Negative rates, demographics and fiscal policy: Heterogeneous tilting taxation in the Euro Area

Mariam Camarero, Juan Sapena and Cecilio Tamarit

MPRA Paper from University Library of Munich, Germany

Abstract: This paper estimates time-varying tax-tilting parameters for eleven EMU member states from 1970 to 2024 using a panel time-varying parameter state-space model that extends the traditional tax-smoothing framework to capture both common and country-specific dynamics. Core countries such as Austria, Belgium, Germany, the Netherlands, France, Ireland, and Finland display a more prudent fiscal stance, while peripheral countries, including Greece, Italy, Portugal, and Spain, shift taxation toward the future, generating current deficits. These patterns are driven by differences between government discounting of future revenues and market rates, and are further influenced by structural factors such as aging populations and unemployment. Periods of negative real interest rates relax fiscal constraints, encouraging governments to delay tax adjustments. The results underscore the need to reduce cross-country fiscal heterogeneity to strengthen long-term sustainability and advance fiscal integration in the Euro Area.

Keywords: Tax-smoothing; time-varying cointegration; multiple structural breaks; Kalman Filter; Time-varying parameters; EU fiscal policy (search for similar items in EconPapers)
JEL-codes: C22 E62 H62 (search for similar items in EconPapers)
Date: 2025-08-09
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