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Inequality, Fiscal Capacity and the Political Regime: Lessons from the Post-Communist Transition

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Christopher Gerry
Tomasz Mickiewicz ()

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Abstract

Using panel data for twenty-seven post-communist economies between 1987-2003, we examine the nexus of relationships between inequality, fiscal capacity (defined as the ability to raise taxes efficiently) and the political regime. Investigating the impact of political reform we find that full political freedom is associated with lower levels of income inequality. Under more oligarchic (authoritarian) regimes, the level of inequality is conditioned by the state’s fiscal capacity. Specifically, oligarchic regimes with more developed fiscal systems are able to defend the prevailing vested interests at a lower cost in terms of social injustice. This empirical finding is consistent with the model developed by Acemoglu (2006). We also find that transition countries undertaking early macroeconomic stabilisation now enjoy lower levels of inequality; we confirm that education fosters equality and the suggestion of Commander et al (1999) that larger countries are prone to higher levels of inequality.

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number wp831.

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Date of creation: 01 Jul 2006
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Handle: RePEc:wdi:papers:2006-831

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Related research
Keywords: income inequality; democracy; oligarchy; fiscal capacity; economic reform; transition;

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Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
P35 - Economic Systems - - Socialist Institutions and Their Transitions - - - Public Finance

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  15. Philippe Aghion & Simon Commander, 1999. "On the dynamics of inequality in the transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 275-298, July. [Downloadable!] (restricted)
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  17. Zvi Griliches & Jerry A. Hausman, 1984. "Errors in Variables in Panel Data," NBER Technical Working Papers 0037, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Anthony B. Atkinson & Andrea Brandolini, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 771-799, September. [Downloadable!] (restricted)
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  23. Simon Johnson & John McMillan & Christopher Woodruff, 2000. "Entrepreneurs and the Ordering of Institutional Reform: Poland, Slovakia, Romania, Russia and Ukraine Compared," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 1-36, March. [Downloadable!] (restricted)
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  25. Torsten Persson & Guido Tabellini, 2005. "The Economic Effects of Constitutions," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661926.
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