Tax Capacity and Tax Effort: Evidence From Albanian Economy

Abstract

The potential tax capacity is very important for assessing the tax space for policy response, especially after the COVID-19 crisis. The main objective of this paper is to study the tax capacity of the Albanian economy, relative to other transition economies with the same patterns of development. We rely on a regression-based approach for the period of 1998-2022 to estimate the potential tax capacity and tax effort. The study found that the structure of the economy, per capita income, openness to foreign trade and corruption are the most consistent explanatory variables of the potential tax capacity. The study also found that tax effort is below one for the Albanian economy, and tax-to-GDP collections are below the average level of the transition economies. We conclude that the country should continue improving the governance quality and fighting corruption to improve tax collection. The study does not support further increases in the statutory tax rates.