Tax Policy Formation and the Transnationalization of the Public Policy Arena

265 Pages·2011·1.4 MB·English

by  Annette Andersen

Tax Policy Formation and the
Transnationalization of the Public Policy Arena

A Case Study of Georgia

Nina Dadalauri

PhD Dissertation

Tax Policy Formation and the
Transnationalization of the Public Policy Arena

A Case Study of Georgia

Politica
© Forlaget Politica and the author 2011

ISBN: 978-87-7335-146-8

Cover: Svend Siune
Print: Juridisk Instituts Trykkeri, Aarhus Universitet
Layout: Annette B. Andersen

Submitted February 8, 2011
The public defense takes place May 3, 2011
Published April 2011

Forlaget Politica
c/o Department of Political Science
Aarhus University
Bartholins Allé 7
DK-8000 Århus C
Denmark

Tel. [phone]
Fax [phone]
e-mail: [email protected]
Table of Contents
Acknowledgements ........................................................................................................................................................ 9 
Chapter 1 Introduction .............................................................................................................................................. 13 
1.1. Tax Policy Defined .................................................................................................................................. 18 
1.2. Conventional Approaches to Tax Policy Formation and Reforms ............................ 22 
1.3. Transnationalization of the Policy Arena: Do Ideas Matter in Tax Policy
Formation? ........................................................................................................................................................... 25 
1.4. Roadmap of the Dissertation ............................................................................................................ 26 
Chapter 2 Ordering From the Menu of Conventional Explanations: Pros
and Cons ................................................................................................................................................................................ 29 
2.1. The Impact of External Forces on Domestic Policy Change ......................................... 30 
2.2. Domestic Factors ..................................................................................................................................... 43 
2.3. Summary ...................................................................................................................................................... 61 
Chapter 3 Transnationalization of the Public Policy Arena: Why and How
Do Ideas Matter in Policy Change? .............................................................................................................. 63 
3.1. An Alternative Explanation: Transnationalization of a Public Policy Arena ......... 64 
3.2. Phases of the Tax System Formation ........................................................................................... 66 
3.3. Transnationalization Literature ........................................................................................................ 68 
3.4. Ideas as Weapons for Change ....................................................................................................... 74 
3.5. Mechanism of Idea Change: Policy Learning ........................................................................ 77 
3.6. Policy Actors and Coalitions ............................................................................................................. 81 
3.7. Institutions as Filters and the Need for Government Support ....................................... 83 
Chapter 4 Methodological Choices and Research Design ................................................... 89 
4.1. In-Depth Case Study of Georgia through Process Tracing ............................................ 90 
4.2. Selection of Data Sources .................................................................................................................. 93 
4.3. Semi-Structured Interviews ................................................................................................................ 96 
4.4. Overall Validity of the Dissertation ................................................................................................ 99 
Chapter 5 Georgian Tax Policy Making at the Dusk of the Soviet Regime ......... 101 
5.1. What Does this Chapter Investigate? ...................................................................................... 101 
5.2. Georgia’s Quest for Independence .......................................................................................... 103 
5.3. Ideas Matter in Policy Change: True or False? ................................................................... 104 
5.4. Policy Coalitions .................................................................................................................................... 108 
5.5. Conditionality ......................................................................................................................................... 118 
5.6. Domestic Structural Factors: Budget Deficit and Low Tax Level .............................. 121 
5.7. Number of Veto Players and Party Politics ............................................................................ 126 
5.8. Government Support ......................................................................................................................... 130 
5.9. Institutional Filters ................................................................................................................................. 134 
5.10. Tax Competition ................................................................................................................................ 140 
5.11. EU as a Part of Idea Diffusion or External Force of Change ................................... 141 
5.12. Summary ................................................................................................................................................ 143 
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Chapter 6 Georgian Tax Policy Making during the Period of Grand Reforms
before the Rose Revolution ............................................................................................................................... 145
6.1. Political Dust Settling ... ...................................................................................................................... 146
6.2. Ideas ............................................................................................................................................................. 147
6.3. Policy Coalitions .................................................................................................................................... 155
6.4. IMF Conditionality ................................................................................................................................ 166
6.5. EU as a Policy Actor in Georgia ................................................................................................... 168
6.6. Tax Competition ................................................................................................................................... 170
6.7. Domestic Structural Factors: Budget Deficit and Low Tax Level .............................. 172
6.8. Number of Veto Players ................................................................................................................... 179
6.9. Institutional Filters ................................................................................................................................. 180
6.10. The Rose Revolution ........................................................................................................................ 182
6.11. Policy Making Mechanisms ......................................................................................................... 183
6.12. Summary ................................................................................................................................................ 184
Chapter 7 Georgian Tax Policy Making After the Rose Revolution ............................. 187
7.1. Political Processes Following the Rose Revolution ........................................................... 187
7.2. Ideas ............................................................................................................................................................. 188
7.3. Policy Coalitions .................................................................................................................................... 190
7.4. Government Support ......................................................................................................................... 193
7.5. Domestic Structural Factors: Budget Deficit and Low Level of Tax
Collection ........................................................................................................................................................... 194
7.6. Number of Veto Players and Party Politics ............................................................................ 197
7.7. Conditionality ......................................................................................................................................... 200
7.8. EU as a Policy Actor ............................................................................................................................ 202
7.9. Formal and Informal Institutions .................................................................................................. 204
7.10. Tax Competition ................................................................................................................................ 204
7.11. Policy Change Mechanisms ....................................................................................................... 205
7.12. Summary ................................................................................................................................................ 207
Chapter 8 Conclusion ............................................................................................................................................. 209
8.1. Theoretical Findings ........................................................................................................................... 210
8.2. In-Depth Case Study Findings ...................................................................................................... 213
8.3. Concluding Remarks .......................................................................................................................... 224
Appendix ............................................................................................................................................................................. 227
Appendix 1. Classification of Taxes and Description of Tax Types
(Tax Handles) ................................................................................................................................................... 227
Appendix 2: Country Size of Post-Soviet States .......................................................................... 233
Appendix 3: Statutory Corporate and Personal Income Tax Rates in CIS
Countries 1992-2006 (%) .......................................................................................................................... 234
Appendix 4: Interview guide .................................................................................................................. 235
Appendix 5. External Debt, total (% of GNI) among CIS Countries, 1997-2006 ...... 238
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Appendix 6: IMF Credits in Thousand USD Provided to Post-Soviet States from
1992 to 2006 .................................................................................................................................................... 239
Appendix 7: Corporate Income Tax Revenues of Post-Soviet Countries
(as percentage of GDP), 1993-2000 ................................................................................................. 240
Appendix 8: Personal Income Tax Revenues of Post-Soviet Countries
(as percentage of GDP), 1992-2000 ................................................................................................. 241
Appendix 9: General Government Tax Revenues of Post-Soviet Countries
(as percentage of GDP), 1993-2001 ................................................................................................. 242
Bibliography ...................................................................................................................................................................... 243
English Summary ......................................................................................................................................................... 255
Dansk resume ................................................................................................................................................................. 261

List of Figures
Figure 1.1: Framework for the causal pathway of Georgian tax policy
formation ....................................................................................................................................................... 26
Figure 6.1: The tax policy making process and important initiatives
1997-2003 ................................................................................................................................................. 145
Figure 6.2: Georgian budget deficit (in mil GEL), 1999-2003 .................................... 174

List of Tables
Table 2.1: Summary of theoretical expectations for Georgian tax policy
formation analysis .................................................................................................................................... 62
Table 3.1: Phases of tax policy formation and reform ....................................................... 68
Table 3.2: Summary of theoretical expectations for Georgian tax policy
formation analysis .................................................................................................................................... 87
Table 4.1: Data sources ......................................................................................................................... 93
Table 4.2: Respondents in the semi-structured interviews .............................................. 98
Table 5.1: Chronology of the main developments in Georgia 1991-1997 ...... 103
Table 5.2: Marginal tax rates of personal income tax in Georgia ........................... 113
Table 5.3: Policy actors and the policy ideas they supported during the
mid-1990s in Georgia ........................................................................................................................ 115
Table 5.4: General government revenue and expenditure (pct. of GDP) .......... 123
Table 5.5: Foreign direct investment in Georgia 1998-2002 ..................................... 141
Table 5.6: EU assistance to Georgia 1992-1997 ............................................................... 142
Table 6.1: Summary of the time period, policy initiatives, and actors
discussed in Chapter 6 ....................................................................................................................... 145
Table 6.2: Chronology of main developments in Georgia 1998-2003 ............... 146
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Table 6.3: Dynamics of tax code changes adopted in the period
1997-2003 (before the Rose Revolution) ............................................................................... 161
Table 6.4: FDI flows in Georgia 2002-2006 ........................................................................... 171
Table 6.5: Georgian exports by country group (1000 USD) ........................................ 171
Table 6.6: Georgian imports by country group (1000 USD) ........................................ 172
Table 6.7: Georgia's budget deficit and external funding ........................................... 173
Table 6.8: Consolidated budget revenues and expenditures as percen-
tage of GDP, 1998-2003 ................................................................................................................... 174
Table 6.9: Total revenues and tax revenues (percentage of GDP),
1998-2005 ................................................................................................................................................. 177
Table 7.1: Chronology of the main developments in Georgia after the
Rose Revolution till the end of 2004 .......................................................................................... 187
Table 7.2: Dynamics of tax code changes adopted between December
2003 and December 2004 .............................................................................................................. 194
Table 7.3: Consolidated budget revenues and expenditures as percen-
tage of GDP, 1999-2003 ................................................................................................................... 194
Table 7.4: EU programs in Georgia from 1998-2006 (Program - Traceca,
Inogate, Natural Resources) ........................................................................................................... 203
Table 7.5: Georgian exports by country group (1000 USD) ........................................ 205
Table 7.6: Georgian imports by country group (1000 USD) ........................................ 205
Table 8.1: Summary of theoretical expectations and empirical findings ........... 216
Table A.1: Historical overview of the income tax introduction in Europe ........... 227
Table A2: OECD classification of taxes .................................................................................... 228
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Acknowledgements
This dissertation is the result of a three-year intellectual journey which was an
interesting and enlightening path. Yet without the contributions of many won-
derful people along this path, it would have been impossible to come this far.
First and foremost, I would like to thank my supervisors, who believed in my
project and stood by my side to make sure I would complete the task and
would stay focused, which often times was a challenge. Their comments, con-
structive criticism, and sense of humour made my work enjoyable and produc-
tive. Therefore, I am deeply grateful to Anne Skorkjær Binderkrantz and Anne
Mette Kjær for being great supervisors. Ever since they took up the task of su-
pervising my journey of PhD research, they never stumbled in dedicating as
much time as I needed. Both Anne and Mette did their utmost to make my
thoughts clearer, my arguments more solid, and the content consistent.
However, I am not sure I have always managed to pursue all their insightful
comments. In addition to my supervisors, I have benefited greatly from the in-
tellectual environment at the Department of Political Science at Aarhus Univer-
sity and the Comparative Politics/Political Systems Section where I have had
the opportunity to present my work and receive insightful feedback. I would
like to say thank you to Karin Hilmer Pedersen, who has been extremely helpful
and who has read and commented on various chapters of my dissertation. Al-
so I owe thanks to Peter Munk Christiansen, who believed in my project and
has supported me throughout the period of writing. His magic words that were
written and stuck on my blackboard ‘Don’t Get It Right, Just Get It Done’ have
eventually worked.
There are numerous helpful colleagues to whom I would like to convey my
gratitude, among them particularly Jørgen Elklit, Lars Johannsen, Svend-Erik
Skaaning, Vibeke Lehmann Nielsen, Lene Mosegaard, Mads Leth Jakobsen
and Marie Østergaard Møller for constructive comments and efforts to make
my arguments clearer and more consistent. Lene and Marie have been great
friends with whom I gladly shared my office and who made my stay in Aarhus
enjoyable with their friendship and support.
Furthermore, I am extremely grateful for the help and tireless support that I
received from ‘TAPPERNE’. Special thanks go to Annette Andersen, Else Niel-
sen, Birgit Kanstrup, Inge Rasmussen, Mette Ahlers Marino, Karen Prehn, Gorm
Willemoes Jensen, Vivi Mikkelsen and Berit Møller. In addition to the technical
support, financial support from the Department of Political Science, Aarhus
University enabled me to conduct fieldwork in Tbilisi, Georgia where I col-
lected valuable data for this dissertation.
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In Tbilisi, I met numerous kind and open people, who were willing to help
collect data on the Georgian tax system during a time of political instability.
During my fieldwork I was generously hosted by Dr. Aleko Rondeli at the Cen-
ter on Strategic Studies and Research in Tbilisi, Georgia. And I would very
much like to render my gratitude to him for that. Moreover, the technical sup-
port from his staff has been greatly appreciated. My gratitude goes to all who
did not spare their time and efforts to help me during and after my fieldwork.
Their help in the crucial parts of my research such as finding contacts or setting
up meetings with respondents, providing documents and information I needed
or requested enthusiastically has been invaluable. Among many of them, I
must thank Dr. Lade Papava, Dr. Niko Orvelashvili, Mr. David Koguashvili and
Ms. Nana Patsia. Moreover, I am grateful to all my respondents who so gene-
rously shared their knowledge of the Georgian tax system with me.
After returning to Aarhus, where I had to put the bits and pieces of the col-
lected data together, I found a shelter at the International Center for Business
and Politics (CBP) at Copenhagen Business School, where the welcoming and
intellectually inspiring environment kept me thriving to complete the disserta-
tion. Among all others at the Center I would like to thank Dr. Ove Kaj Pedersen,
Dr. Lars Bo Christiansen, Dr. Leonard Seabrooke and Mr. Bo Bogekov for hosting
me at their research center, where their hospitality and work environment
made my stay both enjoyable and productive.
Dr. Seabrooke’s comments helped me find my way out of the cul-de-sac
that all PhD students find themselves in once in a while. While being hosted at
CBP, I had the opportunity and great pleasure to discuss my work with Dr. John
Campbell, whose comments were constructive and insightful and helped me
to sharpen my analysis and arguments.
All those who ever followed the path of PhD studies will probably agree
that there are times when this journey seems a tiring, long and lonely process,
which is only possible to complete with the love and support from our loved
ones. I must say that my family and friends did a great job in this. Tons of thanks
go to my parents, Tariel and Tsiala, and my brother Giorgi, who taught me that
commitment and hard work pay off and if you dream high, you achieve high.
Those three years when I was ‘hiding’ behind a computer screen, my friends
kept reminding me that life is much larger and more colorful than my research
interests. Without their support and inspiration, you would not be reading this
passage of acknowledgments.
Finally, I would like to dedicate this work to the sweet memory of my child-
hood friend, Khatuna Chankseliani. Her sense of humour and cordiality
brought a light of joy to my PhD studies. Her emotional support made it possi-
ble to believe that the final result of this journey would be worth my time spent
10