Do Preferences in EU Member-States Support Fiscal Federalism?

Abstract

The aim of this paper is to assess preferences with respect to fiscal federalism in EU member-states. In particular, we address the question of whether each EU country would - if the decision were taken by 'majority voting' - or should – if the decision were takenby a social planner – favour centralisation or decentralisation of mutual risk insurance. Our analysis implicitly assumes that each EU median voter or each EU social planner takes the composition of the fiscal federation as given, leaving aside the issue of how manyand which countries take part in the optimal EU fiscal federation. With majority voting, the median voter 'individual' and the median voter 'region' in each EU country are decisive. In this situation, the national (federal) government level for redistribution is preferredif the national ratio between median income and mean income is lower (higher) than the EU ratio. In contrast, were the decision taken by the social planner, the choice in favour of centralisation(decentralisation) would be derived from the maximisation of a social welfare function. In terms of European regions, the index of 'jurisdictional distance' indicates that social welfare ismaximised by (de)centralised redistribution whenever intra -national income dispersion is greater (smaller) than inter-national income dispersion. The results show that, for the large majority ofEU member-states, when one of the two decision-makers prefers centralisation (decentralisation), the other has the opposite preference; moreover, the chosen government level is in most cases thesame for interpersonal redistribution and inter-jurisdictional redistribution: what is good for the individual is also good for the nation.Income Distribution ; Public Choice ; Fiscal Federalism ; European Economics