Democracy, Economic Freedom and Taxation in the European Union
AbstractThe purpose of this paper is to study empirically how democracy, taxation and economic freedom interact within the European Union (EU-27), european old member states (EU-15) and european new member states (EU-NMS), using VAR methodology, with panel data for 24 countries and yearly observations for the period 1995-2008. The main findings show for EU-27 that democracy amplifies the level of taxation and it discourages economic freedom, while economic freedom has an almost unsignificant, but positive effect on the level of taxation, and a small, positive effect on democracy. As for EU 15, taxation and economic freedom seem to discourage each other; finally, in the case of EU-NMS, the results are similar to EU-27. In respect to policy implication, governments should protect and support private property and initiative, the only ones able to provide functionality for the market’s "invisible hand".
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