Evaluating Impact of Tax Burden on State Financial Stability: Empirical Research of EU Countries

The available literature on the relationship between the tax burden and financial stability is mixed, although some consensus exists on the negative effects of some taxes on economic growth. Since 2008, policymakers have striven to identify the financial vulnerabilities and to avoid the mistakes that led to the Great Financial Crisis. 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 tax burden and the applicability of the index was verified by assessing the impact of tax burden on state financial stability in the 28 EU countries during the 2005-2019 period. 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/Low Financial Stability; Low Tax Burden/High Financial Stability; Low Tax Burden/Low Financial Stability), while decreased in the High Tax burden/High Financial stability country group.


Introduction
The implications of the degree of taxation on financial equilibrium have been How to cite this paper: Skarzauskas, S. (2021). Evaluating Impact of Tax Burden on State Financial Stability: Empirical Re-analysed in many recent studies. It is often considered, that the impact of tax burden is implicit on economic growth, on the capacity to provide the necessary resources for public finance and on the quality of financial system services. The international scientific community is actively researching the factors influencing state financial stability and agrees that an evaluation should be based on a macroeconomic and systemic approach. Assessing the impact of the tax burden on the state's financial stability is particularly relevant in shaping a country's tax policy, and its significance has become apparent in the context of the recent financial crisis. The European Union's ambitious goals for economic and social development are closely linked to the process of reforming the tax system. EU is made up of countries in different stages of economic development that calculate taxes on the basis of differing principles. This provides real opportunities for researchers to study the interrelations between tax burden parameters and national economic development trends. The optimal tax burden is seen as an important condition for social development, the quality of public welfare, business growth, while the efficiency of the tax system is one of the most important factors determining the potential of the national economy (Abuselidze, 2012). Modern economists argue that reducing tax burden effectively influences state financial stability and stimulates the economy (Alstadsaeter et al., 2017;Tamai & Myles, 2019;Celikay, 2020), but there is no consensus among scholars on how tax cuts affect economic development in the long run (Vasiliauskaitė & Stankevičius, 2009). In addition, the empirical evidence is clearly mixed, depending on several characteristics of each study, such as countries, period, methodology or explicative variables. The existing models do not give a clear answer about the impact of the tax burden, as some results are contradictory to others. A comprehensive methodology for assessing all types of factors and testing this methodology in the European Union context is lacking.
In this paper, we studied the relationship between taxation and state financial stability for European Union in 2005-2019 through a regression approach to detect different patterns along with countries groups. 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. This methodology enhanced the possibility to analyse the phenomenon taking into account differences in the distribution as countries with high/low level of tax rate and high/low financial stability can exhibit variance of results. The major contribution of the paper is the development of the complex relationship model between tax burden and state financial stability and verification of the model in 28 EU countries during the 2005-2019 period. By designing the model, the assumptions that create the conditions for the state financial stability were examined and identified, the analysis of the tax burden and the components and indicators of the state financial stability was performed, and an index assessing the impact of the tax burden was constructed and tested.

Theoretical Aspects of Financial Stability and Its' Conceptual Model
Financial stability is widely studied in the scientific literature and the concept differs depending on the scientist's approach. The international scientific community is actively researching the factors influencing state financial stability (Adam et al., 2015;Roosma et al., 2015;Cural & Cevik, 2015;Flood et al., 2016;Bischof et al., 2019). However, as Schinasi (2006: p. 1) points out, "the practice of financial-stability analysis is still in its infancy when compared with, for example, the analysis of monetary stability or macroeconomic stability", meaning there is a lack of a commonly used model or an analytical system to assess financial stability. By some authors financial stability is perceived as the absence of fluctuations (Gadanetz et al., 2012;Das et al., 2019); as the absence of crises and tensions (Haldane et al., 2017;Bischof, Laux, & Leuz, 2019;Ozili, 2020). A broader approach to financial stability is promoted (Houben & Kakes, 2004;Schinasi, 2006;Fell & Schinasi, 2005) and it is argued that financial stability is an extensive concept encompassing various aspects of finance and financial systems. Financial stability manifests itself through the ability to reallocate resources, manage risk and overcome financial imbalances. According to these authors, financial stability can be assessed in terms of the consequences to the real sector of the economy and is perceived as a continuum. Modern economists (Levine & Corbae, 2018;Akins et al., 2016;Ozili & Thankom, 2018;Jiang & Levine, 2019) place emphasis on the interplay between financial system stability and sustainable economic growth, fiscal policy and financial system (Boyd et al., 2005;Kroszner et al., 2007;Dell'Ariccia et al., 2008;Amadeo, 2013;Caner et al., 2010;Staniuliene, 2015). Financial stability could also be assessed through sets of macro indicators covering the various sectors of business, household, financial and finance markets (Schakeldorf et al., 2011;Hawkins & Klau, 2000;Nelson & Perli, 2007;Gray et al., 2007).
Although narrower approaches to financial stability are characterized by simplicity such as the absence of certain phenomena (Gadanetz et al., 2012;Haldane et al., 2017;Das et al., 2019) a broader assessment, encompassing public finance, financial systems, economic growth and fiscal policy, provides an opportunity to reveal the essence of this phenomenon more accurately and is in line with the objectives of this paper. By focusing on the broader concept of financial stability (Fell & Schinasi, 2005;Houben et al., 2005;Levine & Corbae, 2018;Akins et al., 2016;Ozili & Thankom, 2018;Jiang & Levine, 2019), the state financial stability in this paper is defined as the interaction between the stability of public finances, the stability of the financial system and balanced economic growth. Such a perception of state financial stability was chosen as a theoretical starting point for theoretical and empirical research as it creates preconditions for a complex assessment of this phenomenon, with a special focus given to the complex interrelations between these areas ( Figure 1).  important to note that the factors listed are closely linked, therefore the stability of the financial system can only be ensured by the stability of all these components together. For these reasons, financial stability analysis is a particularly difficult and complex task.

The Problematic Aspects of Tax Burden Assessment
Research shows that international tax burden comparisons are possible, but the impact of tax burdens on a country's financial stability remains problematic primarily due to the multifaceted nature of the interaction ( by Bunn and Asen (2020). The chosen valuation methodology is multicriteria and reflects the burden of different tax groups based on the EU's classification (see Figure 2).
After building the basics and methods for assessing the state financial stability and tax burden, a theoretical model of the impact of the tax burden on the state financial stability was constructed as presented in the next section.

The Methodology for Assessing the Impact of Tax Burden on State Financial Stability
The complexity of the model is revealed through different levels of state financial stability and tax burden assessment. The model has been designed for applicabil-  2) Low tax burden and high financial stability (LTBHFS cluster); 3) High tax burden and low financial stability (HTBLFS cluster); 4) Low tax burden and low financial stability (LTBLFS cluster).
The impact of the tax burden on the state financial stability has been examined using multiple linear regression analysis (see equation provided below).
During analysis regression models were formed for each indicator (dependent variable-Y k ) of public finance stability index, financial system stability index and economic stability index using time series data of each cluster. Regression models are provided in appendices of the paper (Tables A1-A3). Tax burden was used as one of the independent variables (x k , y k , z k , •••), therefore coefficients (β) of tax burden variables in the regression models were selected as measure of impact. In cases when statistically significant models were formed only without independent variable of tax burden, it was considered that tax burden has no impact to the dependent variable, e.g. indicator, which is used in calculation of public finance stability, financial system stability or economic stability indexes.
Using coefficients assigned to independent variables of tax burden impact to public finance stability, financial system stability and economic stability was calculated according to weights of indicators in the indices (Table A3). Finally, using data of impact to indices, tax burden impact to state financial stability was calculated (Table 1).

The Generalised Results of the Regression Models
The regression equations for the indicators (Annexes: Tables A1-A3) of the indices of the stability of the public sector, the financial system and the economy allowed us to calculate the overall impact of the change in the tax burden on the state financial stability. Table 1  The results of the empirical study allowed confirming 4 and rejecting 8 hypotheses (Table 2).

Conclusion
Taxation is one of the potential determinants of the state financial stability identified in the literature and in the empirical models. Regarding the methodological and socio-cultural context, the existing models differ in the expected impact of the taxation, and the results of the empirical studies are mixed and not conclusive.
We analysed the impact of the tax burden on state financial stability in 28 EU countries in the period 2005-2019. To summarize, we can say that taxation may affect state financial stability in several ways through impact on economic growth, public finance stability and financial system stability. The intensity and direction of the impact are related to several conditions and depend on countries' tax burden and financial stability level.
In general, when the taxation is measured using tax burden index, an increase in tax burden would have a positive impact on the state financial stability in all country groups except the group with high tax burden and high financial stability.
More concretely, the strongest positive impact is identified in high tax burden/low financial stability and low tax burden/high financial stability country groups, and the weakest one is in low tax burden/low financial stability country groups.  The tax burden has a significant positive impact on state financial stability for the HTBLFS (High Tax Burden/Low Financial Stability) countries: A positive effect of the tax burden for this group was found in all indices. The tax burden influence to Financial system stability index has the lowest positive effect on HTBLFS (0.00026) group countries compared to other countries groups, which also have a positive effect (0.00083 in LTBHFS and 0.00221 in HTBHFS).

H2
The tax burden has a significant impact on the LTBHFS (Low Tax Burden/High Financial Stability) group: H2 1 has a positive (+) effect H2 2 has a negative (−) effect H2 3 significant impact not determined Accepted H2 1 has a positive (+) effect Rejected H2 2 has a negative (−) effect Rejected H2 3 significant impact not determined The tax burden has a significant positive impact on state financial stability for the LTBHFS (Low Tax Burden/High Financial Stability) group: This country group had the most indicators (10) with positive effects compared to other groups of countries, which was determined by the positive change in all three state financial stability indices. In the LTBHFS countries, the impact of the tax burden has the highest positive effect on public finance (0.03011) and economic stability (0.00789) between all country groups.

H3
The tax burden has a significant impact on the HTBHFS (High Tax Burden/High Financial Stability) group: H3 1 has a positive (+) effect H3 2 has a negative (−) effect H3 3 significant impact not determined Rejected H3 1 has a positive (+) effect Accepted H3 2 has a negative (−) effect Rejected H3 3 significant impact not determined The tax burden has a significant negative impact on state financial stability for the HTBHFS (High Tax Burden/High Financial Stability) countries: The negative impact of the tax burden for this country group is found only in the Public finance stability index (-0.02639). However, the negative impact is stronger than the cumulative positive impact of Financial system stability (0.00221) and Economic stability (0.01218) indices, even considering that between all countries groups both indices have the highest positive effect in HTBHFS countries.

H4
The tax burden has a significant impact on the LTBLFS (Low Tax Burden/Low Financial Stability) group: H4 1 has a positive (+) effect H4 2 has a negative (−) effect H4 3 significant impact not determined Accepted H4 1 has a positive (+) effect Rejected H4 2 has a negative (−) effect Rejected H3 3 significant impact not determined The tax burden has a significant positive impact on state financial stability for the LTBLFS (Low Tax Burden/Low Financial Stability) countries. A positive effect is found for the Public finance stability index and the Economic stability index, but a negative impact on Financial system stability (-0.00279). Tax burden positively influences Economic stability in all country groups, but the lowest effect is found in LTBLFS countries (0.00005). Theoretical Economics Letters According to our estimation with regards to the state financial stability index, an increase in the tax burden would have a positive effect on the economic stability in all country groups. The strongest positive impact was identified because of positive changes in bond yields and interest expenditure on government revenue indicators, the strongest negative impact was identified through the reserves/imports ration indicator. In addition, our results show a negative impact of increased taxation on public finance stability in high tax burden/high financial stability countries and positive in all other countries groups. On the contrary, the effect on financial system stability is negative only in low tax burden/low financial stability countries and positive in all remaining country groups (high tax burden/low financial stability, low tax burden/high financial stability, high tax burden/high financial stability).
These results can be also interpreted in terms of policy, as the impact of the variables differs depending on the distribution of the taxation/financial stability level. Hence, policymakers should adopt different strategies or financial stability policies to improve the design and effects of the tax burden in Europe. Finally, as future extensions of this research, it would be interesting to replicate the study using other statistical methods, for example, the quantile regression method, or with information regarding the reforms approved in the last years.

Conflicts of Interest
The author declares no conflicts of interest regarding the publication of this paper.