ABSTRACT
One of the stylised facts of economic transition from a centrally planned economy to a market economy was the decline in tax revenue. Given the nature of transition where the role and size of government is reduced, a fall in tax revenue was predicted. The revenue erosion, particularly evident in the early years of transition, is often explained in the context of a change from the repressive and distortionary tax system of Soviet times where taxes (and subsidies) were the key mechanisms for fiscal redistribution from profitable to unprofitable enterprises and where tax collection from large state-owned enterprises (SOEs) was a simple task, to a more Westernstyle tax system where voluntary compliance and self-assessment are the norm and where confrontation between the tax collector and the taxpayer is not uncommon. Furthermore, as transition economies (TEs) witnessed a recession of historical proportions, a decline in the profitability of the SOEs (and other traditional tax bases), an expansion of the unofficial economy and a rise in tax evasion, corruption and bribery, the tax share of GDP was to fall even further. After a decade of transition, and despite a recovery in tax revenues in a number of leading transition countries by the late 1990s, the tax ratio in some TEs had fallen to levels below what is considered normal in market economies. Many regard this fall as excessive and view the decline in tax revenue as a serious obstacle in the attempts to finance public expenditure, redistribute income and, at the same time, embrace effective fiscal policy.
