The State Capacity and the Foreign Rent Do Matter: Tentative Conclusions on the Different Taxation Policies after the Communism

Abstract

Taxation strategies after the communism present a puzzle because of their diversity. Diversity here means substantial differences among the post-communist countries both in terms of taxation/GDP ratio and in terms of internal taxation structure, e.g. the relative weight of personal taxes, corporate taxes, and value-added tax (VAT). These differences warrant our attention because they occur against a background of previous taxation uniformity in most communist states. This research paper includes short taxation narrative presenting briefly the picture under the communism, and in much more length presenting different taxation strategies in the post-communist countries. Four alternative explanations, state capacity, “resource curse”, foreign rent, and political regime, are tested to major groups of post-communist countries from which sufficient data is available. Following this test I claim that there are two alternative and equally possible explanations for the post-communist taxation diversity. First, it is the state capacity regardless of main reform strategy that causes this diversity; intervening variables of the “resource curse” and of the political regime only support state capacity as main explanation. Second, the foreign rent (or lack of it) can also cause the taxation diversity; the intervening variable in this case is the “resource curse”.

Keywords: communism, post-communism, taxation, state capacity, foreign rent, strategic rent, resource curse, political regime