Auditing a Convergence Claim: An Exact Decomposition of Tax Structure Change by Level of Government in the EU-27
Auditing a Convergence Claim: An Exact Decomposition of Tax Structure Change by Level of Government in the EU-27

Summary/Abstract: A statement that tax burdens in the European Union are converging is a statement about an aggregate, and an aggregate can be reconciled to its parts as an auditor reconciles a reported total to the records behind it. The change in the tax ratio of each member state between 2011 and 2023 is decomposed exactly into the contributions of central government, local government and social security funds, using Eurostat national accounts tax aggregates for the 27 member states; the identity is checked rather than assumed, and a dynamic panel specification measures how quickly tax ratios adjust. The decomposition closes to a maximum absolute residual of 0.0050 percentage points across the 26 countries with complete data, with a mean residual below 0.0002 percentage points. On that panel the mean tax ratio rose by 1.458 percentage points, of which 1.275 came from central government and 0.470 from social security funds, while local government subtracted 0.287. Central government is the largest contributor in 19 of the 26 countries and social security funds in the other 7. Romania moved against the Union, with a fall of 0.761 percentage points that combines a central government contraction of 1.492 with a social security expansion of 1.007. The fixed-effects persistence coefficient is 0.7754; an approximate bias correction raises it to 0.9368 and lengthens the implied half-life from 2.7 to 10.6 years. Convergence indicators certify less than they are taken to certify until the aggregate is decomposed and the decomposition is shown to close.

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