The Role of the State, Ownership and Taxation in Transitional Economies*

Central to a transition from a command to a market economy is a radical transformation in the role of the state, involving both a withdrawal from economic decision-making and greater responsibilities for social welfare. Schematically, transition may be seen as consisting of three interrelated strands: first, the recasting of enterprises into institutions akin to firms in market economies and their disengagement from the state; second, an overhaul of the public finances and, particularly, the tax system; third, the institution of a social security system which does not rely on extensive price subsidies and secure lifetime employment. These three strands are closely intertwined because enterprises are the principal source of tax revenue and the main social welfare agencies in command economies. In the packages pressed on transitional economies the emphasis has been on a transformation of ownership of enterprises. Reform of the tax system and the institution of a social security system, in contrast, have not received the same attention. As is becoming increasingly obvious, a neglect of these is likely to expose the transition process to dangers and mistaken decisions which may seriously damage its prospects for success. In this paper we examine both the transformation of ownership in relation to the role of the state and tax reform in transitional economies.