With the end of war, the United States is now working rapidly to restore civil administration in Iraq and get its economy moving again. A key issue will be the Iraqi tax system, which cannot wait until all the questions about Iraq’s form of government are worked out. The interim authorities will need revenue to pay for police, firefighting and other basic services. Hence, some sort of tax system will need to be put in place quickly.
As best anyone can tell, Iraq really had no tax system under Saddam Hussein. Sales from the state-run oil monopoly provided all the revenue that the government needed for what little it did. Hence, in creating a new Iraqi tax system, the new government will be starting from scratch. In essence, it will have a blank slate to write on.
In this respect, the situation in Iraq is not altogether different from what it was in formerly communist states such as Russia. Although the old Soviet Union had a tax system, it existed neither to provide revenue to the government nor to change the distribution of income. Neither function was necessary in a socialist state, because the government owned everything and everyone worked for it as well. Thus, the state could get all the revenue it needed and achieve whatever income distribution it desired just by changing wages and prices as it saw fit.
As best I can tell, the Soviet tax system functioned like a Federal Reserve open market operation. Its main purpose was to soak up excess money circulating in the economy. (See Soviet Taxation by Franklyn Holzman, Harvard University Press, 1955.) Needless to say, a tax system designed for this purpose was wholly inappropriate for a post-communist, quasi-free economy.
The Russian government struggled for some years to come up with an appropriate tax system. Under extreme pressure from the International Monetary Fund to raise revenue in order to get inflation under control—the central bank was just printing money to cover large deficits—tax rates were raised, many new taxes imposed, and extreme pressure was brought to bear on those evading taxes.
It all proved to be for naught. Tax revenue fell to just 8.6 percent of the gross domestic product in 1998, from 11.1 percent in 1995. In 1996, the IMF suspended its program in Russia because its tax revenues were too low. In effect, the IMF wanted Russia to raise taxes still more.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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