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Dr. Mikel Alla, Accounting Studio & Tax Consultancy University of Elbasan Elbasan, Albania E-mail: mikel-alla@yahoo.com
HAS THE VAT IMPROVED THE TAX REVENUES RATIO IN THE BALKANS?
Abstract: VAT is a special type of turnover tax, applied at each stage of production and distribution process. VAT as a tax on consumption based on the principle of self-declaration, self-assessment and the tax deduction, which means that taxpayers are encouraged to file and assess tax liabilities and may seek reimbursement of tax paid. The study aims to examine the VAT and effect of VAT and other factors on tax revenues of Balkan countries. The empirical results of this study have identified that factors such as; the presence of VAT in a tax system, open trade, inflation, the share of agriculture to GDP etc. are important factors that affect the stability of the ratio of tax revenues. Adoption and implementation of VAT, for a long period in the tax systems of countries of the Balkans, has increased the ratio of tax revenue with 5.12%. The orientation of Albania towards the model of taxation through VAT, towards keeping under control the inflation rate, formalization the agriculture sector and the trend towards open trade, positively affects to the ratio of tax revenues.
Keywords: VAT, Tax System, Income Tax, Tax Revenues Ratio.
Introduction
There is a resonance among the authors that VAT generates more stable and higher income than sales tax. Applying VAT to a tax system tends to increase the level of tax collected Keen and Lockwood [9]. Agha and Haughton [10], using data from 17 OECD countries, concluded that VAT efficiency is achieved when a standard rate is applied to a tax system when a reduced rate and fewer VAT exemptions are applied. De Mello [11] uses data from 42 countries, including mostly OECD countries and other countries. Its findings confirm the Agha and Haughton thesis [10] that VAT efficiency is achieved by applying a standard non-high rate. Michael Keen and Ben Lockwood [9] gave a significant contribution to the effects of adopting VAT on a tax system using data from 143 states for a period of 25 years (1975-2000). The essence of their analysis has to do with the efficiency of adopting a VAT system. According to their study, VAT increases the income ratio by 3.4%. That's about 0.5% of GDP. Auriol and Warlters [12] conducted a study to assess the costs of public funds management for five tax instruments in 36 African countries. They concluded that VAT was the lowest-cost tax instrument. Ebeke and Ehrhart [8] confirmed this result for African countries (for the period 1980-2005). The purpose of Ebeke and Ehrhart's study was to assess the presence of VAT on a tax system and its impact on increasing tax revenue stability in developing countries. They concluded that VAT has a stabilizing effect on the tax revenue ratio.
Purpose and methodology of the study Purpose of the study: This study aims to analyze the VAT and other determining factors of the tax revenue ratio of the Balkan countries.
Research question: What are the determining factors of tax revenues in Balkan countries? What is the effect of VAT? Is it positive or negative impact?
Hypotheses: Ho: B1 = B2 = B3 = ....= Bn = 0 Ha: At least one of the parameters is different from zero Methodology: This paper is based on study of Michael Keen & Ben Lockwood [9] and Christian Ebeke & Helene Ehrhart [8], on
the economic impact ofVAT on tax revenues, and even the variables used are based on study of these authors. For the analysis of the impact of tax revenue factors, the variables are presented in the form of time series for a 24-year period (1991-2014), with the exception of qualitative variables "VAT" and "VAT model". The analysis will be carried out with cross-data of the Balkan countries. The alpha level will be 5% for all empirical analyzes.
Data analysis and results
After reviewing theoretical and empirical literature, variables that have been taken into account for carrying out the empirical analysis are: the ratio of "total income from taxes/GDP, VAT (0 - VAT periods, 1 - periods without VAT), openness (exports + imports/GDP), income per capita, agriculture weight to GDP, inflation, VAT model, country size, population over 65 years of age and population below 14 years of age. The probability rule has been used to validate the hypotheses and the chosen level of significance is 0.05. To test the Regression Model assumptions, are used these tests: Ljung-Box test for stationarity, Durbin Watson test for autocorrelation, Kolmogorov-Smirnov test for normality and White test for heteroskedasticity. The determination coefficient R2 is used for the explanation of the model. The sample consists of 240 observations. From testing the data, it turned out that all the variables are not sustainable. As a result, the relevant transformations have been made and the conclusion is reached, that all the variables are stable with a difference. In the case of our model has resulted that DW = 2.3. Since it is within autocorrelation values we conclude that the term of error has no serial autocorrelation and this assumption of the regression model is also fulfilled. From the analysis performed with SPSS has resulted that K-S = 0.2, which means that the data distribution is normal. The assumption of normality is met. So derived model is sustainable in the long term. White test = 0.63, which is statistically insignificant. The assumption of homoskedasticity is met and the estimated parameters are BLU. From the regression results R = 0.81 and R2 = 0.67. Under these conditions, 67% of the tax income ratio is ex-
HAS THE VAT IMPROVED THE TAX REVENUES RATIO IN THE BALKANS?
plained by independent variables that have been taken into consideration while the remainder may be explained by other variables that are not the subject of this study. Since the probability of the model is 0 and lower than the 5% (significance level), we conclude that the model is statistically significant and can be used for political prediction, control and decision making purposes. From the final results it turned out that all variables taken into account have been statistically significant except "the income per capita" vaiable. Although its impact is positive, in line with expectations, its parameter has not been significant. According to the results, in the case where VAT has not been applied, another form of taxation on consumption is used, tax returns/GDP in the Balkan countries is 32.4%, while in the case of VAT, this indicator increases with 5.12%. So this form of consumer taxation affects positively on tax revenues. To avoid tax accumulation and to tax only once the value of goods and services, the VAT model provides for tax deduction, thereby guaranteeing fiscal neutrality with no double charge on taxation. Cross-border trade increases tax revenues by 1.2%. As a result, the possibility of applying the reverse-charge scheme for cross-border trade between these countries is likely to increase the effect of this variable on tax income Alla M. [13]. The income per capita effect is very small. This variable has been statistically insignificant. Agriculture/GDP ratio reduces tax revenues by 1.16%. The negative effect of this variable on the tax revenue ratio is related to the fact of the fiscal facilities that have enabled this sector as well as the difficulties in formalizing this sector. Also, inflation decreases by 3.2%. Thus, price volatility reduces the tax revenue ratio in the Balkans by 3.2%. The mixed VAT model increases tax revenues by 1.5%. It seems that for a long time, the Western Balkan countries may be outside the EU area. The results show that the European VAT model with the application of a low threshold and many standard norms and many reduced rates is not particularly appropriate for the countries of the Western Balkans. This also relates to the easier access to tax evasion schemes, which become more difficult to find and fight. For these countries, a mixed VAT model, where a standard rate is applied and some reduced rates for sectors of importance to the community and sectors to be stimulated, increases the ratio of tax revenues. Also, the positive effect of
the size of the country, of the category of population under 14 and over 65 years, is observed. Population over 65 years of age increases the tax revenue ratio by 0.9% and the population under 14 grows this ratio by 0.55%, while the effect of the population related to the size of a country is very small. Children up to the age of 14 are under the tutelage of the parents and the latter do everything to meet all their needs. As a result, the greater this category of population, the more benefits will be consumed, as a result of more taxes on the state budget. The same logic is with the category of people over 65 years of age. Generally this category of population is retired and tend to consume due to their savings.
Conclusions
The main objective of this paper was the analysis of VAT, its effect and other factors on the tax revenues of the Balkan countries. VAT, the share of agriculture to GDP, inflation, mix model of VAT, openness and the share of the population over 65 and under 14 are all important indicators that affect the ratio of tax revenues to countries Balkans. The only statistically unimportant factor is " income per capita ". "The size of the Balkan country" has a very small impact on tax revenues. The implementation of VAT for a long-term period in the tax systems of these countries has contributed to the increase of tax revenues by 5.12% compared to other taxation models on consumption. The application of the mixed VAT model, which combines the characteristics of the European model with the non-Eruopian model, has contributed to the increase of Tax Revenues/GDP ratio, as in the ten countries analyzed, six of them are out of the EU and most likely tend to be outside of the EU for a long time. Therefore, for these countries, a mixed VAT model, where a standard rate and some reduced rates for sectors of importance to the community, is better It is better to administer and increase the ratio of tax revenue. Inflation and agriculture/GDP ratio negatively impact on tax revenues, while openness contributes to their growth. Taking into account the empirical results achieved by this study, I think this model is a contribution to policy makers. The orientation ofAlbania towards the model of taxation through VAT, towards keeping under control the inflation rate, formalization the agriculture sector and the trend towards open trade, positively affects to the ratio of tax revenues.
References:
1. Law - No. 9920 dated 19.5.2008 "On Tax Procedures in the Republic of Albania".
2. Instruction of FM, - No. 24, dated 02.09.2008, "On Tax Procedures in the RA".
3. "Tax Glossary." International Bureau of Fiscal Documentation.
4. Law 92/2014 "On value added tax", as amended.
5. Instruction of FM, - No. 6. dated 30.01.2015, "On Value Added Tax in the RA".
6. Tax laws of Balkan countries taken in the analysis.
7. Ebeke C. and Ehrhart H. "Tax Revenue Instability in Sub-Saharan Africa: Consequences and Remedies", Journal of African Economies, - 2011. - P. 1-27.
8. Ebeke C. and Ehrhart H. Does VAT reduce the instability of tax revenues?, CERDI, - 2012. -P. 1-18.
9. Keen M., & Lockwood B. The Value-Added Tax: Its Causes and Consequences, International Monetary Fund. - 2007.
10. Agha A., & Haughton J. Designing Vat Systems: Some Efficiency Considerations. The Review of Economics and Statistics, - Vol. 78. -No. 2. - 1996. - P. 303-308.
11. De Mello L., Avoiding the value-added tax: Theory and cross-country evidence. Public Finance Rev., - 2009. - 37 (1). - P. 27-46.
12. Auriol E. and Warlters M. "The marginal cost of public funds and tax reform in Africa", Journal of Development Economics, - Vol. 97 (1), - 2012. - P. 58-72.
13. Alla M., "Possibility of Creating a New Regime of Cross-Border Goods of Goods in Albania and Balkan Countries", published in the international journal European Academic Research, Romania, EU - Vol. IV, Issue 9 / December - 2016. Impact Factor: 3.4546 (UIF).
14. URL: http://(www.worldbank.org/developmentindicators)
15. URL: http://(www.imf.org/financialstatistics)
