence of a substantial 'informal' sector, a tax like VAT that falls on the formal sector acts to deter the growth and development of the economy as a whole. Increasing consumption taxes definitely fosters the expansion of the hidden economy if the labor-intensity of production in that sector is greater than in the formal sector. The present government need for revenues suggest that even government aware of such problems may have nonetheless choose to impose higher taxes, including VAT, on the formal sector of the economy because with their relatively weak tax administrations the best way for them to raise revenue may be to increase barriers to entry to the formal sector, thus creating 'rents' that may then be taxed.
The results were socially and morally devastating: an avalanche of illegal activities, all intended to avoid paying taxes. Monstrous black economies were formed by entrepreneuring souls. These economic activities went unreported and totally deformed the processes of macroeconomic decision making, supposedly based on complete economic data. This apparent lack of macroeconomic control creates a second layer of mistrust between the citizen and his government (on top of the one related to the collection of taxes).
Changes in tax rates can also have a significant impact on the integration of UTPs into the tax provision. UTPs will normally be recorded at the tax rates used to file the tax return for the year in which the issue arose. For example, a potential disallowance of an expense in a prior year must be measured at the tax rates in effect for that year. This could be different from the tax rates used to compute the tax provision in the current year. This means that UTPs must be tax effected and carried forward using a unique rate structure that is not dependent upon the rates used in the tax provision for the current year. As noted above, the UTPs must be integrated into all aspects of the tax footnote disclosure. The different tax rate structures make it difficult to simply add UTPs and tax return activity together on a pretax basis. Instead, it may be advisable to tax effect the UTPs separately and then add them to the standard tax provision computations. Under FAS 109, de-ferret tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision.
The success of VAT in the EU showed that VAT worked. The consistent support and advocacy of this form of taxation by the IMF and others in a variety of countries, encouraged and facilitated the adoption of VAT by countries with much less developed economic and administrative structures than those in the original EU member states, like Albania. The VAT, it's invariably among the most important sources of government revenue. Not all is so good for VAT, however. Some of problems have always been inherent in the structure and operation of VATs but are exacerbated by the increased fiscal weight being placed under pressure for new fiscal revenues for example to offset revenue losses from tariff reductions needed to accord with WTO requirements. It is thus perhaps time for a new look at the role of VAT in Albania. I want to make some question that can be a referent point for this discussion. Can VATs be adapted to cope with the rising demands for more access to revenues by local and regional governments? Can tax administration deal with such new problems as those arising from changes in business practices with financial innovations and e- commerce? Does VAT provide a way to tap the informal sector or does it instead tend to expand that sector? The answers to such questions are not only critical to the fiscal stability of Albania, but also to her economic growth and development. Not only do we as yet have surprisingly little solid empirical knowledge of some critical factors but the relevant economic theory also remains rather sketchy and we know even less about the relevant political economy context.
As we said, VAT works. Despite some doubts by various analysts, for the most part it remains true that, if a country needs or wants a simpler tax, it is well to have a VAT. Nonetheless VAT does not always work well, principally because we yet are so tax educated society ready for "self-assessment". VAT is by no means necessarily the 'money machine' for every government.. Indeed, the equally conventional conclusion that a VAT is the most economically desirable and administratively effective way in which to collect a given share of national income through a general consumption tax also holds -- provided, again, that the capacity exists to administer VAT adequately. Similarly, as with any tax, although increasing the rate of an existing VAT rates will neither necessarily increase revenues proportionately nor be costless, it may nonetheless be the economically most sensible way to expand revenue shares in economy, if that is the policy goal.
Recently, however, some have begun to explore in more detail the theoretical framework linking VAT, tariff reform, trade and welfare, turning up some interesting and to some extent disquieting results. Analysts have also recently begun to discuss the implications for VAT of the considerably larger underground or shadow economies found in Albania as compared to developed countries. Some analysis suggests that in the presence of a substantial 'informal' sector, a tax like VAT that falls on the formal sector acts to deter the growth and development of the economy as a whole. Increasing consumption taxes definitely fosters the expansion of the hidden economy if the labor-intensity of production in that sector is greater than in the formal sector. The present government need for revenues suggest that even government aware of such problems may have nonetheless choose to impose higher taxes, including VAT, on the formal sector of the economy because with their relatively weak tax administrations the best way for them to raise revenue may be to increase barriers to entry to the formal sector, thus creating 'rents' that may then be taxed.
The results were socially and morally devastating: an avalanche of illegal activities, all intended to avoid paying taxes. Monstrous black economies were formed by entrepreneuring souls. These economic activities went unreported and totally deformed the processes of macroeconomic decision making, supposedly based on complete economic data. This apparent lack of macroeconomic control creates a second layer of mistrust between the citizen and his government (on top of the one related to the collection of taxes).
Changes in tax rates can also have a significant impact on the integration of UTPs into the tax provision. UTPs will normally be recorded at the tax rates used to file the tax return for the year in which the issue arose. For example, a potential disallowance of an expense in a prior year must be measured at the tax rates in effect for that year. This could be different from the tax rates used to compute the tax provision in the current year. This means that UTPs must be tax effected and carried forward using a unique rate structure that is not dependent upon the rates used in the tax provision for the current year. As noted above, the UTPs must be integrated into all aspects of the tax footnote disclosure. The different tax rate structures make it difficult to simply add UTPs and tax return activity together on a pretax basis. Instead, it may be advisable to tax effect the UTPs separately and then add them to the standard tax provision computations. Under FAS 109, de-ferret tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision.
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Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Condominium Conversions: Is This Right For You? You have full permission to reprint this article provided this box is kept unchanged.
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