Abstract
The most notable feature in Hilary Appel’s new book, Tax Politics in Eastern Europe, is that there is no politics, or at least very little politics. Like a sleuth alerted to the dog that didn’t bark, Appel seeks to understand how postcommunist governments managed to enact burden-shifting regressive tax reforms, with nary a whimper from Eastern Europe’s new taxpayers. “The surprisingly weak role of domestic politics in key tax areas,” she explains, “has motivated the writing of this book” (p. 6). Her investigations point the finger to the “dominance of external factors,” namely economic globalization as a general phenomenon and the European Union as a particular institution. Moreover, Appel concludes with a grim assessment of the implications of her findings for the cultivation of democracy in postcommunist Eastern Europe.
This book is a welcomed companion to scholarly efforts to understand better the institutional origins, practical workings, and sociopolitical effects of the postcommunist tax state, a relatively recent research endeavor prompted by the 1998 financial collapse of the Russian state. Up to that point, the research agenda of postcommunist political economy was dictated mainly by neoliberal economists or economics-influenced political scientists, whose conceptual world did not assign much space to “the state” as an integral analytical component. But the postcommunist transitions did not follow the neoliberal script, and so the state was called on to make another dramatic return to center stage. A scholarly consensus now blamed state weakness for postcommunism’s wayward transition outcomes. The source of state weakness, at least some argued, was dysfunctional state finances. Appel’s research is part of this scholarly reaction. Her particular niche in the literature has been to demonstrate how international forces shaped postcommunist tax policy trends. Let it be known, this review is written by someone whose niche in the same literature has been to uncover the ways in which domestic politics influenced postcommunist tax policy trends.
The book’s case studies are drawn mostly from East-Central Europe, particularly the first wave of EU entrants, although other cases make occasional appearances in the analysis. An additional chapter, which stands apart from the main comparative argument, focuses on Russian tax politics and energy export revenues. The empirical evidence is bolstered by numerous personal interviews with high-level fiscal policy makers. The book’s organizational scheme breaks down tax policy into four distinct reforms: (a) the macro-policy tax reform accompanying the introduction of a market-based economy in the early 1990s, (b) the EU accession-driven reform of indirect taxes in the early 2000s, (c) the rate-cutting trend in corporate income taxes in later 2000s, and (d) the widespread adoption of flat-rate personal income taxes in the 2000s. Of these four reforms, Appel contends, only one—the flat-rate personal income tax—was subjected to vigorous public debate, which in some cases caused its rejection via domestic political mechanisms. The other three reforms were dictated largely by international pressures of one kind or another. Here the argument becomes a bit tricky, however, as the causal factor fluctuates between a concrete institution, the European Commission, and a nebulous force, economic globalization.
Appel’s examination of the EU-dictated indirect tax reforms is the standout chapter in the book. It combines keen analysis with impressive supporting evidence to make a compelling case concerning the direct involvement of the European Commission in policy reforms, which eliminated scores of special exemptions and tax deals. It shows how Eastern European governments, from different political parties, deliberately suppressed domestic debate, and effectively “ceded control” over the indirect tax policy agenda to EU overseers. The chapter is comprehensive in its coverage of all aspects of the policy reform process, from EU preconditions for indirect tax harmonization to postaccession policy developments. There is not much coverage of the post-2008 financial crisis, however, which has led to a reassertion of “economic sovereignty” by some EU member states, particularly Hungary. In addition, the chapter asserts that by dictating tax policy reforms the prodemocracy EU “paradoxically weakened democratic development” in the new Eastern European member states (p. 59). This is a big claim, especially considering that the cases involved are widely viewed as postcommunism’s most successful consolidated democracies. Unfortunately, the assertion is not followed up with empirical support.
Concerning the initial macro-policy tax reforms, postcommunist governments introduced a new tax system explicitly modeled after prevailing revenue practices in the advanced capitalist states. In the early 1990s, these reforms were strongly encouraged by international advisors and encountered little domestic resistance. But these reforms were not imposed by international forces. A widespread consensus existed among most postcommunist finance ministers to create a tax system compatible with a market economy, particularly given the fiscal shortcomings of the command economy. In this instance, the diffusion of ideas preceded the diffusion of policy. Indeed, Hungary led the way in this first set of reforms, in 1988, more than a year before communism collapsed, suggesting that the preferences of insiders mattered just as much as the pressures of outsiders. Next, in the later cases of corporate and personal income tax reforms, Appel correctly notes that both leftist and rightist political parties have supported rate-cutting policies, which she attributes to “international influences.” Here again we see widespread copying among postcommunist governments, but no formal external pressure to reduce and flatten rates. In fact, the European Commission, Germany, and France were highly critical of Eastern Europe’s rate-slashing corporate income tax reforms, which postcommunist governments tenaciously defended as rightfully their own affair. Meanwhile, the widespread adoption of flat rate personal income taxes had less to do with external prods and more to do with readjusting macro-level tax policy to address the shortcomings of transitional tax regimes, beset with low tax morale and weak tax administration. So although these three cases of tax reform can be viewed as a product of international influence of a sort, it is a very different type of influence than was seen in the case of EU accession tax reform. It is one thing to be dictated to, and quite another to calculate what works best for you. The EU-mandated tax reform was an example of the former, the initial macro-policy tax reform and later corporate and personal income tax reforms were examples of the latter. It is a distinction that Appel notes in particular spots in the narrative but elides over when making general claims.
Appel’s study should be applauded for drawing attention to the international dimension of tax policymaking, though the book probably goes too far in its claims. The argument works, but only with a narrow view of what constitutes “tax politics.” The term is not defined explicitly in the book, but seems to refer mostly to the process of enacting a tax code. If one looks beyond the formal tax code to its actual distributive effect, then a lot of “tax politics” is apparent. First, tax systems anywhere, not just in Eastern Europe, are in perpetual motion, as those on whom the burden falls try to lighten their obligations. The book, however, does not consider the politics entailed in taxpayer–tax collector relations, as matters of compliance and enforcement are not part of the analysis. But, as an example, Poland’s social democratic governments, whose electoral base was strongest among public sector employees, routinely allowed public-sector firms to run up huge tax arrears, which were simply written off. Second, it certainly is true that major tax reforms were enacted at the transition’s outset without political fuss, during the short-lived condition that Balcerowicz described as “extraordinary politics.” But domestic influences kicked in almost as soon as the new system was in place with a profusion of ad hoc rate reductions and tax exemptions. It is hard to explain the creation of a tax break without noting the politics behind the process. Third, many of these special tax deals were related to the VAT, and subsequently terminated as a precondition to EU accession. But again, almost immediately after EU membership was secured, postcommunist governments began to slash their personal and corporate tax rates. What was conceded to the EU on indirect taxation was taken back on direct taxation. One might reasonably presume that at least some of the beneficiaries of direct tax reforms were the previous beneficiaries of special indirect tax privileges. Or, as a different example, Polish farmers were earlier exempted from the VAT, which was imposed on them as a condition of EU membership; however, Polish farmers were subsequently compensated by generous EU agricultural subsidies and grants, which have been estimated to have greater worth than the lost tax breaks. These postaccession developments suggest that domestic political considerations, particularly of the distributive effects of tax policy, were not absent in tax reform processes. Although it seems relevant to the main argument of the book, Appel does not systematically engage the matter of distributive effects (p. 82).
These remarks are not meant to distract from what is an important contribution to comparative political scholarship on Eastern European taxation. Appel’s work persuasively makes a case for the role of international forces, which was previously neglected in most studies of postcommunist tax reform. She expertly articulates the theoretical dimensions of the argument and supports it with solid and original empirical research. The book has much to offer scholars and graduate students concerned with postcommunist transitions, European integration, and comparative political economy.