Tax structure• Tax structure is important, because spending very much depends on the tax structure (Mulligan).• Case of VAT introduction in 1960s and rapid expansion of government spending.
Fiscal rules• Tax reform based on simplification and flatter tax rates has to be combined with greater control over government spending.• Key incentives for of fiscal rules introduction: – to limit public expenditures – to stop indebtedness – to create barriers for spontaneous growth of bureaucracy
• Discussed fiscal measures: 1. Balanced budget (The primary rule) Budgetary surplus/deficit as a percentage of GDP: Example: If the GDP growth equals 4 %, state budget will generate a surplus at the level of 1 % of GDP 1. Public debt (The secondary rule) – Public debt as a percentage of GDP: – Debt over 40 % of GDP: Expenditures must be limited… – Debt over 50 % of GDP: No transfers from funds, no expenditures for representation, no needles investments…
Fiscal harmonization – way to fiscal centralization• Representatives selected by modern democracies are neither altruistic, nor too concerned about morality, however, they can hardly resist the temptation to legislate, regulate and increase expenditure.
Fiscal harmonization vs fiscal competition• Supports position of supranational policymakers, bureaucracy and interest groups operating on international level.• Lowers position of national politicians and interest groups operating only on the national level.