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Taxation and the Development of Democracy in Poland and Russia


Gerald Easter explains that the Communist governments of Eastern Europe and the Soviet Union had simple but relatively effective ways of raising revenue. They controlled large scale economic enterprises through the mechanisms of central planning. It was not too difficult for their finance ministries to direct a good proportion of the revenues of these enterprises into the public treasury. There was no need to go through the complicated processes of finding ways of taxing the incomes of small enterprises and ordinary households. All that changed with the collapse of the Soviet Bloc and the central planning system around 1990. One of the greatest challenges facing the post-Communist governments has been to introduce a new set of broad-based taxes that tap household incomes and consumption, and enterprise turnover and profits. The record is variable. Poland's is quite impressive. The overall ratio of taxation to GDP has been maintained at a high level, despite a rapid decline in the old heavy industrial base and the consequent disappearance of the tax base that had sustained the Communist regime. It is especially striking that successive Polish governments have managed to introduce a direct income tax that now impacts on a large proportion of households, and provides the government with a quarter of its revenue. Success in this area has enabled the state to avoid punitive taxation of new economic enterprises. Further, the process of introducing this tax has strengthened democracy and pluralism in Poland. There was considerable popular resistance to various versions of the new income tax. Polish governments bargained with the trades unions and other organisations that articulated these protests, negotiated compromises, brought the unions into a Tripartite Commission with government and industrial managers in 1994, and won the acquiescence of the population. Direct income taxes on ordinary households are now accepted as legitimate in Poland.

Russia presents a different story. Unlike Poland, Russia has very large reserves of natural resources - minerals, metals, oil and gas. These are the main source of export earnings, and, after the end of Communism, came under the control of a small number of fully or partly private conglomerates. Rather than broadening their revenue base, post-Soviet governments in the Kremlin have essentially come to rely very heavily on these conglomerates for their revenue. The Kremlin has however been obliged to compromise with powerful groups that have a strong stake in these conglomerates: their owners and managers; the regional political authorities where the commodities are produced; and the banks that, starting life as the financial departments of these enterprises, now have an entrenched role as money managers for the Russian state. This 'lock-in' has adverse fiscal, economic and political consequences. The Russian state is unable to tax the big commodity conglomerates at a reasonable level. Partly in consequence, its taxation authorities continue to raid and squeeze smaller economic enterprises that lack political muscle. And there is no significant or transparent negotiation between government and organised socio-economic interests over taxation issues: the contributions of the conglomerates are determined through elite bargaining.

There is a long academic tradition of 'fiscal sociology' that identifies the modes of government revenue collection, and the relationship with society that these generate, as important drivers of political and social change. In recent decades in particular, the extent to which governments of poorer countries depend on tax revenue or are able to finance themselves from natural resource revenues have exercised a major influence over the quality of governance. (See Ross, 2001). Easter's work suggests that similar forces are at work in contemporary transition states: the ways in which governments finance themselves shape the ways in which they evolve, including the extent to which they become democratic.

Source:Easter, G. M. 2002. "The Politics of Revenue Extraction in Post-Communist States: Poland and Russia Compared," Politics and Society, Volume 30 Number 4, pp. 599-627. Politics and Society is published quarterly by Sage (

Keywords: government revenue, elites, democracy, Russia, Poland

Commentator: Mick Moore, IDS, (January 2003)

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