Tax authority to the European Parliament?

Abstract

In this paper we analyze whether countries of the EC community should plead for a decentralized system to finance the European funds rather than using a uniform tax imposed by the European parliament. The analysis is within a multistage game-theoretic framework in which the implication of the financing system of a confederation on the investment behavior in the respective states is considered. The paper is in the tradition of the literature which claims that from a view of global efficiency property-rights structures inducing ex-post efficient allocations may be worse than a system leading to an ex-post inefficient allocation. For this specific economic issue we elucidate the tradeoff between incentive effect and distributional policy. Especially we demonstrate that rather homogeneous countries benefit by installing a central tax institution. If the countries are rather heterogeneous, the countries may have opposing interests with respect to the answer of the question which is presented in the title. It is possible that the “high-developed” country prefers to install a central tax authority while the “low-developed” country does not. However, in general the reverse ordering which is more in line with our intuition results.