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Why has the crisis been bad for private pensions, but good for the flat tax? The sustainability of 'neoliberal' reforms in the new Member States. CEPS Working Document No. 356, October 2011
In this paper, we examine two questions related to the sustainability of the major, neoliberal, economic
and social reforms in the new EU member states, namely the flat income tax and private pension
pillars. First, we look at the relationship between the political consensus/controversy at the time
major policy reforms were passed and the future sustainability of these reforms after a change of
government. Second, we explore what we call a paradox of reverse sustainability, whereby the flat
income tax has been more politically resilient during the global financial and economic crisis than
private pensions, even though ex ante expectations and the literature would lead us to expect the
opposite.
The paper shows that controversy at the time the reforms were passed had no effect on subsequent
sustainability, and the levels of partisanship and public support with regard to a specific reform seem
less important than the political costs and benefits. We also find that despite their apparent neoliberal
bent, the two policies are versatile enough to be shaped towards a variety of policy goals, allowing
their introduction and retention in a variety of economic and social circumstances. In other words,
even though private pensions and particularly the flat tax have powerful political connotations, they
are by no means policy straitjackets.
While both reforms could sustain themselves throughout the âgoodâ times before the global crisis, their
fates diverged during the crisis. Neither public support nor the large constituency of savers could
fully protect private pensions from a policy reversal during a period of exceptional fiscal pressure.
That is because a reversal was associated with significant, short-term fiscal gains and the states where
these reversals took place also took a range of other decisions that were politically extraordinarily
difficult. On the other hand, we demonstrate that the introduction or potential reversal of the flat tax
was not associated with significant, short-term revenue gains. It is the relatively âcheapâ nature of the
flat tax that distinguishes it from private pensions, because it sends a highly cost-effective signal in
terms of revenues lost owing to its existence
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