When governments care about tax revenues, the taxability of different forms of econoic
activity will influence the decisions of governments about what activity to support.
If factors of production are mobile across sectors which differ in their taxability,
political economies will organize themselves into equilibria where governments support
activity because resources are allocated to it, which in turn encourages that resource
When resources and government support are organized in support of an "old" equilibrium,
and the possibility of a "new", possibly more efficient equilibrium beckons, the
relative taxability of the old and new sectors will determine the likelihood of such
a shift. In postcommunist Europe, such factors were influential in the creation of
two general political-economic configurations: one where such support is lacking
and new businesses are rare. Differences in relative taxability of new and old economic
activity contribute to the prevalence of the first configuration in Eastern Europe,
and the second in the former Soviet Union.