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Modeling Fiscal Policy in the European Union


Janusz Kudla, Konrad Walczyk and Robert Kruszewski

The book discusses optimal fiscal policy for an internationally integrating economy when public borrowing is constrained. Various innovations have been introduced: the agglomeration effect, the fiscal solvency concept, the harmonization of capital income tax base with formula apportionment and transaction tax on financial transactions. Tax structure consists of taxes on labor, capital and consumption, and bonds – the study looks at equilibrium tax rates under international tax competition pressure, and estimates them econometrically. It also offers policy recommendations as a contribution to the discussion about the desired scope of fiscal integration in the European Union.
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The idea for this book has originated in the light of the ongoing debate on whether taxes should be harmonized in the European Union and, if so, to what degree. The discussion has been sparked further because of two reasons: firstly, because of the economic crisis and secondly, because of the impact of countries indebtedness. Debt crises in the European Union countries raise a question: what is the transfer mechanism between various economic phenomena – tax revenues, spending and debt. In all European Union countries public borrowing is necessary to supplement inefficient public revenue in order to provide the level of public goods and services required by its citizens. This need arises also when tax revenues decrease while the level of public goods and services remains roughly constant. Furthermore, obtaining the tax revenues from capital, labor and consumption a government can optimize the tax mix, in order to obtain the maximum budget revenue. However, in practice the tax mix is a result of not only economic optimization but also of public bargaining. This is why the analysis presented in this book has to include public debt with the tax mix optimization.

The purpose of this study is to derive some analytical economic models that will allow for the assessment of the consequences implied by various forms of fiscal integration in the short and long term. We especially focus on propositions postulated to implementation in European Union. It is our hope that undertaken study helps to explain the...

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