A Comparative Analysis of EU Member States' Taxation Policies Before and After the Crisis: Tackling the Fiscal Paradox

1. DEPARTMENT OF SOCIAL AND POLITICAL STUDIES A comparative analysis of the EU member States before and after the crisis Tackling the fiscal paradox from the angle of taxation* • Alessia Damonte and Fedra Negri • *The study is part of the PRIN project ‘POLCrises@Europe’, www.polcrises.unimi.it. • We kindly acknowledge the Italian Ministry of Education and the Institute for theNew Economic Thinking for financial support.

2. The context: a fiscal paradox • The economic crisis  Fiscal policies of the EU member states under an unprecedented pressure. • Shrinking economies Less revenues for governments & higher demandfor pro-cyclical moves. • Stability Pact commits governments to balance budgets. • Decreasing voters' consensus. Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

3. Tackling this paradox from the angle of taxation • Economic crisis = window of opportunity for governments to redesign their fiscal policies for higher effectiveness and sustainability. • Taxation is an effective tool for promoting changes in behaviour that can boost economic performances. • Taxation enforces the normative paradigm of social justice deciding who bears the burden and who deserves not to. Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

4. EU institutions know it… • The crisis has re-opened the debate on the need of a ‘a euro-wide fiscal stabilisation function’Fiscal Union. ‘One of the main lessons of the crisis has been that fiscal policies are a matter of vital common interest in a monetary union’ ‘Unsustainable fiscal policies harm financial stability insofar as they create contagion between member states and financial fragmentation’ Juncker et al., June 2015: 14 Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

5. The research design, so far /1 • Assumptions: • The effect of taxation on system performance is configurational and chemical rather than additive and physical> Y: attention to trade-offs in performance> Xs: shifts from single tools to their combinations as regimes Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

6. The research design, so far /2 • RQs: • Does the taxation regime affect the coupling of economic wealth and income equality? • If so, which mix of taxation tools proves more effective, and which instead fails? • Do we observe significant differences in regimes’ effectiveness before and after the crisis? Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

7. The research design, so far /3 • Mixed Method Strategy: • Fuzzy-set ideal type building • to operationalize Y; • Qualitative Comparative Analysis • to identify the minimal conjunctions (mix of taxation tools) associated to different couplings (and decouplings); • Multivariate analysis • to assess the probabilistic effect of minimal conjunctions (mix of taxation tools) on Y. Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

8. The research design, so far /4 coupling = f(taxation regime) + ε • Y is the Boolean conjunction of 2 main properties: • Economic wealth; • Income equality. • X is a vector of variables referring to design and revenue of different taxation tools. • Units of analysis are EU member States (minus Croatia and Luxemburg), observed before (2005-2007) and after (2013-2015) the breakout of the crisis (2008). By now, we are dealing with the construction of Y. Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

9. What is a fuzzy-set ideal type? /1 • An ideal type is an analytical construct that cannot be found anywhere in reality, which can be used as a yardstick to establish the extent to which real empirical phenomena are similar to or different from some predefined measure (Weber, 1949). • It can be operationalized as a logical conjunction of properties (Boolean ‘and’) • Each property can be thought of as a set to which a case can be a member to some degree… Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

10. What is a fuzzy-set ideal type? /2 • A fuzzy-set is ‘a fine-grained, continuous measure that has been carefully calibrated using substantive and theoretical knowledge relevant to set membership’ (Ragin, 2000: 7). • The researcher has to establish 3 breakpoints: • 1 forwhen a country is fully in of a property set. • 0.5 is the cross-over point (maximum ambiguity). • 0for when a country is fully out of a property set. Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

11. A fuzzy-set ideal type analysis to build Y • The sets that constitute the ideal type come from concepts. • With k being the number of sets, there are 2kpossible combinations. • Fuzzy-set ideal type analysis reveals: • which ideal type a case (country) belongs to; • what its degree of membership is to all the possible combinations (Kvist, 2003: 16–19). Let’smove to the analysis… Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

12. I STEP: CONCEPTUALISING THE SETS /1 • Normative theories of taxation set dual goals of economic growth and fairness (Hettich and Winer, 1999: 99-120). • Theory of equitable taxation byHenry Simons, 1938. • The optimal taxation theory by Brennan and Buchanan, 1980. • The EU Commissionseems to share this normative statement: ‘First, if we want a strong and sustainable economy, we need a tax system that supports this. Last but not least, if we want to maintain the European social model and ensure a basic harmony between the people, the policy makers and the business community, we must restore fairness to the tax system’. Pierre Moscovici, June 2016 We understand fairness = social equality Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

13. I STEP: CONCEPTUALISING THE SETS /2 • 2 concepts (wealth & equality)  2 sets  4 ideal types: • equal * wealthy • ~equal * wealthy • equal * ~wealthy • ~equal * ~wealthy Note: * reads ‘AND’, indicates the conjunction/intersection of sets; ~ reads ‘not’, indicates the complement of a set Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

14. II STEP: SELECTING THE QUALITATIVE BREAKPOINTS BY NATURAL GAPS /1 • Economic Wealth  GDP per capita in PPS (Eurostat) • Breakpoints: 1>=104.67; 0.5=92; 0<=72.17 • Median=88.33 Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

15. II STEP: SELECTING THE QUALITATIVE BREAKPOINTS BY NATURAL GAPS /2 • Equality  Gini coefficient of equivalized disposable income after tax and transfers (EU-SILC survey) • Breakpoints: 1 <= 28,6; 0,5=31,05; 0 >= 32,88 • Median 29.88 Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

16. III STEP: ESTABLISHING THE CASES’ MEMBERSHIP OF THE IDEAL TYPES • The minimum principle (logical-and or intersection)  A case’s membership to an ideal type is the minimum value of the involved sets’ scores. • E.g., between 2005-2007, UK scored 0.03 on equality and 0.99 on economic wealth. Thus, it has 0.03 membership of the ideal type ‘equal x wealthy’ A case’s membership of an ideal type is determined by the weakest link. • Intuitively, this approach might seem plainly wrong. Logically, however, it is correct. • Both a case scoring low on equality (.03) and high on economic wealth (.9) and a case scoring low (.2) on equality as well as on economic wealth correspond hardly to the ideal type (‘equal x wealthy’). Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

17. Changes in degree before and after the crisis • Changes in degrees  A country changes its membership score, but stays in the same ideal type. • CZE, MLT became more wealthy • ITA, PRT, SVN became less wealthy • GBR became more equal • DEU, FRA: became less equal Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

18. Changes in kind before and after the crisis • Changes in kind A country shifts from one ideal type to another. • IRL from ~e*w to e*w • GRC, ESP from~e*w to~e*~w • CYP from e*w to~e*~w • POL from~e*~w to e*~w Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

19. This is a work in progress… • … comments are welcomed (and needed)! • We have established the breakpoints according to the observed distribution of the countries on the 2 dimensions (wealth and equity). > Do you think our breakpoints make sense? • The alternative is to set them ex-ante, according to established theories,psychological thresholds, etc. > Any suggestion? • … Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

20. Next steps… • Fuzzy-sets’ scores will be used as Y in the following steps. Thus, we have to: • Identify the right sets of taxation tools associated with the 4 (de)couplings (EU level) • Assess their probabilistic effect on (de)couplings (EU level), together with other Xs such as Partisanship  Policy implications. • Develop a fine grained longitudinal analysis on the Italian case. Damonte & Negri Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES

21. Thank you for your attention! • fedra.negri@unimi.it • alessia.damonte@unimi.it • Damonte & Negri • Tackling the fiscal paradox from the angle of taxation DEPARTMENT OF SOCIAL AND POLITICAL STUDIES