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chapter 1 The Decline of Tax Politics in Eastern Europe After the collapse of the communist regimes in Eastern Europe and the abandonment of the command economy system, newly elected leaders had to create the basic institutions of a capitalist tax system. Within this process a staggering number of profound policy choices had to be made within a short period of time. Public of‹cials had to decide, for instance, which sectors of the economy should shoulder the greatest burden for revenue generation. They needed to set the distribution of the personal income tax across different income classes. They needed to consider how to tax real property and intellectual property, whether to tax nonpro‹t organizations differently from pro‹t-seeking ones, and whether to tax small domestic ‹rms differently from large foreign corporations. Of‹cials needed to determine whether to introduce a sales tax or a value-added tax and on which goods to levy excise duties.1 How should social welfare taxes be organized? Should there be an inheritance tax? Should there be tax allowances for large families? The new and generally inexperienced promarket policymakers in Eastern Europe were not simply tinkering at the margins of the existing tax systems. They were designing the fundamentals of a new ‹scal system. Given that leaders were reconceptualizing the country’s basic approach to raising revenue, one would expect the development of the new tax system to have been highly controversial and politicized. After all, these reforms held important distributional consequences for multiple groups in society. Certain aspects of capitalist tax reform did create political friction, yet the evolution of the tax regime overall was less sensitive to domestic political logics than one might expect. When the new democratic leaders introduced dramatic changes to the ‹scal system, they seldom faced controversy or popular resistance, even though ordinary citizens with almost no experience paying taxes under communism were now required to pay taxes on the goods they consumed and income they earned, with little input as to how that burden should be distributed across different actors and sources of revenue. Even the positions of political parties across the ideological spectrum were surprisingly similar on numerous areas of taxation. Similarities in approaches to taxation emerged across countries as well. Many tax programs and ‹scal trends have been shared across countries as politically and economically diverse as Bulgaria, Hungary, Slovakia, Lithuania, Romania, the Czech Republic, and Poland. Their common approaches in taxation are all the more surprising when compared to the rather wide variation in other areas of economic policy-making, like exchange rate policy, ‹nancial regulation, wage controls, international aid, and privatization (Aslund 2007). Some interesting puzzles emerge in the study of postcommunist taxation: Why are there such pronounced commonalities in tax trends across a strikingly diverse region? For example, why did the tax systems in postcommunist Europe become decreasingly progressive over time, such that those individuals with a lower ability to pay contributed proportionately more sales and income tax over time? Why did the tax obligations of corporations drop so consistently and dramatically across postcommunist Europe? Why did the governments in countries with economic and political conditions as diverse as Russia, the Czech Republic, Ukraine, Serbia, Slovakia, Macedonia, Romania, Kazakhstan, and many more adopt a ›at tax—a single tax rate on all income brackets? Most strikingly, why did citizens and political elites defer so much policy-making authority to external actors, like the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), and, most important, the European Union (EU), in developing their tax structures? How powerful was the European Union in taxation, and was there any backlash from East European citizens or policymakers against the EU’s dictates in ‹scal policy? Unfortunately there is not one simple answer to these questions. However, turning to international factors sheds much light upon the evolution of key areas of postcommunist taxation and tax politics. For example, in the largest area of revenue, indirect taxes—the taxes levied on consumption, including all forms of sales tax, import and export duties, and excise taxes—the EU absolutely dominated. The preparations for joining the European Union took precedence over many domestic political priorities. As part of the process of preparing for membership, East European leaders adopted in full the consumption tax regime that the West European states had collectively developed. This process of tax harmonization, as it was called, left little room for variation across acceding countries. Their tax laws had to be harmonized...

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