Optimal Tax Rates and Tax Design during Systemic Reform

Budgets in Eastern Europe are under strain as taxes are reformed and receipts fall. Should existing levels of expenditure be maintained or should personal taxes be cut at the expense of redistributive expenditures? The paper asks how optimal tax rates might respond to a transition in which the government becomes less averse to inequality, but the inequality in skills increases. These lead to roughly offsetting changes, and are less important than the fall in enterprise revenue and the decline in the efficiency of personal taxation, both of which cause a sharp fall in optimal transfers. Tax, design consists in balancing the differing inefficiencies of incompleteness in indirect tax coverage against evasion-prone direct taxes.