European fiscal solidarity: An EU-wide optimal income tax approach

The current financial crisis has brought Europe to a critical juncture. In this paper, we map the fiscally United States of Europe. We simulate an optimal EU-wide income tax and calculate the implied cross-country transfers. The comparison of the implied transfers with the real transfers shows how insufficient the actual transfers are to reduce income disparities across the EU. Moreover, to evaluate the chances for a stronger European fiscal integration within different (core-) groups of member states, we illustrate the winners and losers from an optimal EU-wide income redistribution across the Union. While the need for centralized redistribution grows with the number of heterogeneous member states, the implementation of a European income tax becomes at the same time ever more unlikely.