Federalism, Fiscal Autonomy and Democratic Legitimacy in Europe: Towards Tax Sharing Arrangements

In this article data on fi scal autonomy of different levels of government in the European Union are presented. Within Europe central governments still hold the lion’s share of the power to tax and spend. Other levels of government largely have to make do with upward and downward funding schemes which seriously diminish their fi scal autonomy. It is argued that this (vertical) fi scal imbalance has considerable negative impacts on especially the legitimacy of the European Union, both in terms of input and output legitimacy, and that the EU as a whole suffers from a joint legitimacy problem in fi scal matters. After a review of several theories on federalism (fi scal federalism theory, dual or competitive federalism and cooperative federalism) it is concluded that the model of cooperative federalism best suits the European Union. Part of this model is tax sharing (or joint taxation) which is advocated as a way-out of the current fi scal deadlock.