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The Effects of Flat Tax on Inequality and Informal Employment: The Case of Albania

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Name of the Asset | The Effects of Flat Tax on Inequality and Informal Employment: The Case of Albania
Type of Asset | Working Paper
Authors | Isilda Mara, Edlira Narazani (Albanian Centre for Social-Economic Research, Tirana, Albania)
Date | December 2011
Country and/or Region | Albania



In Albania, the informal sector, while  sizable and crucial to the economy, has not been formally analyzed in depth. On the one hand, it contributes to providing many individuals with employment alternatives. On the other, it can increase vulnerability by keeping people out of the social security system. This study applies a micro-simulation model that allows counting for both formal and informal employment, to investigate the implications of a flat-tax regime on informal employment. It finds that the flat tax implemented since July 2007 has not contributed to the reduction of labor informality, but that increases in regular wages have played an important role in convincing individuals to move to the formal labor market. Furthermore, it finds that controls and audits are more efficient than fines in inducing people to switch from the informal to formal labor market. These results imply that a kind of progressiveness should be put back into tax policy, without affecting the attractiveness and simplicity that a flat tax entails.

Name of the Program | Global Development Network – GDN Working Paper Series 
Funder(s) | The Jubiläumsfonds of the Austrian National Bank (OeNB), Austrian Ministry of Finance.
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