International imperatives and tax reform: Lessons from postcommunist Europe

Comparative Politics

Volumn 39, Issue 1, 2006, Pages 43-62

  Appel, Hilary ^a  

^a NONE

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EID: 33845509049     PISSN: 00104159     EISSN: None     Source Type: Journal    
DOI: 10.2307/20434020     Document Type: Review

References (90)

1. Robert Kaufman and Alexa Segura-Ubiergo, "Globalizations, Domestic Politics, and Social Spending in Latin America: A Time-Series Cross-Section Analysis, 1973-97," World Politics, 53 (July 2001);
2. Layna Mosley, "Room to Move: International Financial Markets and National Welfare States," International Organization, 54 (Autumn 2000);
3. Brian Burgoon, "Globalization and Welfare Compensation: Disentangling the Ties That Bind," International Organization (Summer 2001);
4. John L. Campbell, "State Building and Post-communist Budget Deficits," American Behavioral Scientist, 38 (March-April 1995).
5. Herbert Kitschelt et al., eds., Continuity and Change in Contemporary Capitalism (New York: Cambridge University Press, 1999);
6. Geoffrey Garret, Partisan Politics in the Global Economy (New York: Cambridge University Press, 1998);
7. Helen Milner and Robert Keohane, eds., Internationalization and Domestic Politics (New York: Cambridge University Press, 1996).
8. Campbell, "State Building," p. 763.
9. Value added taxes constituted 22.0 percent of the budget in Poland, 20.6 percent in Hungary, and 18.2 percent in the Czech Republic (2002 figures). Eurostat, Structures of the Taxation Systems in the European Union (Luxembourg: European Communities, 2004), p. 243.
10. Beata Heimann, "Recent Trends in Personal Income Taxation in Poland and in the UK," Berichte aus dem Weltwirtschalflichen Colloquium der Universität Bremen, 76 (November 2001).
11. Gabor Kiss and Gyorgy Szapary, "Fiscal Adjustment in the Transition Process: Hungary, 1990-1999," Post-Soviet Geography and Economics, 41 (2000);
12. Christopher Heady and Stephen Smith, "Tax and Benefit Reform in the Czech and Slovak Republics," in David Newberry, ed., Tax and Benefit Reform in Central and Eastern Europe (London: Centre for Economic Policy Research, 1995);
13. Vito Tanzi, "Tax Reform and the Move to a Market Economy: Overview of the Issues," in The Role of Tax Reform in Central and Eastern European Economies (Paris: OECD, 1991).
14. Alicia Martinez-Serrano and Ben Patterson, "Taxation in Europe: Recent Developments," European Parliament Working Paper ECON 131 EN 01-2003 (Luxembourg: European Commission, 2003), p. 11.
15. Jaime Vazquez-Caro et al., Tax Reforms in Light of EU Accession: The Case of Poland (Washington, D.C.: World Bank Country Study, 2001), pp. 17-32;
16. Martinez-Serrano and Patterson, "Taxation in Europe," p. 15.
17. In Hungary a top official in the ministry of finance explained that even if membership in the EU (or then the EC) was not on the horizon in 1988, the Hungarians were looking at European models in developing their own tax structures, in part as a way to use economic reform to differentiate themselves as much as possible from the Soviet Union and the system of central planning. Interview with László Kékesi, Deputy State Secretary, Ministry of Finance, Budapest, June 13, 2002.
18. It is not membership per se that accounts for the adoption of "institutions similar to the EU" but the anticipation of membership. Jeffrey Kopstein and David Reilly, "Geographic Diffusion and the Transformation of the Postcomunist World," World Politics, 53 (Oct. 2000), p. 25.
19. Interview with Václav Klaus, Claremont, January 17, 2001.
20. Kiss and Szapary, "Fiscal Adjustment."
21. A. Tate, ed., Fiscal Issues in Economies in Transition (Washington, D.C.: International Monetary Fund, 1992);
22. David Newberry, ed., Tax and Benefit Reform in Central and Eastern Europe (London: Centre for Economic Policy Research, 1995).
23. Právo, Mar. 11, 2004.
24. Interview with Pavel Telička, chief negotiator for the Czech Republic, Claremont, April 18, 2005.
25. As one negotiator explained: "With this 57 percent rule, it is almost double price and it is quite sensitive for the politicians to say [to their constituents] now you will have cigarettes double price." Interview with Tomáš Kučirek, Mission of the Czech Republic to the EU, Brussels, June 28, 2002.
26. The full list of special negotiated terms can be found at the EU website at http://europa.eu.int/comm/enlargement/negotiations/chapters/chap10/ (accessed September 20, 2004).
27. European Commission, "Report on the Results of the Negotiations on the Accession of Cyprus, Malta, Hungary, Poland, the Slovak Republic, Latvia, Estonia, Lithuania, the Czech Republic, and Slovenia to the European Union" (Brussels: EU Commission, 2003), pp. 1-64.
28. Interview with Alain Bothorel, Counselor, Delegation of the European Commission to Hungary, Budapest, June 14, 2002.
29. Stephen Holmes, "A European Doppelstaat?," East European Politics and Societies, 17 (Winter 2003), 107-18.
30. Andrew Moravcsik and Milada Anna Vachudova, "National Interests, State Power and EU Enlargement," East European Politics and Societies, 17 (Winter 2003), 42-57.
31. Interview with Pavel Mertlík, Former Czech Finance Minister, Prague, May 29, 2002.
32. CTK Newswire, Feb. 20, 2004.
33. OECD, OECD Economic Surveys: Poland 1999-2000 (Paris: OECD, 2000), p. 127.
34. PAP Polish Newswire, May 5, 2004.
35. An OECD report nonetheless characterizes the exemptions associated with Poland's corporate income taxes as "generous." Poland has "more than 40 investment allowances, 63 depreciation schedules, and investors enjoy 5-10 years of tax holidays in 17 Special Economic Zones." OECD Economic Surveys: Poland, p. 127.
36. European Commission, DG XXI, Final Report: Structures of the Tax Systems in Estonia, Poland, Hungary, the Czech Republic, and Slovenia (Reference Contract XXI/99/801, 2000).
37. OECD, OECD Economic Surveys, p. 123, Figure 33.
38. Richard Hunter and Robert Shapiro, "Reform of the Polish Tax System: Triumph of Politics over Policy?," International Tax Journal, 26 (Fall 2000), n7.
39. He refers to the move by deputies in the coalition to vote against their own legislation as a way to prevent the inclusion of amendments proposed by the opposition Democratic Left Alliance. Ibid.
40. A detailed discussion of the outcome is found in "Nie bȩdzie nowych progów" [No new thresholds], Rzeczpospolita, Nov. 29, 2002 (available in the Rzeczpospolita online archives).
41. Poland Business Review Newswire, Nov. 5, 2001.
42. Financial Times, Jan. 25, 2002.
43. OECD, OECD Economic Surveys, p. 125.
44. European Commission, DB XXI, Final Report.
45. It should be noted that shareholders did not pay an additional tax on these dividends, since 20 percent of the profits was withheld by the company, primarily as a way to improve compliance.
46. BBC, Apr. 19, 2004.
47. Irish Times, May 1, 2004.
48. Interview with Gabor Kiss, Hungarian Central Bank, Budapest, June 13, 2002. One Hungarian tax specialist in the ministry of the economy went so far as to describe Hungary as a tax haven for corporations. Interview with Tamás Révész, Ministry of Economy, Budapest, June 17, 2002.
49. Szabolcs Vámosi-Nagy, Imre Kocsis, and Luis Alvaro Sanchez, "Tax-Policy Reforms in Hungary," in Lajos Bokros and Jean Jacques Dethier, eds., Public Finance Reform during Transition: The Experience of Hungary (Washington, DC.: World Bank, 1998), p. 483.
50. Ibid.
51. Hungary offers more nonstandard deductions to taxpayers than in neighboring states, however. Whereas Poland and the Czech Republic provide tax allowances for mortgage interest payments, charitable donations, and home improvement, in Hungary additional nonstandard deductions and credits include employee contributions to mutual pension or health insurance, life insurance, certain income from intellectual activities, charitable contributions, investments in certain qualifying securities, mortgage interest payments, and savings for home mortgages, among others, Martinez-Serrano and Patterson, pp. 42-43.
52. OECD, OECD Economic Surveys, p. 123, Figure 33. Comparatively, 75 percent of taxpayers in the U.K. fall in the middle bracket (22 percent), with the remaining taxpayers divided nearly evenly between the lowest (10 percent) and highest (40 percent) brackets. Heimann, "Recent Trends," p. 56.
53. KPMG Hungary, "Tax Rates: EU Accession Countries" (2003).
54. European Commission, DB XXI, Final Report.
55. Alex Easson, "Tax Competition Heats Up in Central Europe," Bulletin for International Fiscal Documentation, 52 (1998), 193.
56. Carla Bronchi and Andrew Burns, "The Tax System in the Czech Republic" (Paris: Working Paper, OECD Economics Department, 2000), p. 17.
57. Právo, Mar. 11, 2004.
58. Bronchi and Burns, "The Tax System in the Czech Republic," p. 21.
59. International Tax Review, "EU Dreams Force Polish Evolution," International Tax Review, 10 (November 1999), 19-20.
60. Dana Trezziova, "Czech Republic: Income Tax and VAT Amendments," European Taxation, 41 (February 2001), 70.
61. Bronchi and Burns, "The Tax System in the Czech Republic," p. 29.
62. European Commission, DB XXI, Final Report.
63. Implicit rates are the ratio between tax revenues and the tax base. Implicit tax rates best approximate marginal rates, which are important in understanding incentives and distortions. Since implicit rates were not available for East Central Europe, tax rates as a percentage of total taxation are considered.
64. The report continues: "A growing body of evidence now points to a strong negative effect of high labour taxes on the level of employment and growth in Europe." Commission of the European Communities, Communication from the Commission to the Council: A Package to Tackle Harmful Tax Competition (1997), p. 3.
65. Der Spiegel, Apr. 26, 2004.
66. Ibid.; Munich Focus, Apr. 26, 2004;
67. Baltic News Service, June 1, 2004.
68. Hospodárské noviny, May 17, 2004.
69. Slovak finance minister Ivan Miklos stated unequivocally: "We are strictly against harmonization of direct taxes." Czech President Va"clav Klaus responded: Those who argue along these lines must know whether they want free markets, or whether they would rather have broad harmonization. I thought it was almost unbelievable what I heard about this from the German chancellor or the Swedish prime minister." Expressing the logic behind East European opposition to tax harmonization, Dariusz Rosati, Polish former foreign minister, explains: "Low taxes are a way, at least partly, to neutralize that competitiveness gap. For Poland to maintain its present level of competitiveness, tax rises would have to be accompanied by cuts in wages, which today do not amount to even a quarter of average German wages. In this context, speaking of fiscal dumping is improper."
70. ČTK, June 3, 2004;
71. Hospodárské noviny, Apr. 27, 2004;
72. Polish News Bulletin, June 9, 2004.
73. The intent of Garrett is to counter the position expressed by an opposing group of scholars that has portended the end of the welfare state, at least in its current form, as governments find themselves increasingly unable to afford past welfare commitments. They argue that firms do not shy away from countries with strong welfare states and corporatist structures due to the other advantages that such environments offer. Others like Swank and Steinmo conclude that there is a decline in statutory corporate income tax rates but not effective rates in fourteen advanced economies. Dani Rodrik, Has Globalization Gone Too Far? (Washington, D.C.: Institute for International Economics, 1997);
74. Duane Swank and Sven Steinmo, "The New Political Economy of Taxation in Advanced Capitalist Democracies," American Journal of Political Science, 46 (July 2002);
75. Garrett, Partisan Politics;
76. Geoffrey Garrett and Deborah Mitchell, "Globalization, Government Spending and Taxation in the OECD," European Journal of Political Research, 39 (2001).
77. Philipp Genschel looks at OECD data and concurs with Garrett that globalization does not set off a race to the bottom among welfare states and agrees that the data do not reveal a shift from corporate to labor taxes. But in his opinion it does lead to "more austerity, more deficit finance and a less employment-friendly tax mix" and diminishes policy autonomy. Philipp Genschel, "Globalization, Tax Competition, and the Welfare State," Politics and Society, 30 (June 2002), 246.
78. Effective tax rates (also known as implicit tax rates) are preferable to nominal tax rates since they take into account tax exemptions, deductions, depreciation schedules and other factors shaping the overall tax burden of a corporation. They also hold advantages over other measures like tax ratios and taxation as a function of GDP since they do not take into account the effects of the size of the tax base. That is, an increasing tax burden may be hidden by a decreasing tax base.
79. Officials from the ministry of finance and central bank across all three countries consistently responded to the author's requests for these data by stating that estimates of effective tax rates were still not being calculated officially.
80. As the Czech finance minister Bohuslav Sobotka explained: "we have to take changes in the neighboring countries into account. This is why I am glad that we managed to push through the decrease of the corporate income tax despite the opposition's pressure. Investors perceive that we have a certain plan to cut down this tax. The curve is clear and it will certainly help more foreign investments to flow into the Czech Republic." Pravo, Dec. 4, 2003.
81. Eurostat, Structures of the Taxation Systems, p. 241.
82. Janice Shields, "'Social Dumping' in Mexico under NAFTA," Multinational Monitor, 16 (April 1995).
83. Recent interviews with the two finance ministers most directly involved in tax reform and accession in Poland and the Czech Republic left me with the impression that they wholly supported the direction that the EU was taking them in fiscal reform. Interviews with Leszek Balcerowicz, Warsaw, June 27. 2002; Pavel Mertlik, Prague, May 29, 2002.
84. I would like to thank Anna Seleny for highlighting the importance of this point.
85. Interview with Václav Klaus, Claremont, January 17, 2001.
86. Similar concerns have emanated from the Polish right. Economist, Apr. 21, 2001.
87. Hungarian News Agency (MTI). Feb. 3, 2002;
88. Agence France Presse. Jan. 31, 2002.
89. The Czech finance minister Bohuslav Sobotka (CSSD) explained the loss of parliamentary involvement in tax policymaking as follows. The setting of "individual rates is limited by EU rules; there is quite a strict regulation in this area. It tells the newcomers clearly what items can be exempted from tax and it also clearly says that the standard rate must not be lower than 15 percent. Therefore, we cannot exempt certain items simply based on our Parliament's decision." Pravo, Dec. 4, 2003.
90. Magyar Nemzet quoted in Kopstein and Reilly, "Geographic Diffusion," n44, p. 27.