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Fiscal Union in Europe? Redistributive and Stabilising Effects of a European Tax-Benefit System and Fiscal Equalisation Mechanism

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Author Info

  • Olivier Bargain

    ()
    (Aix-Marseille School of Economics, IZA and CEPS/INSTEAD)

  • Mathias Dolls

    ()
    (IZA and University of Cologne)

  • Clemens Fuest

    ()
    (University of Oxford, University of Cologne, CESifo and IZA)

  • Dirk Neumann

    ()
    (IZA and University of Cologne)

  • Andreas Peichl

    ()
    (IZA, University of Cologne, ISER and CESifo)

  • Nico Pestel

    ()
    (IZA and University of Cologne)

  • Sebastian Siegloch

    ()
    (IZA and University of Cologne)

Abstract

The current debt crisis has given rise to a debate about deeper fiscal integration in Europe. The view is widespread that moving towards a ‘fiscal union’ would have a stabilising effect in the event of macroeconomic shocks. In this paper we study the economic effects of introducing two elements of a fiscal union: Firstly, an EU-wide tax and transfer system and secondly, an EU-wide system of fiscal equalisation. Using the European tax-benefit calculator EUROMOD, we exploit representative household micro data from 11 Eurozone countries to simulate these policy reforms and to study their effects on the distribution of income as well as their impact on automatic fiscal stabilisers. We find that replacing one third of the national tax and transfer systems by a European system would lead to significant redistributive effects both within and across countries. These effects depend on income levels and the structures of the existing national tax and transfer systems. The EU system would improve fiscal stabilisation especially in credit constrained countries. It would absorb between 10 and 15 per cent of a macroeconomic income shock. Introducing a fiscal equalisation system based on taxing capacity would redistribute revenues from high to low income countries. The stabilisation properties of this system, however, are ambiguous. This suggests that not all forms of fiscal integration will improve macroeconomic stability in the Eurozone.

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Bibliographic Info

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1222.

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Date of creation: 2012
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Handle: RePEc:btx:wpaper:1222

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Keywords: European income tax; automatic stabilisation; fiscal union;

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References

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  1. Aaberge, Rolf & Colombino, Ugo, 2006. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," IZA Discussion Papers 2468, Institute for the Study of Labor (IZA).
  2. Konrad, Kai A. & Zschäpitz, Holger, 2011. "The future of the Eurozone," Munich Reprints in Economics 13966, University of Munich, Department of Economics.
  3. Barry Eichengreen., 1990. "One Money for Europe? Lessons from the US Currency Union," Economics Working Papers 90-132, University of California at Berkeley.
  4. Fuest, Clemens & Peichl, Andreas, 2012. "European Fiscal Union: What Is It? Does It Work? And Are There Really 'No Alternatives'?," IZA Policy Papers 39, Institute for the Study of Labor (IZA).
  5. Michael D. Bordo & Agnieszka Markiewicz & Lars Jonung, 2011. "A Fiscal Union for the Euro: Some Lessons from History," NBER Working Papers 17380, National Bureau of Economic Research, Inc.
  6. Hammond, George & von Hagen, Jürgen, 1995. "Regional Insurance Against Asymmetric Shocks. An Empirical Study for the European Community," CEPR Discussion Papers 1170, C.E.P.R. Discussion Papers.
  7. repec:ese:emodwp:em5-11 is not listed on IDEAS
  8. Olivier Bargain & Kristian Orsini & Andreas Peichl, 2011. "Labor Supply Elasticities in Europe and the US," Working Papers 201114, School Of Economics, University College Dublin.
  9. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2009. "Automatic Stabilizers and Economic Crisis: US vs. Europe," IZA Discussion Papers 4310, Institute for the Study of Labor (IZA).
  10. Christian Keuschnigg, 2012. "Should Europe Become a Fiscal Union?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 13(1), pages 35-43, 04.
  11. repec:imf:imfpdp:9607 is not listed on IDEAS
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Cited by:
  1. Ritzen, Jo & Zimmermann, Klaus F., 2013. "A Vibrant European Labor Market with Full Employment," IZA Policy Papers 73, Institute for the Study of Labor (IZA).
  2. repec:ese:emodwp:em1-14 is not listed on IDEAS
  3. Dolls, Mathias & Fuest, Clemens & Neumann, Dirk & Peichl, Andreas, 2013. "Fiscal integration in the eurozone: Economic effects of two key scenarios," ZEW Discussion Papers 13-106, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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