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© 2022 International Monetary Fund
[WP/22/239
IMF Working Paper
Fiscal Affairs Department
Labor Taxation in the Western Balkan: Looking Back and Forward
Prepared by Alain Jousten, Mario Mansour, Irena Jankulov Suljagic, and Charles Vellutini
December 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: This paper examines how labor taxation (personal income taxes and social security contributions) in the Western Balkan contributes to labor market outcomes such as high informality and a significant gender gap in participation rates. We find that limited progressivity combined with high tax wedge on low incomes poses a major twin equity-efficiency challenge in the region, resulting in low redistributive capacity and inadequate incentives to enter the job market. Policy implications are discussed with a view to alleviating the excessively high tax wedges on low incomes, while improving progressivity of income taxation.
RECOMMENDED CITATION: Jousten et al. “Labor Taxation in the Western Balkan: Looking Back and Forward”, IMF Working Paper WP/22/239, 2022.
| JEL Classification Numbers: | H24, H31. |
| Keywords: | Western Balkan; labor taxation; labor tax wedge; personal income tax; corporate income tax; social security contributions |
| Author’s E-Mail Address: | ajousten@uliege.be; mmansour@imf.org; ijankulov@imf.org; cvellutini@imf.org |
| JEL Classification Numbers: | H24, H31. |
| Keywords: | Western Balkan; labor taxation; labor tax wedge; personal income tax; corporate income tax; social security contributions |
| Author’s E-Mail Address: | ajousten@uliege.be; mmansour@imf.org; ijankulov@imf.org; cvellutini@imf.org |
Title Page
WORKING PAPERS
Labor Taxation in the Western Balkan: Looking Back and Forward
Prepared by Alain Jousten, Mario Mansour, Irena Jankulov Suljagic, and Charles Vellutini*
Contents
I. Introduction
II. Brief Review of the Literature
III. The Context of Labor Taxation in the Western Balkan: Labor Market Outcomes
IV. Incentives Implications of Labor Taxation
A. Labor Taxation in the Region’s Tax Policy Mix
B. Key Features of Labor Taxation
C. Progressivity and Redistributive Capacity
D. Incentives at the Extensive Margin
E. Incentives at the Intensive Margin
F. SSCs and Design of Benefits
G. Self-employment
V. Policy Implications
VI. Concluding Remarks
References
BOXES
1. The Labor Tax Wedge
2. Recent Developments in Labor Taxation in the Western Balkans
3. Measures of Progressive and Redistributive Capacities
4. Experience with SSC Reductions
FIGURES
1. Labor Force Participation Rates, 2019
2. Labor Market Indicators by Age and Gender, 2019
3. Employment Rate by Education Level and by Gender, 2019
4. Characteristics of the Employed Population, 2019
5. Share of Informal Employment by Age and by Gender, 2019
6. Personal, Corporate, and Value Added Tax Rates, 2000–2020
7. Tax Revenue Composition by Economic Function, 2004–2020
8. PIT Marginal Rates, 2021
9. SSC Rates on Gross Wages – Combined Employee-Employer, 2021
10. Labor Tax Wedge by Income Level in Western Balkan and OECD Countries, 2019
11. PIT Redistributive Capacity, 2021
12. Average Tax Wedge for Full-Time Wage Earner
13. Marginal Tax Rates for Full-Time Wage Earner
TABLES
1. Labor Force Participation Rates, 2010–2019
2. Minimum and Maximum Contributions, 2021
3: Taxation of the Self-Employed, 2021
The authors would like to thank, for their comments, Nabil Ben Ltaifa, Zsuzsa Munkacsi, Bobana Cegar, Ruifeng Zhang, Si Guo, Amanda Edwards, Faton Sulejmani, Selim Thaci, Myrto Oikonomou, and Ryota Nakatani. Julieta Raquel Ladronis provided excellent research assistance.