Wilson Center Experts

October 2005 - While all governments face the challenge of specifying fiscal arrangements that guarantee the state adequate resources to ward off physical or material threats to the citizenry, the new governments after the collapse of communism faced certain challenges specific to their capitalist transformation. They had to design tax systems within the context of creating an entirely new economic system. Fundamental public sector reforms eliminated the previous system's main source of taxation. As a result of privatization, East European states could no longer rely on appropriating profits from state-owned enterprises. In the past, the state would finance expenditures primarily by transferring revenue from state firms to the federal budget. With a large portion of these enterprises undergoing privatization, the state had to develop a tax policy to collect revenue from private sector production and private individuals. Thus, a wide range of taxes had to be put into place or be significantly reformed, including private property taxes, personal income taxes, inheritance taxes, consumption taxes, real estate taxes, capital gains taxes and excise duties. In allocating the tax burden across these different tax forms, leaders had to reconcile several competing considerations: which kinds of taxes would reliably raise budgetary revenue, which tax forms were hardest to evade, which forms would seem distributionally just to a population raised in a paternalistic state and lacking personal experience in honoring tax responsibilities and which would advance the country's foreign policy goals and international interests. more