A fiscal union is the economic and fiscal integration of two or more political entities, such as countries or regions, into a single fiscally unified entity. In essence, it involves the consolidation of the fiscal policies of the participating entities, which means that they share a common tax system, tax regulations and, in some cases, a joint budget.
Fiscal unions can take different forms and degrees of integration, ranging from limited fiscal agreements to complete harmonization of fiscal policies.
Some common features of fiscal unions include:
- Tax harmonization: Participating entities agree to adopt common or similar tax policies in areas such as income taxes, value added taxes (VAT), corporate taxes, among others.
- Free movement of goods, services and people: Within a fiscal union, there is usually free movement of goods, services and people, facilitating trade and labor mobility between participating entities.
- Coordination of economic policies: Entities in a fiscal union can coordinate broader economic policies, such as monetary, fiscal, and employment policies, to promote economic stability and growth within the union.
- Fiscal solidarity: In some cases, entities in a fiscal union agree to share tax revenues and expenditures equitably, in order to promote economic and social cohesion between less developed and more developed regions.
Fiscal unions can have several objectives, ranging from promoting trade and economic integration to coordinating policies to address common economic and social challenges.
However, they can also pose challenges, such as the loss of fiscal autonomy for member states and the need to manage economic and fiscal differences between participating regions.
Are fiscal unions a viable option?
Although this “recession” we are experiencing was (and is) avoidable with some international development, we cannot expect this cooperation from the currently elected leaders.
Until the fog clears and an alternative solution is predicted, we must prepare for the worst. But we already ran out of lifeboats in the last crisis.
The tools of our central banks (interest rates above all) became obsolete for not having correctly diagnosed the 2007 catastrophe.
If we do not want to drown, we will have to start investigating new means. And a fiscal union looks promising.
It has been a request made by the own central banks, who consider that leaving the entire burden of stimulating the economy on them is excessive.
The possibility of a fiscal union is attractive, since its effects on promoting the economy are undeniable.
In addition, they offer a wide range of applications that specify their use, from reducing or promoting specific behaviors, to redistributing wealth.
Having this support would help central banks recover pre-crisis interest rates, in addition to providing an excellent opportunity to make their inflation objectives, which are currently too demanding, more flexible.
With this variety of tools, greater stability and synchronization could be guaranteed, especially in the European Union, the most complex case.
However, there are a certain number of barriers to overcome along the way. Mostly, The problem is that tax regimes are the responsibility of each State.
And this makes sense, since the taxes existing in each country depend on the behavior of its citizens.
Consumption, work, investment habits, etc., are different in different nations due to their geographical area, their culture, their economy and much more.
In addition, governments must meet budgets and, in most cases, deal with large levels of debt.
This makes it difficult to unify the taxation of countries.. But the biggest reason why political leaders are reluctant to cede their fiscal regime to an outside centralized figure is electoral.
It is known by all that to win votes, parties play with tax rates, but they will be unable to do so if these are not under their complete control.
Seen from another perspective, we must remember what happened to the central banks.
The fact that they had to reduce interest rates was to be expected and was the reason they were created in the first place.
However, discounting the possible negligence in the ECB In the last crisis, the fact that interest rates have not recovered twelve years later is a serious problem.
Since it is impossible to turn to these guys now, we have nothing left to do but watch as a new crisis is upon us.
And the reason they haven't been increased again in the past few years is because “sugar rush”.
This expression means that, Once the economy has been stimulated by lowering interest rates, no one dares to increase them because the opposite effect would occur, slowing down the economy. although it is essential to recover a margin in interest that allows us to act in new economic contractions.
If this situation occurred in the case of taxes, the debt of deficit countries would worsen dangerously in the first crisis that this system faced.
Although it must be remembered that there would be support from the central bank in the form of financial stimuli.
Will the European Union be a fiscal union?
Currently, the countries of the European Union They have primary control over how they collect taxes, while the European Union can only intervene in certain areas. It focuses on ensuring that the single market works well, which is why it has worked on making indirect taxes the same in all member countries. Although it is also interested in equalizing direct taxes, this has been more difficult to achieve. There is great concern about people and businesses trying to avoid or evade paying taxes, and strong action is being taken to address this issue. For the European Union to change tax laws, all member countries must agree. The European Parliament also has a say in this issue and can influence budget decisions.
In the case of the European Union, It is expected that, if it survives the test of time, it will become a fiscal, legal and finally, political union.
Within it there are important economic differences between regions.
In some cases it provokes diverse reactions to problematic circumstances, such as recessions, which have therefore been much more serious in Greece, Spain, Portugal and Ireland, and they had to rely on other nations such as Germany and France to recover.
In others it provokes confrontation and even separatism, as in Italy and Spain, since the fact that The European client to the north of these countries generates concentration of industry and wealth in its geographical north, and with it demands for independence (Catalonia in Spain, the Northern League in Italy).
These differences could be reduced with the help of a central tax system for this group of nations.
We must not forget, on the other hand, that the majority of crises can be prevented, and that they usually arise due to poor management, such as erratic Trump tariffs.
Central banks or agreed taxes will be able to do little if politicians do not act responsibly.
The current system is better than the past, which consisted of only dropping those who, due to specific circumstances, could not be saved from crises. But there is room for improvement, and the path begins by grouping our tax systems.
Maybe it should be a gradual change, like the frog in the pot of hot water, but The longer it takes, the more opportunities we will lose, and the more challenges we will have to face in the process..
Collaborator at Reáculoateypunto, graduated in Business Administration and Management at Loyola University, debater and connoisseur of the world! I studied for a year in Derby, and I have work experience in public administration. I am passionate about business administration and national and supranational institutions, especially financial matters and international economics... And that is why I write and share my opinions on these topics!
