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 voting - or should - if the decision were taken by 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 many and which countries take part in the optimal EU fiscal federation. With majority voting, the median voter and the median voter region in each EU country are decisive. In this situation, the national (federal) government level for redistribution is preferred if 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 is maximised 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 of EU 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 the same for interpersonal redistribution and inter-jurisdictional redistribution: What is good for the individual is also good for the nation.