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Cash social transfers, direct taxes, and income distribution in late socialism


  • Milanovic, Branko


The author analyzes the impact of direct taxes and cash social transfers on income distribution in Bulgaria, Czechoslovakia, Hungary, Poland and Yugoslavia in the years before the collapse of communism. He contrasts the results for socialist and market economies. Cash social transfers accounted for about a fifth of gross income, a proportion comparable with that in developed welfare economies. Generally, cash transfers were unrelated to income in socialist countries, in marked contrast with market economies, where such transfers go mainly to low income households. Direct taxes played almost no role in income redistribution. They were small - 1 to 2 percent of gross income, except in Hungary - and proportional to income. Most taxes were paid by enterprises, as payroll taxes, and most workers were unaware of the taxation and that public spending could not permanently exceed public revenues from taxation. In socialist countries, social support was built into the system through full employment guarantees, state run pension schemes, and free public education and health care. The only explicit policy toward poverty involved alcoholics, handicapped people, and other special categories. This system is being replaced by a market system in which the labor market is key and those who cannot earn enough must be supported by the state. To counteract increasing income disparities, social transfers must be focussed more on the poor. Eastern European states are ill prepared for this role. They have no experience in identifying the needy and targeting support to them. The question is, toward which world of welfare capitalism are the formerly socialist countries likely to evolve? The author contends that the Central European countries will probably evolve toward the corporatist model of continental Europe. Capitalist countries in Europe tend to have large social transfers that are often related to previous earnings, so they have relatively limited roles in income distribution. Transfers are closer to social insurance than to social assistance. The evolution of more agricultural Balkan countries and the Slavic republics of the former Soviet Union is more difficult to predict. Poorer and more agriculture based countries are generally less able to administer welfare schemes, gauge individual incomes, deliver social support - and their finances may be even more strained than those of their Central European counterparts.

Suggested Citation

  • Milanovic, Branko, 1993. "Cash social transfers, direct taxes, and income distribution in late socialism," Policy Research Working Paper Series 1176, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1176

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    References listed on IDEAS

    1. Bergson, Abram, 1984. "Income Inequality under Soviet Socialism," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1052-1099, September.
    2. Adam, Jan & Nosal, Miloslav, 1982. "Earnings differentials and household-income differentials in Hungary--Policies and practice," Journal of Comparative Economics, Elsevier, vol. 6(2), pages 173-203, June.
    3. O'Higgins, Michael & Schmaus, Guenther & Stephenson, Geoffrey, 1989. "Income Distribution and Redistribution: A Microdata Analysis for Seven Countries," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 35(2), pages 107-131, June.
    4. Morrisson, Christian, 1984. "Income distribution in East European and Western countries," Journal of Comparative Economics, Elsevier, vol. 8(2), pages 121-138, June.
    5. Okrasa, W., 1988. "Redistribution and the two dimensions of inequality : An east-west comparison," European Economic Review, Elsevier, vol. 32(2-3), pages 633-643, March.
    6. Phelps Brown, Henry, 1988. "Egalitarianism and the Generation of Inequality," OUP Catalogue, Oxford University Press, number 9780198286486.
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    Cited by:

    1. Pritchett, Lant, 2005. "The political economy of targeted safety nets," Social Protection and Labor Policy and Technical Notes 31498, The World Bank.
    2. Milanovic, Branko, 1995. "Poverty, inequality, and social policy in transition economies," Policy Research Working Paper Series 1530, The World Bank.
    3. Cristina Matos, 2013. "The Shifting Welfare State in Hungary and Latvia," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(4), pages 851-891, October.


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