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Fiscal union in Europe? Redistributive and stabilizing effects of a European tax-benefit system and fiscal equalization mechanism

  • Olivier Bargain
  • Mathias Dolls
  • Clemens Fuest
  • Dirk Neumann
  • Andreas Peichl
  • Nico Pestel
  • Sebastian Siegloch

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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File URL: http://hdl.handle.net/10.1111/1468-0327.12011
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Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 28 (2013)
Issue (Month): 75 (07)
Pages: 375-422

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Handle: RePEc:bla:ecpoli:v:28:y:2013:i:75:p:375-422
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References listed on IDEAS
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  1. Olivier Bargain & Kristian Orsini & Andreas Peichl, 2011. "Labor Supply Elasticities in Europe and the US," Working Papers 201114, School Of Economics, University College Dublin.
  2. repec:imf:imfpdp:9607 is not listed on IDEAS
  3. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Automatic Stabilizers and Economic Crisis: US vs. Europe," Cologne Graduate School Working Paper Series 01-02, Cologne Graduate School in Management, Economics and Social Sciences.
  4. Rolf Aaberge & Ugo Colombino, 2008. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," ICER Working Papers 19-2008, ICER - International Centre for Economic Research.
  5. Bargain, Olivier & Decoster, André & Dolls, Mathias & Neumann, Dirk & Peichl, Andreas & Siegloch, Sebastian, 2011. "Welfare, Labor Supply and Heterogeneous Preferences: Evidence for Europe and the US," IZA Discussion Papers 6102, Institute for the Study of Labor (IZA).
  6. von Hagen, Jurgen & Hammond, George W, 1998. "Regional Insurance against Asymmetric Shocks: An Empirical Study for the European Community," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(3), pages 331-53, June.
  7. Eichengreen, Barry, 1990. "One Money for Europe? Lessons from the US Currency Union," Department of Economics, Working Paper Series qt6ks1k831, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. 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).
  9. Keuschnigg, Christian, 2012. "Should Europe Become a Fiscal Union?," Economics Working Paper Series 1205, University of St. Gallen, School of Economics and Political Science.
  10. Michael D. Bordo & Lars Jonung & Agnieszka Markiewicz, 2013. "A Fiscal Union for the Euro: Some Lessons from History ," CESifo Economic Studies, CESifo, vol. 59(3), pages 449-488, September.
  11. Kai A. Konrad & Holger Zschäpitz, 2011. "The Future of the Eurozone," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 12(2), pages 46-49, 07.
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