Tax Policy and Subnational Finances

Abstract

The primary functlon of any country’s tax System is to generate revenue. The international experience wlth developmg and transitlonal economies has been that sustained deficit reduetion occurs primarlly through long-term revenue enhancement rather than expenditure re- form. Budgeiary politics tend to rnake current expendiiures “sücky- downwards”: easier to raise than to reduee. Further, the political consensus needed to cut spending is generaily elusive, and this is true in both the dcvcloping and wcstcrn industrializcd countrics.¹ Finally, The World bank experience has been that fiscal adiustment tends not to be sustained in countries that reduee deficits through mamiy short-term increases in revenues or spending cuts; a more sustained effort is required/ Thus, iong-term revenue enhancement through tax System devclopment and administrative eapacky-building is an imperative for countries like Ukraine.