Modelling impact of Tax Burden on State Financial Stability

Abstract

Scientific attempts to assess the relationship between the tax burden and financial stability face many challenges and scientific deadlocks. Research in this area has particularly intensified since the 2007-2008 global financial crisis, which demonstrated a close correlation between financial systems and macroeconomic factors. Various scholars studying the impact of tax burden focus on different aspects and generate controversial conclusions therefore a comprehensive methodology for assessing all types of factors and testing this methodology in the European Union (EU) context is lacking. Based on the analysis of scientific sources this paper presents a theoretical model that causally combines the components of tax burden and state financial stability. The newly constructed Index was used to assess state financial stability and the applicability of the index was verified by assessing the impact in the 28 EU countries during the 2005–2017 period. A clustering of the EU countries according to the differing tax rate policies and financial stability level was performed using the Ward method of hierarchical clustering. According to the results of the empirical study (regression analysis) the increase in tax burden strengthened state financial stability in three country groups (High Tax Burden / High Financial Stability; Low Tax Burden / High Financial Stability; Low Tax Burden / Low Financial Stability), while decreased in the High Tax burden/ Low Financial stability country group.