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	Foreword
	Changes in the Health Care and Pension System in the Context of Public Redistribution
	Tax Reform and Tax Policy Development

Tax Reform and Tax Policy Development

In redesigning their tax systems, post-socialist countries can either install indigenous tax systems or rely on world-wide experience. In most cases the countries in transition copy Western tax systems, systems that developed over many years and under the influence of various interests and factors. These systems contain a host of weaknesses, such as multiple taxation, progressive tax rates, widespread relief and exemptions, ambiguous and complex tax rules, costly administration, and a heavy tax burden. Taxes are used as a regulating tool, distorting the workings of the market and providing an open invitation to corruption, tax evasion, and arbitrary disbursement of the tax burden. The paper expands on the defects of such systems, identifying potential pitfalls involved in their adoption.
The purpose of tax reform should be to reduce the tax burden so as to create the most favourable conditions for the pursuit of well-being and achieve the most efficient allocation of resources. Tax reforms should be aimed at minimising destructive and distortionary effects of taxes on economic processes and market agents, cutting down the cost of tax administration, as well as easing and levelling the tax burden.
The tax burden is determined by the attitude to the role and functions of the state. The tax burden is threefold: direct, or paid in taxes, indirect, or the costs of tax compliance and administration, and hidden, or the impact of taxes on the economy and allocation of resources. To lift the direct tax burden, a budget reform should be adopted, aiming at privatisation of government functions, expedient financing, and a balanced and transparent budget. For the indirect tax burden to be reduced, tax systems should be replaced, enacting simple and accurate procedures for tax computation and payment as well as automatic tax administration that would occur regardless of the administrator's will. To minimise the hidden tax burden, an economically neutral tax system must be installed, a system that would do the least possible damage to economic activity and perform, not a regulating, but revenue-generating role.
The identification of fundamental principles of a new system is vital for a consistent enactment of the reform and prevention of eclectic, incoherent decision. The principles that would allow to construct an economically neutral, simple, automatic and pro-growth tax system are the following principles: the revenue-generating, not regulating, role of taxes; the least effect on economic activity; fairness; a declining tax burden; single taxation; transparency; universality and automaticity; and inexpensiveness of tax administration. These principles were used as the basis in constructing the whole tax code.
The paper explores all prevailing taxes in terms of their defects and compatibility with the aforesaid principles. The taxes analysed include corporate and personal income taxes, social security contributions, value-added tax, excise and customs duties, property taxes, etc. The analysis is supplemented with a comprehensive vision of reform and recommendations for the restructuring of individual taxes. VAT is identified as a tax most compatible with the principles attached to a simple, automatic and pro-growth tax system, therefore a shift from direct to indirect taxation-that is, the abolition of income taxes in favour of general VAT and earmarked taxes-is viewed as a means to achieve such a system. VAT, if applied without breaks and exemptions, operates automatically, can hardly be used as a regulating tool, and prevents voluntary decisions. As a result of the proposed reform, VAT would become the principal source of budget revenues.
There are two alternatives of eliminating direct income taxes. One of them consists of removing corporate income tax with a subsequent abolition of personal income tax. The other option involves concurrent reductions in both tax rates until their complete abolition. The former alternative is more acceptable politically but its adoption will not reduce the cumbersome burden imposed by personal income tax and social security contributions on labour force. Nor will it ease complex tax accounting and compliance procedures for companies. The second option is more acceptable from an economic point of view but given its longer implementation, it will require a strong commitment to reform on the part of the government.
To multiply the effect of the reform, tax revenues should become the only source of financing government functions. The remaining two sources-government borrowing and the dilution of the value of money-should be out lawed.

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