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Tax Systems in Transition Economics

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Abstract

This paper presents an overview of taxation in the transitional economies of Central and Eastern Europe and the Former Soviet Union. The governments of transitional economies have been implementingsimultaneous reforms of legal, political, and economic institutions, reforms which are dependent upon the ability of the emerging tax systems to efficiently enforce the tax system. As the transitional process continues, we are able to identify characteristics of successful reform programs, and note the common problems that hinder implementation of more stable tax systems. The discussion covers 4 main issues: the enduring legacy of centralized tax systems, the general direction and timing of tax reform, the tax policies of the transitional period, and thoughts about the path of reform in the future.In the Centrally Planned Economy (CPE), taxes were viewed as an instrument to manage cash flows and to fulfill the budget plan. Taxes were often retroactively adjusted to meet perceived expenditure needs. In many cases, the final tax liability of an enterprise was more dependent upon its ability to negotiate with the financial administration than tax law. Private activity was taxed at exorbitant rates and in most cases, citizens were unaware of taxation. Tax administration was simplified by the central role of the government in the economy and the control over the payment system.The path and timing of reform had to address the legacy of the previous system and determine the structure of the transitional tax system. Two major options were considered,a transitional system of taxesthat would be relatively simple to administer and provide broad coverage of the economy, and a system that would replicate most features of Western tax systems. The most common adoption of the latter system led to substantialproblems, although over time there has been convergence towards sensible tax structures. Yet, the gains of the last 4 to 6 years are endangered by the almost universal lack ofprogress in the reform and modernization of tax administrations. While governments have been able to adopt andevolve their Western oriented tax systems with relative ease, the lack of a significant commitment to modernize existing tax administrations has led to higher tax evasion and low rates of revenue mobilization.Only recently, as governments face substantial fiscal deficits resulting for low rates of revenue mobilization, is more attention being paid to tax administration.

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  • Jorge Martinez-Vazquez & Robert McNab, 1997. "Tax Systems in Transition Economics," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper9701, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper9701
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    Cited by:

    1. Benno Torgler, 2003. "Tax Morale in Transition Countries," Post-Communist Economies, Taylor & Francis Journals, vol. 15(3), pages 357-381.
    2. Roy Bahl, 1999. "Intergovernmental Fiscal Relations in Leningrad Region," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper9902, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    3. Torgler, Benno, 2011. "Tax morale and compliance : review of evidence and case studies for Europe," Policy Research Working Paper Series 5922, The World Bank.
    4. Jorge Martinez-Vazquez & Robert McNab, 1997. "Tax Reform in Transition Economies: Experiences and Lessons," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper9706, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    5. Jorge Martinez-Vazquez & Robert McNab, 2000. "Tax Reform in The Tax Reform Experiment in Transitional Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0001, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    6. John E. Anderson, 2005. "Fiscal Reform and its Firm-Level Effects in Eastern Europe and Central Asia," William Davidson Institute Working Papers Series wp800, William Davidson Institute at the University of Michigan.
    7. Torgler, Benno, 2011. "Tax morale, eastern Europe and European enlargement," Policy Research Working Paper Series 5911, The World Bank.
    8. Jorge Martinez & Baoyun Qiao & Shuilin Wang & Heng-fu Zou, 2014. "An Essay on Public Finance in China," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 413-519, May.
    9. Krug, B. & Zhu, Z. & Hendrischke, H., 2004. "China’s emerging tax regime: Devolution, fiscal federalism, or tax farming?," ERIM Report Series Research in Management ERS-2004-113-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    10. Benno Torgler, 2004. "Tax Morale, Trust and Corruption: Empirical Evidence from Transition Countries," CREMA Working Paper Series 2004-05, Center for Research in Economics, Management and the Arts (CREMA).

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    Keywords

    tax; transition; tax reform;

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