Transcript Tax Reform in CIS Countries: Multi-Stage Transition

Tax Reform in CIS Countries:
Multi-Stage Transition and a Few
Political Economy Lessons
Core Course on Governance and AntiCorruption
April 24, 2007
Luca Barbone
Model: Multiple party, multistage
transition
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Tax reform the result of interaction
among several parties:
State apparatus
 Old industrial/state interests
 New Industrial interests
 Foreign advice/influence
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Multistage, as it mimicks the change in
power relations among groups
Four Conceptual Stages
Stage zero: Meltdown of old system
 Stage 1: The arrival of the consultants
and the set-up of the formal system
 Stage 2: Economic interests take over
 Stage 3: Return of growth, yearn for a
better system, mature politics
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Stage Zero: Institutional-Economic
Setting
Incomplete Institutions—mix of old and
new rules and substantial lacunae
 Economic decline—drastic drop in GDP
 Dramatic decline in revenues
 Disappearance of the old
compliance/control mechanisms.

Stage 1: Arrival of the Consultants
Early adoption of a “western-style” tax system
(VAT, CIT, PIT)
 Depending on the country, quick
implementation
 But complications appear, due to multiple
levels of government, lack of fiscal discipline,
enforcement, use of tax administration as a
political weapon, etc.
 It becomes clear that the binding constraint is
not legislation

Stage 2: Economic Interests Take Over
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Early winners seek to establish rights, and
later on to protect them, but to protect them
they have to access the state.
 Hence, economic interests seek direct
representation in the political process and
borderline between political and economic
interests becomes blurred. Political parties
directly created by economic interest groups.
Example: Ukraine—Tax Arrears and
Amnesties

In every year between 1996 and 2003 tax
amnesties were implemented—either sector
specific or general.
 The combined amnesties issued in year 2001
amounted to 10 percent of GDP
 Amnesties favored the energy complex and
agriculture, but also regional interest,
industries, the works
 Tax arrears were the “adjustment variable” (in
parallel with generalized arrears in payments)
Example: Ukraine—Tax Exemptions
and Free Economic Zones
Besides tax amnesties, tax exemptions
likewise became popular.
 Tax exemptions proliferated to cover
agriculture, industry.
 Emergent practice of tax free zones
linked to regional political pressure.

Stage 3: Self-propelled
Modernization
As growth resumes and economic
interests become established, demand
for rules increases endogenously
 “Ownership” appears, but with unusual
country characteristics

The Faces of the Protagonists
Politics in Stage 3: Contrast Ukraine
and Russian Federation
Ukraine: Fractionalized political system,
resulting in a lot of special-interest
legislation, and very strange bedfellows
 Russia: Stronger control by the
executive, suppression of opposition,
capacity to pass legislation.
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How to approach?
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Avoid innocentsabroad syndrome
 Understand where
you stand
 Who are your
friends?
Lessons Learned (a Partial List)
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Tax legislation is not necessarily the main obstacle or
even concern for tax reform
Need to understand the institutional environment
before offering technical assistance or conditionality
Tax reform is hampered by events that happen outside
the tax arena: need to address those (non-payments,
regional disputes)
Tax reform, or more precisely tax incentives, make
very strange bedfellows
The workers in the tax complex matter—you need to
buy them
Beware of the foreign advisors
Hire local expertise