**<mark>To our knowledge, no previous study has examined the distributional effects of tax policy or the fiscal</mark>**

**<mark>system as a whole</mark>** <mark>.  There has been substantial work in better understanding the role of fiscal policy in Albania. Some studies looked at the effect of fiscal policy on economic growth (Shijaku & Gjokuta, 2013; Milova & Vokshi-Abazi, 2014; Trebicka, 2015; Patonov, 2016), the macroeconomic effects of fiscal policy in general (Mançellari, 2011; Llollari & Kripa, 2016; Merko</mark> _<mark>et al.,</mark>_ <mark>2017), the effects of a flat tax rates on inequality and informal employment in particular (Mara & Narazani, 2011), the performance of the tax system (Fortuzi & Doda, 2015), and the perceptions of the current tax system (Muceku & Balliu, 2017). However, none of these studies evaluates the role of fiscal policy in reducing poverty and inequality. Also, it is surprising that despite the abundance of empirical research on fiscal policy in Albania, only one study (Mara & Narazani, 2011) focuses on micro-level analysis (household or individual level).</mark>

**<mark>The majority of these empirical studies tend to support the contribution of fiscal policy on economic growth, while stressing the larger economic effect of government revenue than government expenditure</mark>** <mark>(Shijaku & Gjokuta, 2013; Patonov, 2016). Similar results, though not on economic growth, were reached by Mançellari (2011), where taxes appear to have a positive effect on macroeconomic variables (interest rates, consumption, savings), different from the (mostly) insignificant economic effect of expenditure. In the same vein, Merko</mark> _<mark>et al.</mark>_ <mark>(2017) suggest the negative impact of government consumption and debt on current account. While the above studies focused on the macro-level, the study of Mara and Nazari (2011), which focuses on the micro-level, investigates the labor supply decision (accounting for informality) in the presence of different tax systems. By simulating changes in the latter, Mara & Nazari (2011) argue over the superiority of the progressive tax, while acknowledging the simplicity of the flat tax.</mark>

**This paper uses standard incidence analysis to comprehensively assess the impact of the fiscal system on poverty and inequality in Albania, in order to inform the dialogue around fiscal reform with an equity lens.** It also benchmarks Albania to other countries in which a similar methodology has been applied. In particular, the analysis employs the Commitment to Equity Methodology (Lustig and Higgins, 2017), already applied in many countries around the world and across regions, to explore: a) How much income redistribution and poverty reduction is achieved in Albania through the fiscal system (taxes, subsidies and social spending), b) Who bears the burden of taxes and receives the benefits?; c) How equalizing and propoor are particular fiscal interventions, and how equitable  is the use of education and health services?, and d) What is the expected impact of changes in the size and progressivity of a particular tax (i.e. the personal income tax)  on poverty and inequality outcomes.

**The analysis relies on the 2015 Household Budget Survey collected by INSTAT, together with macroeconomic and fiscal data from the national income accounts in Albania** . The analysis does not incorporate behavioral or general equilibrium effects. Moreover, using an input-output matrix it captures the indirect effects of excise taxes on intermediate goods, since these can be important as they are passed through to prices of all other goods. Given the available data, the analysis incorporates the fiscal components that capture around 70 percent of fiscal revenues, in particular direct taxes (personal income tax and social security contributions) and indirect taxes (household-paid VAT and excises). On the spending side, it captures social spending (education, health and social protection), which amounts to 45 percent of

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