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Cash social transfers, direct taxes, and income distribution in late socialism, Volume 1
 
Author:Milanovic, Branko; Collection Title:Policy, Research working papers ; no. WPS 1176. Transitions and macro-adjustment
Country:Europe and Central Asia; Date Stored:2001/04/19
Document Date:1993/09/30Document Type:Policy Research Working Paper
SubTopics:Environmental Economics & Policies; Economic Theory & Research; Services & Transfers to Poor; Poverty Impact Evaluation; Safety Nets and TransfersLanguage:English
Major Sector:(Historic)Economic PolicyRegion:Europe and Central Asia
Report Number:WPS1176Sub Sectors:Macro/Non-Trade
Volume No:1  

Summary: The author analyzes the impact of direct taxes and cash social transfers on income distribution in Bulgaria, Czechoslovakia, Hungary, Poland and Yugoslavia in the years before the collapse of communism. He contrasts the results for socialist and market economies. Cash social transfers accounted for about a fifth of gross income, a proportion comparable with that in developed welfare economies. Generally, cash transfers were unrelated to income in socialist countries, in marked contrast with market economies, where such transfers go mainly to low income households. Direct taxes played almost no role in income redistribution. They were small - 1 to 2 percent of gross income, except in Hungary - and proportional to income. Most taxes were paid by enterprises, as payroll taxes, and most workers were unaware of the taxation and that public spending could not permanently exceed public revenues from taxation. In socialist countries, social support was built into the system through full employment guarantees, state run pension schemes, and free public education and health care. The only explicit policy toward poverty involved alcoholics, handicapped people, and other special categories. This system is being replaced by a market system in which the labor market is key and those who cannot earn enough must be supported by the state. To counteract increasing income disparities, social transfers must be focussed more on the poor. Eastern European states are ill prepared for this role. They have no experience in identifying the needy and targeting support to them. The question is, toward which world of welfare capitalism are the formerly socialist countries likely to evolve? The author contends that the Central European countries will probably evolve toward the corporatist model of continental Europe. Capitalist countries in Europe tend to have large social transfers that are often related to previous earnings, so they have relatively limited roles in income distribution. Transfers are closer to social insurance than to social assistance. The evolution of more agricultural Balkan countries and the Slavic republics of the former Soviet Union is more difficult to predict. Poorer and more agriculture based countries are generally less able to administer welfare schemes, gauge individual incomes, deliver social support - and their finances may be even more strained than those of their Central European counterparts.

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