with ‘new Europe,’ it will have to lower taxes and rethink the social-welfare systems
that high taxation support.” Although the welfare state is considered to be a core part
of European identity, despite its unsustainability and its drag on European competitive-
ness, enlargement might prove a powerful catalyst for reform.33 Again, this may prove
politically difficult to push through Brussels, because of the unanimity requirement in
any change in formal tax matters (according to Articles 94 and 95.2 of the EC Treaty).
That said, the initial conditions are far from analogous, as Eastern Europe had an
unusually mercurial policy environment and a glaring need for reform. Furthermore,
the costs to Western European governments of adopting the tax are far greater than to
Eastern European ones. Recall the case of Kirchhof: the cost of his even mentioning
the flat tax might have been so huge that he had to be quarantined from politics. If we
were to include Western Europe in future analyses, it would be necessary to model the
heterogeneity between the benefits and costs to each government, taking into account
that the costs were relatively trivial for Eastern Europe and that the potential benefits
(particularly with respect to tax collection) were high. Western Europe’s welfare states
and path dependency would give it a rather different cost function.
What is required at this stage is a more complete articulation of the political mecha-
nism through which neighbor influence works. We have shown that competition for invest-
ment does not suffice. It is possible that empirics would be less illuminating than formal
theory. Work on collective action (Kuran, 1991) or information cascades (Lohmann, 2000)
might be useful here, though those models usually require either that one outcome be
truly optimal, or that most actors share, but suppress, a preference for a particular kind
of outcome. As such, the parallels may be in policy reform more generally, such as the
33Hans H.J. Labohm. TSC Daily. “The Cradle of the European Tax Rebelion: Estonia.” 13 Oct 2004.
Available at http://www.tcsdaily.com/article.aspx?id=101304A
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