The Tax-Spend Debate with an Application to the EU

The important contribution of this paper is to shed light on the validity of the tax-spend debate using panel data from 15 selected EU countries. The controversial tax and spend, spend and tax, fiscal synchronisation and institutional separation hypotheses compose the four theories in the field that have been formulated to describe the relationship between government expenditures and tax revenues. The goal of the present study is achieved through three steps. In the first step, the entire period 1970-2007 is split into two time frames, 1970-1991 and 1992-2007, in order to take into account the pre and post-Maastricht subperiods. In the second step, two-variable and three-variable panel models are estimated employing the TSLS and GMM techniques. In the third step, we perform a sensitivity analysis by conducting short-and long-run Granger causality tests to check the robustness of TSLS and GMM results. Our empirical findings in the case of EU countries are consistent with the theoretical framework of the fiscal synchronisation hypothesis.