TAX IMPLEMENTATION ISSUES IN THE TRANSITION FROM A PLANNED-ECONOMY

The implications for tax policy of economic reforms in formerly planned economies are examined. We stress the constraints on tax reform of the historical legacy of socialism of the administrative capacity of the bureaucracy and of the compliance capacity of the taxpaying population. The tax implementation problems faced by the emerging market economies are daunting. The tax administration must be constructed practically from the ground up, yet there is a legacy of distrust of the state that will hamper the creation of any tax system. Although there is an experienced bureaucracy in place, it is not trained in tax administration. Although the population is highly literate, there is no tradition of business accounting, something that is essential for business taxation. Perhaps most troubling of all, what in most other countries is the promising avenue of tax collection - withholding at source by business enterprises - is suspect in this context because business enterprises, many newly privatized and others still within the state sector, have a verv shaky institutional structure, and their key role in efficient tax collection cannot be assumed. These considerations suggest that, due to the high marginal cost of raising funds, tax-financed programs that neither provide public goods nor redistribute income should be kept to a minimum. Where possible, government-provided benefits ought to be tied to the payment of taxes, through user fees or actuarially fair social insurance programs. Finally, given the uncertainty about the structure of the new system, diversifying the tax base is appropriate.