ABSTRACT
The relationship between the state and the enterprise sector in the socialist economies of Central and Eastern Europe was characterised by the SBC and financial indiscipline. Loss-making firms were accustomed to receiving aid from the state, in the form of arbitrary pricing and/or budgetary subsidies. As these countries have recently witnessed a transition from a planned to a market economy, enterprises have found new ways of extracting subsidies from what is often a compliant state. One mechanism by which the state channels funds to the enterprise sector, and in the case of the SBC to financially distressed firms, is by means of tax arrears. Tax arrears arise when firms’ tax liabilities are overdue. In this chapter we set out to measure the size of this tax arrears subsidy for one of the slow reforming transition economies, namely Romania. Using a stock/flow analysis on firm-level data (balance sheets and profit and loss statements), we develop a methodology that allows us to measure the extent of the tax arrears subsidy in the enterprise sector.
