Flux or Fixed: Tax Reforms, Informal Economy and Foreign Investment in New EU Member States

Abstract

The paper tries to analyze the tax reforms in new EU member states, and to understand how these developments came into existence. Despite several commonalities we argue that across country variation is very much present, especially in the areas of degree of dependence on indirect taxes as well as the share of each component in total tax revenue. Our preliminary evidence indicates that there are three identifiable groupings; Hungary, Slovenia and Czech Republic as the first, Poland and Slovakia as the second, and the rest of the countries as the third. From the clusters we claim that these differences reflect the underlying the structural characteristics of the economies, particularly the scope of the informal economy and the intensity of competition to attract foreign capital. The paper contributes to the literature in a number of ways. First, it gives a comprehensive overview of reforms and possible explanatory factors. Second, it attempts to categorize the transition countries according to the features of the tax systems adopted. Finally, it establishes a linkage between the informal sector, capital from external sources and why particular modifications were implemented.