Public Debt Asymmetries: The Effect on Taxes and Spending in the European Union

57 Pages Posted: 14 May 2003

See all articles by Signe Krogstrup

Signe Krogstrup

National Bank of Denmark - Economics Department; Danmarks Nationalbank (The Central Bank of Denmark); IMF

Date Written: August 2002

Abstract

The aim of this paper is two-fold: First, assuming public debts are pre-determined and in their steady state in EU countries, the paper investigates the effect of asymmetric debt service obligations on taxes, primary spending and the tax mix in EU countries. Second, it investigates how increased tax competition may change these effects. The impact of debt service on taxes, primary spending and the tax mix is derived in a simple model of tax competition, and the hypotheses derived from the model are tested empirically for a panel of EU countries. Cross-country differences in public debts are found to lead to asymmetries in taxes and primary expenditures across EU countries, with high debt countries having lower expenditures and higher taxes than low debt countries. Capital mobility is found to increase these asymmetries, and trigger cross-country asymmetries in the tax mix of EU countries.

Keywords: Public Debt, Public Finance, European Union, Asymmetric, Tax Competition

JEL Classification: H6, H23, H73, H87, F02

Suggested Citation

Krogstrup, Signe, Public Debt Asymmetries: The Effect on Taxes and Spending in the European Union (August 2002). ECB Working Paper No. 162. Available at SSRN: https://ssrn.com/abstract=358020

Signe Krogstrup (Contact Author)

National Bank of Denmark - Economics Department ( email )

1093 Copenhagen
Denmark

Danmarks Nationalbank (The Central Bank of Denmark) ( email )

Havnegade 5
Copenhagen, 1093
Denmark

IMF ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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