OPTIMAL TAX RATES AND TAX DESIGN DURING SYSTEMIC REFORM

Budgets in Eastern Europe are under strain as taxes are reformed and r eceipts fall. Should expenditure be maintained or should personal taxe s be cut? This paper asks how optimal tax rates might respond to a tra nsition in which the government becomes less averse to inequality, but the inequality in skills increases. These are roughly offsetting and less important than falling enterprise revenue and the decline in the efficiency of personal taxation, both of which cause a sharp fall in o ptimal transfers. Tax design consists of balancing the differing ineff iciencies of incompleteness in indirect tax coverage against evasion-p rone direct taxes.