Interview with Marc Berenson, Title VIII-Supported Research Scholar, and Senior Lecturer in the Russia Institute, King’s College London, on August 27, 2014. Kennan Institute Project “Taxes and Trust: Transitioning from Coercion to Compliance in Poland, Russia, and Ukraine.”

Malinkin: One of the main topics that your project addressed is governance. What are some of the things we can learn about governance in Poland, Russia, and Ukraine through the lens of tax compliance?

Berenson: I regard taxation to be one of the key activities that all states take up. States also distribute money, regulate aspects of the market economies within their countries, and provide for security and defense. Taxing is extracting money from society in order for the state to function and to be able to accomplish its tasks. At one level, taxation itself is a prime governance function, but it is also one of the only activities where the state and society have to interact with one another, and it is one of the few by which citizens have an obligation to give up something to the state. We talk about obligations citizens have perhaps with respect to voting, with respect to learning a certain language or other acts of civic duty, but taxation is one where they have to give something up, citizens have to enter into a sort of financial relationship with their state, disclosing their income, their expenses, in the hope that not only will the state leave them alone per se, but may even give them something back in the form of deductions or reimbursements. So if the state cannot raise taxes with the cooperation of the public, the state cannot function and society cannot function either.

Let’s take a look at Poland - you mentioned in a talk that Poland did a better job incorporating civil society into the actions of the state – can you talk about how Poland did this regarding tax compliance?

All three countries that I studied — Poland, Russia and Ukraine — adopted new tax systems at roughly the same time, 1992-1994. And they adopted the same types as well: value added tax, personal income tax, corporate income tax, etc. But Poland was unique among the cases I looked at in that it really went out into the public to educate people as to what this newly founded thing called taxes was: what does paying taxes involve, etc. Poles today know where their local tax office is the way Americans know where their local post office is. In the late 1990s, a survey was conducted that showed that the Polish tax bureaucracy was the third most trusted branch or agency of the Polish government. I think they won that trust to a great extent because they had their tax office employees go out into public, go on television, go on local radio, have tax information checkpoints established within tax offices, to educate the public as to what this was all about. And they were very excited to do so, they said. The public had an interest in learning and the government had an interest in making sure they understood how this was to be carried out. That type of public interaction didn't take place farther to the East.

So there was a conscious effort to do a public information campaign?

That's right. This was a time in Polish history of extraordinary politics; in many ways, politics in Russia and Ukraine after the Soviet Union collapsed were times of ordinary politics. In Poland after ’89, the state was governed of, by, and for Poles for the first time since the interwar period, and that meant a lot. Yes, there was a lot of corruption going on in Polish state and society, even though it was less after the transition, but there was this notion that “we are part of something greater,” “here we are creating something new.” And Poles also recognized within five years that it was advantageous to file income taxes, as most of them were receiving rebates and reimbursements from the state for health claims and education benefits and the like.

Were there certain leaders in Poland who were key to making that happen? Or was it a broader movement?

With respect to taxes, I think the whole socio-economic transformation that was taking place in Poland was at all levels of state and society, and there was a real drive to reclaim the country as another anchor in Europe with a market economy and democratic system. I certainly think Polish nationalism helped fuel that; they were building a new state after having one that was imposed on them from abroad. But within the tax administration itself and the Ministry of Finance to which it was subordinate, there was a real effort to create a new tax system that made use of historical reference points, to times when the state was perceived as more capable and embodied with human and technical resources. Without a doubt, it was not all perfect in Poland, it's not the most shining example, perhaps, but it does show what can be done when there is a greater will to do so.              

You mentioned the role that nationalism played in the tax reform movement in Poland – was a similar approach taken in Russia and Ukraine as well?

Poland gained its freedom to be a state governed of, by, and for Poles in 1989. But Russia became the successor to a collapse in 1991 that left some bewilderment, at best, with respect to how Russians see themselves in their country and their place in the world. Coupled with the manner in which the economic reform programs and privatization were taking place within Russia and Ukraine, and the rise in corruption associated with that, there was much uncertainty among Russians as to what their nation was. Ukraine’s situation was different —not being the center of the collapse, it did not inherit the central ministries. At the beginning of the 1990s, experts were trying to catch up and build the state but were not really certain of what to do, and the main objective for Ukraine was to establish its independence.

Back to Poland for a moment, were Poles able to see the results of their taxes more than the Russians or the Ukrainians? Like roads being built in their cities? Or was it going into a central pot like in Russia and Ukraine?

Well, it does come back out again. Poland was moving very rapidly throughout this process. While the roads may have remained bad in Poland, the Poles got a lot back from their state through their social welfare system. With Jeffrey Sachs and the shock therapy program, Poland embarked on rapid economic reforms, but it got slowed down, and one of the things that slowed it down were the many social welfare payments that were given out.

Did that also help to build trust, however? You have talked about how there is more trust and less fear in Poland in terms of taxes. Was this how the state gained trust or did the Polish state enjoy more trust even before these reforms? (compared to Russia and Ukraine)

The Polish state prior to 1989 was not viewed with great trust and went through a period of state and society being in opposition to each other. Those who studied the state transitions of ‘89 have argued that Poland had the longest transition. The Solidarity movement came, Martial Law was introduced in 1981, and it took a decade of battling with the regime. Ironically, some of the innovations in the early to mid-80s in Poland with respect to how the state was organized were designed by the Communist regime. They were bringing back institutions from the interwar era as a way to legitimize their rule as they struggled to keep the proverbial saddle on the Polish cow that was not willing to take on the Communist rule, to paraphrase Stalin.

So it sounds like they worked consciously to build trust.

But it was done because they were concerned about building an effective economy that was going to create a successful country.

When you say Ukraine has the worst of possible scenarios, do you mean the worst in terms of how the state functions? Or worst from which viewpoint? In comparing Russia and Ukraine, Ukraine can be characterized as having more chaos and more corruption, but perhaps more freedom and on its way to somewhere that Russia is not.

That's true. I view these three countries as on a J-curve of sorts in that Poland is the ideal type where countries in that part of the world should want to become: higher levels of trust in their state and people acting on trust. An effective state is also one that provokes some fear —all states need to provoke some fear in order to get people to comply with paying taxes, for example — as a higher authority, but not with extreme coercion that limits state effectiveness in the long run. Russia is at that sub-optimal level, with a state evoking more fear than trust, while Ukraine is at the bottom of the trough, trying to transition, if you will, from Russia to Poland. What Ukraine has now is twenty-some years of not focusing on building the state itself. The state has been privatized for corrupt interest, and when it has tried at times to be coercive, the population knows that there are ways of getting around the state. It has greater freedom in society, of course.  The freest Russian media right now is in Ukraine and people have more information about what's going on regarding their society and the state and corruption than in Russia. I found in my surveys over the years that roughly only 9 to 10 percent of Ukrainians could consistently trust the state to do what was right or to provide them with goods and services—much lower than in Russia and in Poland. The question is: can Ukraine get out of this trough? If it does and moves towards building a rule of law that is as respected and trusted as it is in Poland then it will have even greater advantages than the Russian state in terms of being effective. Absent that, however, the Russian state is able to accomplish more because it is able to invoke great fear and manipulation through the media.

Going back to the personal contact with the tax officials in the Polish case, how does personal contact affect compliance? Was that part of what made Poles more compliant relatively speaking?

I think that was what helped initially. Certainly the type of direct personal contact with the tax inspector that’s conducting, receiving, evaluating your tax return has become anonymized over the years. But I think that being shown how to do things mattered more than signs that say "Pay your taxes." I’ve seen a video of a commercial from the 1990s in Russia, where a man and a woman are in bed and the man is very agitated and keeps getting up to turn the light on and off, and then the tagline appears stating that he wouldn't be so anxious if he paid his taxes.

Was this type of advertising common in Russia?

I don't know of that many such adverts. I think that they certainly posted street advertisements about paying one’s taxes, but I haven't seen too much. In Ukraine they had a children's alphabet of taxes, children’s books, children's drawing contests, etc. It seemed they did more outreach to elementary schools students than to adults.

Teach them early! To what degree does the attitude of citizens towards taxes in transitioning states differ from the attitude in more developed countries? Are you aware of any studies on this – how can we put it into context?

Well, taxes were introduced in the early 1990s across these countries as they were transitioning from a socialist, communist economy towards a capitalist one. For the vast majority, that meant that everyone was equally poor. Then when the transition came, there were drastic differences in wealth. This happened to a lesser extent in Poland, which is a more equal society in that regard. I think the wealth differences may have added to the difficulties of compliance. It affects tax morale and tax attitudes. In other words, the distribution of wealth in a society has an effect upon one's willingness to comply. And I imagine that the situation Poland, Russia, and Ukraine faced in the early 1990s was a unique time and quite different from in Western or Latin American countries where there was already greater wealth differentiation.

What would you recommend for Russia to increase its tax compliance?

I don't know if I can give advice for Russia at this point that the Russians would be receptive to. I think Russia is posing a real question for us globally as to how can democracies and authoritarian regimes really get along with one another. How can they interact economically, tradewise when other values and issues are at stake? If we do or don't interact with them, what does that mean about our values and our ideals as Western democracies? In many ways, the tax systems in Russia and Ukraine were probably not designed just chiefly for gaining revenue. They are also about control the way an internal affairs organization or the KGB were at different times. Putin went after Khodorkovsky because of taxes, and he deliberately chose that institutional mechanism. Russia is likely to feel painted into a corner and the need to be even more coercive before a change. As Russia’s Ukraine campaign, which is really at the heart of the Kremlin's identity at the moment, backs down, it may unravel the whole way of governing which is a threat to those at the top.

At this stage in your writing, where do you stand on what is more important in implementing policy objectives – the state’s relationship with society – or the design of its administrative structures?

I think you have to have both to work effectively. The model I have is not just a model for increasing tax compliance but is really a model for how governance works when it works best, and how the state is able to implement policy. It requires a state that is organized and outward-focused and willing to engage with society through trust, and also a society that is capable and primed and able to partner with the state. In Ukraine today, they have not been able to build an effective, outwardly-focused state, and society doesn't trust the state to provide it with goods and services, or any of the other things that it expects. So you have the worst of both - society doesn't fear the state to be overly coercive towards it, and it is very capable of shunning obligations and getting away with it.

Mary Elizabeth Malinkin
Matthew Rojansky, Director, Kennan Institute