5 - REVENUE TRAPS

Summary

The previous chapters present a story about the importance of initial conditions in determining political-economic outcomes in Eastern Europe and the former Soviet Union. Facing diverse constraints in the early 1990s, postcommunist governments went about the task of creating tax systems in different ways. In the eastern half of the postcommunist world, a decision to focus on corporate taxation meant not only that tax revenue from enterprises would be politically important in general, but also that collections from firms that were familiar revenue sources — large enterprises, monopolies, and so on — would be especially critical to cash-starved governments. As I have shown, one apparent consequence of this decision is that post-Soviet governments disproportionately provided collective goods to sectors that were relatively easy to tax; in practice this amounted to a particular bias against new private enterprise. In contrast, the focus in Eastern Europe and the Baltics on new revenue sources created fewer incentives to discriminate in the provision of sector-specific collective goods based on the taxability of economic activity.

This is, so far, a story about the sensitivity of outcomes to initial conditions and the decisions made in the early years following the collapse of communism.