Nice Vs. Nasty in Eastern Europe:

Insights from Gerald Easter

Most readers of this website do not read books on Eastern European taxation just for fun. I do.

I read books on taxes because I think taxation is what makes states functional, and a functional state is what makes society work.

However, sometimes the taxation process can turn scary/ugly.

If you are a tax hater and not a tax lover, you want to read the Russian sections of Gerald Easter’s very cool book Capital, Coercion and Postcommunist States.

Gerald Easter divides up Eastern Europe into two blocs, the nice bloc and the nasty bloc. In the nice bloc, bona fide democracy of a sort exists. The government can not and does not railroad civil society. While there are no societies, where the state completely serves “the will of the people as expressed by the ballot box” in more democratic societies, organized interest groups and blocs do have a voice and these voices matter. Workers ask for higher wages or for support for jobs in their industry. Regions ask for their fair share of government spending. Old people ask that their pensions be protected. The government hears these requests, and doles out some concessions. Not everyone gets everything, but enough gets given out to keep a reasonable plurality of the people happy. In Eastern Europe, the nice bloc consists of Poland, Slovenia, the Czech Republic, the Balts and some other places near Western Europe.

In the nasty bloc, the government is in complete control. Taxes are collected by straight up coercion. Maybe the government will provide services. Maybe they won’t. But if you don’t want to lose your business, your home and do significant jail time, you pay now.  The tax police are in your apartment, explaining this to you. Net of paying what you owe right now, it might be best to pay something on the side to ensure that your case is not re-opened in the immediate future. The nasty bloc includes Russia, the Ukraine, the Caucasus states and the Central Asian former SSRs.

The tax systems of nearly all of these countries were born in crisis. The finances of most Eastern European states were in tenuous shape in 1989. Weak financial state capacity was a huge factor in driving the fall of the Berlin Wall in the first place. Governments could neither provide enough benefits to keep their populations happy, nor provide enough military force to put down a wide range of regional rebellions. After the Fall of the Wall, there were widespread attempts to repair state finance, many of which failed. International financial crises such as that of 1998 crushed even the experiments that were working, let alone those that were not providing any improvement.

The problems for Russia were particularly acute. Regional governors had taken to keeping federal taxes and not passing them on to the government in Moscow. The real risk was that whole states, notably those in the East, would simply declare first financial independence and then real independence and would become independent countries similar to Estonia, or Azerbaijan or Kyrgyzstan. Russia could have ended up being much smaller than it is today.

In most cases, the fiscal problem got solved. How it got solved made all the difference for the quality of life of the citizens involved.

Gerald Easter provides a whole book’s worth of sophisticated factors that led to these different outcomes. Here are super-simplified notes-on-the-internet to what went down.

1.) Countries with mineral wealth or oil wealth could just get their hands on that, and with those resources at hand, railroad everyone else into tax obedience. This sometimes meant taking on the mineral tycoons or oil tycoons first and beating them. But with tycoon money safely in the government coffers, the state had the financial clout to pay for enough muscle to get everyone else in line.

2.) Countries with pre-existing strong unions or pre-existing strong civil societal groups such as organized religions found they could not just stomp down the population. The population organized and fought back. In Poland, the critical factor was organized labor that would just keep going out on strike and winning when it was not happy. The unions made alliances with other groups who could then mobilize people who were not industrial workers to engage in similar tactics. These outside groups really were strong enough to overthrow governments. Tax ministries and finance ministries really had to listen to what these people had to say, and put together packages that could be accepted by these external actors.

Note that 2) is not independent of 1). Societies that had no minerals were dependent on selling industrial products to have an economy. This gave both industrialists and their workers legitimate strategic power. The lack of mineral resources also meant that governments had to have real economic development plans – which meant they needed business acumen within the government. Just hiring a bunch of cops and strongarm men would not be enough to effectively govern.

3.) In the nasty bloc, the Fall of the Berlin Wall led to a complete fragmentation of the state. Civil officials, military officials and security officials split among themselves and then fought among themselves to obtain power. Not surprisingly, the players who were most successful combined skilled diplomacy with strategic and tactical use of coercion. The figures who rose to the top were masters of the art of force.

In the nice bloc, there was generally a split between the government and the rest of society. All of the popular forces were on one side, and the government with its repressive forces was on the other side. So, when the protesting forces overthrew the regimes of 1989, the new governing figures were people whose expertise was in civil organizing and peaceful protest. They ran rallies and printed leaflets. They sat at bargaining tables. They negotiated.

My takeaway from Gerald Easter is that not all tax collection is wonderful. Many of his tales of Russia, frankly, give me the creeps. However, fiscal crisis is what motivates desperate politicians to take extreme measures in the first place. The best thing is to keep the government on a sound foundation, without anyone having to look for retired policemen to do unsavory extra work.

The other takeaway is that a strong civil society and a genuine record of popular political protest matter. Individuals who are experienced at using collective voice and are capable of organizing are the best defense against bullies who would like to see the people silenced. Those bullies continue to exist.